March 25, 2008

Naked Capitalism provides a very good round-up of the BSC/JPM deal commentary. I will quibble with the repeated suggestion that formal bankruptcy Monday morning was the only alternative to a deal. I agree that their options (speaking strictly in terms of their economic interests as shareholders, not as employees and creditors) were both limited and unpalatable – I pointed that out on March 14, but there is the question of the Japanese banks. Naked CapitalismWhy didn’t Bear use its credit lines? – couldn’t understand why they didn’t draw their lines; and the Japanese banks have previously advertised their willingness to lend to any player who is sufficiently desperate.

So – I think – Bear had a choice, albeit one with which Hobson would be familiar. Of particular interest in the post is the discussion of the alleged contract glitch that I briefly mentioned yesterday. Dealbreaker has posted twice on the issue, claiming that the conference call was crystal clear and then backing up his statement with the transcript. Upon thinking about it a little more myself – and reviewing the transcript – I’m inclined to believe that Dealbreaker is correct and the alleged glitch was in fact an explicitly desired thing.

Look: What’s the point of the guarantee in the first place? To ensure that Bear can operate until they’re formally taken over, right? If Bear had difficulties finding counterparties on the Friday, those difficulties were going to double on Monday (assuming that they did not file for bankruptcy at the crack of dawn). In order to serve its purpose, the guarantee had to be absolutely binding – who’s going to enter into a trading committment of a year, say (CDSs and Swaps will typically be 5 years) on the basis of a guarantee that might vanish in a month? JPM had to make the guarantee binding and lengthy, or there was no point going through the motions.

In familiarly cheery news, the US housing price drop is accellerating:

Home prices in 20 U.S. metropolitan areas fell in January by the most on record, a sign the housing recession is deepening, a private survey showed today.

The S&P/Case-Shiller home-price index dropped 10.7 percent from January 2007, after a 9 percent year-on-year decrease through December 2007. The gauge has fallen for 13 consecutive months.

Lehman Brothers Holdings Inc. forecasts home prices as measured by Case-Shiller will decline another 10 percent by the end of 2009. It predicts new-home sales will bottom in the middle of this year and existing-home sales and housing starts will reach a trough in the third quarter.

“Prices have reached what might be called a fair value,” Dan North, chief U.S. economist at Euler Hermes ACI in Owings Mills, Maryland, said in a Bloomberg Television interview before the report. “However, prices have still got to go substantially past that” to trigger demand and a recovery.

A separate report from the Office of Federal Housing Enterprise today showed home values fell 3 percent in January from a year ago, and 1.1 percent from December.

The S&P/Case-Shiller index measures repeat home sales in 20 U.S. cities, regardless of mortgage size, while the Ofheo monthly index excludes sales of homes with mortgages higher than $417,000, the maximum allowed during that time for homes bought by government-chartered Fannie Mae and Freddie Mac.

There is further commentary on the WSJ Blog.

In other news of interest Jeffrey Frankel argues that commodity prices are rising due to low real interest rates rather than due to new demand from the BRIC bloc.

Assiduous Readers will be familiar with my view that banking regulation needs to be improved; primarily by drawing a brighter line between the core banking system and the shadow banking system (e.g., by increasing capital requirements for committed – or effectively committed, as is the case with bank-sponsored SIVs – credit lines) and reviewing capital requirements for non-core-but-still-bloody-important institutions like investment banks (such as margin requirements on derivatives, as mentioned yesterday). I’m not alone in this view: Mark Thoma of Economist’s View got some ink in the WSJ Blog by musing about the need for reform:

There is quite a bit of discretionary authority in the hands of regulators. As the philosophy of both parties has drifted toward a hands off approach over time, and as appointment after appointment to this or that agency has reflected that changing philosophy, the accompanying regulatory oversight has changed along with it. The changes have been more dramatic under Republican administrations, and the current administration strongly prefers a hands off approach on all matters involving economic policy (with the exception of tax cuts for the wealthy), so it’s no surprise that the same philosophy has, over the last several years, filtered into the offices charged with regulatory oversight more so than in the past (and appointments based upon how much someone contributed and the strength of their ideology rather than their competence hasn’t helped).

Very – very! – light on specifics, but it’s a start. I might as well stake out my position pretty clearly right now … I want a core banking system, an investment banking system and a shadow banking system, with exposure between the levels being determined by margin and capital requirements rather than flat prohibitions and directives. What’s more, I believe that the appropriate policy response can better be described as “tweaking” rather than “reform”. The pendulum never swings half-way however, so it will be a fight – and certainly the political response so far has been to erode capital at the GSEs and FHLBs to protect Americans’ God-given right to McMansions.

The Fed has announced that yesterday’s TAF auction ($50-billion, one month) came in at 2.615% for one month money – about 4bp less than current LIBOR. This continues to be a good sign – a rate significantly above LIBOR would imply that there were players shut out of the interbank market desperate for funds. For those having trouble with the plethora of new Fed acronyms, remember that the TAF is restricted to banks and is fully collateralized.

In news that will cause fear and trembling amongst BCE investors (the equity kind, anyway), the Clear Channel buy-out looks sick:

Clear Channel Communications Inc. dropped in extended trading after the Wall Street Journal reported its $19.5 billion private-equity buyout is close to falling apart.

The buyout group, led by Thomas H. Lee Partners LP and Bain Capital Partners LLC, hasn’t been able reach an agreement on terms with the banks financing the transaction, the newspaper said today, citing people familiar with the matter. The lenders include Citigroup Inc., Morgan Stanley, Deutsche Bank AG, Credit Suisse Group, Royal Bank of Scotland Group and Wachovia Corp.

Clear Channel, the largest U.S. radio broadcaster, dropped 14 percent to $28 after closing at $32.56 in New York Stock Exchange composite trading. Since the buyout was announced in November 2006, the stock has traded below the $39.20-a-share offer price because of investor concerns that the deal won’t be completed. Credit-market turmoil has made it harder for buyout firms to obtain financing.

Clear Channel’s 5.5 percent notes due in September 2014 rose 2.75 cents, or 4.4 percent, to 65 cents on the dollar to yield 13.9 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

A day enlivened by the BMO new issue of 5.80% perps. Volume picked up nicely, but perpetualDiscounts got smacked as players adjusted their portfolios to account for … for … for … for what they think the new standard is. Or something.

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 5.38% 5.41% 33,162 14.78 2 +0.3894% 1,092.3
Fixed-Floater 4.78% 5.49% 60,904 14.86 8 +0.1545% 1,039.9
Floater 4.89% 4.89% 78,707 15.70 2 -2.2179% 851.7
Op. Retract 4.84% 3.15% 76,735 2.96 15 +0.0367% 1,047.5
Split-Share 5.39% 6.08% 93,265 4.12 14 -0.1382% 1,021.7
Interest Bearing 6.21% 6.66% 65,753 4.21 3 -0.0672% 1,084.8
Perpetual-Premium 5.80% 5.70% 252,506 11.39 17 -0.0470% 1,018.3
Perpetual-Discount 5.58% 5.64% 294,725 14.42 52 -0.3642% 926.0
Major Price Changes
Issue Index Change Notes
BAM.PR.K Floater -5.2525%
BCE.PR.R FixFloat -2.3569%
RY.PR.W PerpetualDiscount -1.6115% Now with a pre-tax bid-YTW of 5.48% based on a bid of 22.59 and a limitMaturity.
SLF.PR.D PerpetualDiscount -1.4627% Now with a pre-tax bid-YTW of 5.54% based on a bid of 20.21 and a limitMaturity.
BNS.PR.N PerpetualDiscount -1.2879% Now with a pre-tax bid-YTW of 5.61% based on a bid of 23.76 and a limitMaturity.
RY.PR.A PerpetualDiscount -1.1848% Now with a pre-tax bid-YTW of 5.40% based on a bid of 20.85 and a limitMaturity.
FTU.PR.A SplitShare -1.1274% Asset coverage of just under 1.4:1 as of March 14, according to the company. Now with a pre-tax bid-YTW of 8.64% based on a bid of 8.77 and a hardMaturity 2012-12-1 at 10.00.
BMO.PR.K PerpetualDiscount -1.1097% Now with a pre-tax bid-YTW of 5.73% based on a bid of 23.17 and a limitMaturity.
BMO.PR.J PerpetualDiscount -1.0924% Now with a pre-tax bid-YTW of 5.72% based on a bid of 19.92 and a limitMaturity.
SLF.PR.A PerpetualDiscount -1.0909% Now with a pre-tax bid-YTW of 5.47% based on a bid of 21.76 and a limitMaturity.
PWF.PR.L PerpetualDiscount -1.0323% Now with a pre-tax bid-YTW of 5.63% based on a bid of 23.01 and a limitMaturity.
FAL.PR.B FixFloat +1.0101%
BCE.PR.A FixFloat +1.0101%
BCE.PR.Z FixFloat +1.2335%
Volume Highlights
Issue Index Volume Notes
TD.PR.N OpRet 150,300 Nesbitt crossed 150,000 at 26.12. Now with a pre-tax bid-YTW of 3.96% based on a bid of 26.02 and a softMaturity 2014-1-30 at 25.00.
MFC.PR.A OpRet 105,000 Nesbitt crossed two lots of 50,000, both at 25.65. Now with a pre-tax bid-YTW of 3.97% based on a bid of 25.27 and a softMaturity 2015-12-18 at 25.00.
TD.PR.M OpRet 103,206 Nesbitt crossed 100,000 at 26.26. Now with a pre-tax bid-YTW of 3.95% based on a bid of 26.13 and a softMaturity 2013-10-30.
TD.PR.R PerpetualDiscount 34,255 Now with a pre-tax bid-YTW of 5.67% based on a bid of 24.87 and a limitMaturity.
TD.PR.Q PerpetualPremium 30,193 Now with a pre-tax bid-YTW of 5.67% based on a bid of 25.06 and a limitMaturity.

There were twenty-four other index-included $25-pv-equivalent issues trading over 10,000 shares today.

One Response to “March 25, 2008”

  1. […] voices his support for Jeff Frankel’s explanation of high commodity prices mentioned here yesterday and follows up with a warning: I have long argued that the broad increase in commodity prices over […]

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