On the weekend, Naked Capitalism republished an interesting account of a CDS lawsuit … in a nutshell, UBS bought credit protection for $1.3-billion in super-senior CDO notes from a hedge fund’s special purpose subsidiary capitalized with $4.6-million. The sub has not met its margin calls.
I’ll bet a nickel that this was a back-to-back deal … e.g., UBS wanted to insure its position and a monoline wanted to insure it, but (a) UBS was up to its position limits with the monoline, and (b) the monoline refused to consider posting collateral. In this scenario, UBS would put together a back-to-back deal, whereby they would buy protection from the sub at 15.5bp and the sub would buy protection from the monoline at 10.5bp. Hey, presto, 5bp on $1.3-billion = $650,000 p.a. free money.
Trouble ensues when the mark-to-market hits. The sub has agreed to post collateral, but the monoline hasn’t. There may also be a certain amount of doubt regarding the value of the monoline’s contract.
Sounds far-fetched? It’s my understanding that this is exactly what happened with CIBC and their big writedown. Anybody with more information on the lawsuit or the sub’s total position – let me know! You might even win a nickel!
Accrued Interest has written some more about the Bear Stearns affair with an emphasis on the idea that Lehman now finds itself in much the same position. He also links to a three-part review by the WSJ which, as he says, is excellent.
Prof. Daniel Cohen writes a piece on VoxEU that blames the sub-prime crisis on moral hazard. His answer:
Panglossian principles first explain why finance requires regulation. Prudential rules set a minimum ratio of banks’ equity capital to the amount of their investments. The idea is to oblige them to hold at their disposal the liquidity necessary to pay, and therefore to anticipate, their potential losses.
Ah, it would be a much better world if only there were more rules! I don’t have time to address this issue at the moment – but I’ll try to get to it tomorrow.
According to me, the market drifted up reasonably well today, but according to the TSX, the index drifted down. Take your choice! At least volume was good!
| 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 | 4.24% | 4.25% | 54,970 | 16.5 | 1 | +0.0788% | 1,113.3 |
| Fixed-Floater | 4.88% | 4.66% | 63,050 | 16.05 | 7 | -0.0347% | 1,025.8 |
| Floater | 4.06% | 4.11% | 61,302 | 17.11 | 2 | +0.2947% | 929.6 |
| Op. Retract | 4.83% | 2.22% | 89,660 | 2.47 | 15 | +0.0422% | 1,057.1 |
| Split-Share | 5.25% | 5.38% | 72,936 | 4.21 | 15 | -0.1211% | 1,057.9 |
| Interest Bearing | 6.10% | 6.05% | 50,831 | 3.80 | 3 | +0.1012% | 1,116.3 |
| Perpetual-Premium | 5.83% | 5.43% | 415,324 | 7.96 | 13 | +0.0248% | 1,025.8 |
| Perpetual-Discount | 5.66% | 5.71% | 226,195 | 14.17 | 59 | +0.0742% | 925.6 |
| Major Price Changes | |||
| Issue | Index | Change | Notes |
| BNA.PR.C | SplitShare | -1.2042% | Asset coverage of just under 3.2:1 as of April 30, according to the company. Now with a pre-tax bid-YTW of 6.78% based on a bid of 20.51 and a hardMaturity 2019-1-10 at 25.00. Compare with BNA.PR.A (5.87% to 2010-9-30) and BNA.PR.B (6.93% to 2016-3-25). |
| BNS.PR.N | PerpetualDiscount | -1.1264% | Now with a pre-tax bid-YTW of 5.48% based on a bid of 24.24 and a limitMaturity. |
| IAG.PR.A | PerpetualDiscount | +1.4670% | Now with a pre-tax bid-YTW of 5.55% based on a bid of 20.75 and a limitMaturity. |
| Volume Highlights | |||
| Issue | Index | Volume | Notes |
| BMO.PR.J | PerpetualDiscount | 219,900 | Now with a pre-tax bid-YTW of 5.60% based on a bid of 20.25 and a limitMaturity. |
| GWO.PR.H | PerpetualDiscount | 209,182 | Now with a pre-tax bid-YTW of 5.38% based on a bid of 22.55 and a limitMaturity. |
| BNS.PR.O | PerpetualDiscount | 131,400 | “Anonymous” bought 35,000 from “Anonymous” at 25.25 – which may, or may not, have been a cross! “Anonymous” then bought 26,200 from RBC in two tranches at 25.20. These anonymouses (anonymice?) may have have been one and the same – they may have been four different parties. Now with a pre-tax bid-YTW of 5.63% based on a bid of 25.16 and a limitMaturity. |
| BNS.PR.N | PerpetualDiscount | 87,300 | Now with a pre-tax bid-YTW of 5.48% based on a bid of 24.24 and a limitMaturity. |
| POW.PR.D | PerpetualDiscount | 68,475 | TD crossed 65,000 at 22.35. Now with a pre-tax bid-YTW of 5.68% based on a bid of 22.33 and a limitMaturity. |
There were twenty-seven other index-included $25-pv-equivalent issues trading over 10,000 shares today.