July 11, 2008

Panic, Chaos, Confusion! And then it got worse!

It looks like the US administration, quite properly, will ensure investors are wiped out before taking over Fannie & Freddie:

A government takeover of one or both companies is among several options that have been considered, Joshua Rosner, an analyst at Graham Fisher & Co., said after meetings with administration officials. U.S. Treasury Secretary Henry Paulson said today that federal regulators are backing Fannie Mae and Freddie Mac in “their current form.”

“The administration is considering all options in its contingency planning,” Rosner said. “That doesn’t mean to say that we’re at an inflection point where any decision is required immediately.”

The U.S. is reluctant to step in before Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac, which own or guarantee about half the $12 trillion in home loans outstanding, exhaust their options for raising capital, according to Rosner and U.S. Representative Spencer Bachus of Alabama.

… but this will have very serious knock-on effects …

“It is impossible to contemplate all of the negative events that will occur if Fannie and Freddie go under,” said Richard Bove, an analyst at Ladenburg Thalmann & Co.

Fannie Mae fell $4.40 to $8.78 as of 11:21 a.m. after closing at the lowest level in 17 years yesterday. Freddie Mac slid $2.85 to $5.15.

“Fannie and Freddie’s demise mean the investment banks can’t do any more securitization for a while, but their securitization revenue being zero has been written off from their share prices already,” said Brad Hintz, an analyst at Sanford C. Bernstein & Co.

There is considerable opposition to a bail-out:

Former U.S. Treasury Secretary John Snow said that Fannie Mae and Freddie Mac have relied on leverage to fund their businesses in the same fashion as a hedge fund, and that the government should avoid taking them over.

“Congress ought to be embarrassed” for years of delays in passing legislation aimed at strengthening regulation of the two companies, Snow, now chairman of New York-based buyout fund Cerberus Capital Management LP, said in a telephone interview. He said he flagged when in office that “the business model they were using was really the model of a hedge fund.”

The government-chartered companies, which grew to account for almost half of the $12 trillion in U.S. mortgages, were able to borrow at cheap rates because of an implicit federal guarantee, Snow said. His opposition to a full government takeover echoes the signal sent today by his successor, Treasury Secretary Henry Paulson.

Naked Capitalism has further clippings.

After the bell IndyMac was siezed by regulators:

IndyMac Bancorp Inc. became the second-biggest federally insured financial company to fail today after a run by depositors left the California mortgage lender short on cash.

The Federal Deposit Insurance Corp. will run a successor institution, IndyMac Federal Bank, starting next week, the Office of Thrift Supervision said in an e-mail today. Customers will have access to funds this weekend via automated teller machines.

The Pasadena, California-based bank specialized in so-called Alt-A mortgages, which didn’t require borrowers to provide documentation on their incomes. Its home state has been among the hardest hit by foreclosures.

IndyMac becomes the largest OTS-regulated savings and loan to fail and second-biggest financial institution to close behind Continental Illinois in 1984, according to the FDIC.

The lender racked up almost $900 million in losses as home prices tumbled and foreclosures climbed to a record. California ranked second among U.S. states, with one foreclosure filing for every 192 households in June, 2.6 times the national average.

The Office of Thrift Supervision comments:

The immediate cause of the closing was a deposit run that began and continued after the public release of a June 26 letter to the OTS and the FDIC from Senator Charles Schumer of New York. The letter expressed concerns about IndyMac’s viability. In the following 11 business days, depositors withdrew more than $1.3 billion from their accounts.

“This institution failed today due to a liquidity crisis,” OTS Director John Reich said. “Although this institution was already in distress, I am troubled by any interference in the regulatory process.”

Schumer comments:

“If OTS had done its job as regulator and not let IndyMac’s poor and loose lending practices continue, we wouldn’t be where we are today,” Schumer, a New York Democrat, said in an e-mail today. “Instead of pointing false fingers of blame, OTS should start doing its job to prevent future IndyMacs.”

Naked Capitalism has other media clippings.

Credit woes? You know things are really getting out of hand when people need to be reassured about … :

U.S. debt is “well within” the guidelines for an Aaa rating, said Steven Hess, vice president and senior credit officer at Moody’s in New York. The U.S.’s AAA rating is not at risk, said Nikola Swann, S&P’s primary U.S. credit analyst.

Treasuries got crushed and Accrued Interest provides us with a little nugget about credit swaps:

credit default swaps on the United States of America moved 11bps wider today (from 9bps to 20bps).

Who’s the counterparty?

Accrued Interest comments on monoline re-structuring initiatives with the telling line:

In other words, bonds are trading as though there is a penalty for once carrying Ambac or MBIA insurance. While this would seem to present a buying opportunity, be sure you can handle the illiquidity. Many institutional municipal buyers don’t want to explain to their clients why they hold so much MBIA paper, so even at higher yields, bids can be hard to come by.

This is an unfortunate reality of the business. There are many who take great joy in pointing out that the average investment manager (by which they generally mean “stockbroker”, an entirely different thing) is average. Chasing rainbows, panicking … there are a great many investment managers (and many more stockbrokers) who simply reflect the greed and fear of their clients without adding any value of their own. But … if they don’t reflect the greed and fear of their clients, they’ll get fired and the next guy will reflect this greed and fear.

Investment pundits love a hard-nosed maverick who sticks to his guns, right or wrong … until the first time he’s wrong.

Things went blahooey today all right! Yet another ghastly day, with some extremely sloppy trading (great market making there, guys! Keep up the good work!), not terribly exciting volume and … none of the volume leaders had any block trades at all. Retail’s panicking, Institutional’s at the cottage … I get a little trading done now and then. Not much, but enough to be worthwhile.

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 4.30% -0.48% 46,393 0.08 1 +0.2358% 1,122.4
Fixed-Floater 4.66% 4.39% 70,980 16.34 6 -0.1836% 1,088.4
Floater 4.11% 4.13% 50,394 17.17 3 -0.6199% 896.8
Op. Retract 4.97% 4.23% 160,323 2.55 17 -0.2304% 1,044.0
Split-Share 5.43% 6.65% 64,226 4.12 14 -0.5728% 1,018.0
Interest Bearing 6.15% 4.86% 44,594 1.97 3 +0.0676% 1,119.5
Perpetual-Premium 6.04% 5.95% 65,990 10.89 4 -0.0504% 997.8
Perpetual-Discount 6.35% 6.40% 239,815 13.37 67 -0.8373% 833.1
Major Price Changes
Issue Index Change Notes
BMO.PR.L PerpetualDiscount -6.5041% Now with a pre-tax bid-YTW of 6.48% based on a bid of 23.00 and a limitMaturity.
RY.PR.F PerpetualDiscount -4.0659% Now with a pre-tax bid-YTW of 6.48% based on a bid of 17.46 and a limitMaturity.
POW.PR.A PerpetualDiscount -3.9251% Now with a pre-tax bid-YTW of 6.53% based on a bid of 21.54 and a limitMaturity.
LFE.PR.A SplitShare -3.3898% Asset coverage of just under 2.2:1 as of June 30, according to the company. Now with a pre-tax bid-YTW of 6.13% based on a bid of 9.69 and a hardMaturity 2012-12-1.
MFC.PR.C PerpetualDiscount -3.3498% Now with a pre-tax bid-YTW of 6.47% based on a bid of 17.60 and a limitMaturity.
BAM.PR.B Floater -3.2821%  
SLF.PR.C PerpetualDiscount -3.0671% Now with a pre-tax bid-YTW of 6.71% based on a bid of 16.75 and a limitMaturity.
FFN.PR.A SplitShare -2.9744% Asset coverage of just under 1.8:1 as of June 30, according to the company. Now with a pre-tax bid-YTW of 6.36% based on a bid of 9.46 and a hardMaturity 2014-12-1 at 10.00.
ELF.PR.G PerpetualDiscount -2.9697% Now with a pre-tax bid-YTW of 7.04% based on a bid of 16.99 and a limitMaturity.
HSB.PR.C PerpetualDiscount -2.9426% Now with a pre-tax bid-YTW of 6.62% based on a bid of 19.46 and a limitMaturity.
RY.PR.G PerpetualDiscount -2.4758% Now with a pre-tax bid-YTW of 6.32% based on a bid of 18.12 and a limitMaturity.
BNS.PR.K PerpetualDiscount -2.3488% Now with a pre-tax bid-YTW of 6.17% based on a bid of 19.54 and a limitMaturity.
ELF.PR.F PerpetualDiscount -2.2544% Now with a pre-tax bid-YTW of 7.33% based on a bid of 18.21 and a limitMaturity.
SLF.PR.E PerpetualDiscount -2.1143% Now with a pre-tax bid-YTW of 6.64% based on a bid of 17.13 and a limitMaturity.
RY.PR.A PerpetualDiscount -2.0630% Now with a pre-tax bid-YTW of 6.28% based on a bid of 18.04 and a limitMaturity.
CM.PR.H PerpetualDiscount -2.0560% Now with a pre-tax bid-YTW of 7.03% based on a bid of 17.15 and a limitMaturity.
RY.PR.C PerpetualDiscount -2.0074% Now with a pre-tax bid-YTW of 6.31% based on a bid of 18.55 and a limitMaturity.
CM.PR.E PerpetualDiscount -1.9268% Now with a pre-tax bid-YTW of 6.91% based on a bid of 20.36 and a limitMaturity.
RY.PR.D PerpetualDiscount -1.8378% Now with a pre-tax bid-YTW of 6.30% based on a bid of 18.16 and a limitMaturity.
CM.PR.J PerpetualDiscount -1.6766% Now with a pre-tax bid-YTW of 6.88% based on a bid of 16.42 and a limitMaturity.
BMO.PR.K PerpetualDiscount -1.6196% Now with a pre-tax bid-YTW of 6.28% based on a bid of 21.26 and a limitMaturity.
RY.PR.E PerpetualDiscount -1.5676% Now with a pre-tax bid-YTW of 6.29% based on a bid of 18.21 and a limitMaturity.
CM.PR.G PerpetualDiscount -1.5400% Now with a pre-tax bid-YTW of 6.84% based on a bid of 19.82 and a limitMaturity.
BMO.PR.H PerpetualDiscount -1.4045% Now with a pre-tax bid-YTW of 6.40% based on a bid of 21.06 and a limitMaturity.
DFN.PR.A SplitShare -1.3766% Asset coverage of 2.3+:1 as of June 30, according to the company. Now with a pre-tax bid-YTW of 5.25% based on a bid of 10.03 and a hardMaturity 2014-12-1 at 10.00.
BNS.PR.J PerpetualDiscount -1.3749% Now with a pre-tax bid-YTW of 6.12% based on a bid of 21.52 and a limitMaturity.
BAM.PR.I OpRet -1.3398% Now with a pre-tax bid-YTW of 6.19% based on a bid of 24.30 and a softMaturity 2013-12-30 at 25.00. Compare with BAM.PR.H (5.48% to 2012-3-30), BAM.PR.J (7.02% to 2018-3-30) and BAM.PR.O (6.43% to 2013-6-30)
BNS.PR.O PerpetualDiscount -1.2083% Now with a pre-tax bid-YTW of 5.92% based on a bid of 23.71 and a limitMaturity.
CM.PR.I PerpetualDiscount -1.1621% Now with a pre-tax bid-YTW of 6.94% based on a bid of 17.01 and a limitMaturity.
MFC.PR.B PerpetualDiscount -1.1311% Now with a pre-tax bid-YTW of 6.12% based on a bid of 19.23 and a limitMaturity.
RY.PR.W PerpetualDiscount -1.0909% Now with a pre-tax bid-YTW of 5.70% based on a bid of 21.76 and a limitMaturity.
SLF.PR.D PerpetualDiscount -1.0465% Now with a pre-tax bid-YTW of 6.60% based on a bid of 17.02 and a limitMaturity.
BAM.PR.K Floater +1.2301%  
W.PR.H PerpetualDiscount +1.2301% Now with a pre-tax bid-YTW of 6.58% based on a bid of 21.06 and a limitMaturity.
W.PR.J PerpetualDiscount +1.3195% Now with a pre-tax bid-YTW of 6.56% based on a bid of 21.50 and a limitMaturity.
POW.PR.D PerpetualDiscount +1.4271% Now with a pre-tax bid-YTW of 6.56% based on a bid of 19.19 and a limitMaturity.
PWF.PR.G PerpetualDiscount +1.5047% Now with a pre-tax bid-YTW of 6.26% based on a bid of 23.61 and a limitMaturity.
CM.PR.D PerpetualDiscount +1.5130% Now with a pre-tax bid-YTW of 6.73% based on a bid of 21.47 and a limitMaturity.
SBC.PR.A SplitShare +1.5047% Asset coverage of 1.9+:1 as of July 10, according to Brompton Group. Now with a pre-tax bid-YTW of 5.63% based on a bid of 9.86 and a limitMaturity.
BAM.PR.M PerpetualDiscount +2.1629% Now with a pre-tax bid-YTW of 7.48% based on a bid of 16.06 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
CM.PR.H PerpetualDiscount 42,121 Now with a pre-tax bid-YTW of 7.03% based on a bid of 17.15 and a limitMaturity.
BMO.PR.L PerpetualDiscount 32,822 Now with a pre-tax bid-YTW of 6.48% based on a bid of 23.00 and a limitMaturity.
RY.PR.H PerpetualDiscount 29,800 Now with a pre-tax bid-YTW of 6.04% based on a bid of 23.88 and a limitMaturity.
SLF.PR.E PerpetualDiscount 28,698 Now with a pre-tax bid-YTW of 6.64% based on a bid of 17.13 and a limitMaturity.
BNS.PR.M PerpetualDiscount 28,020 Now with a pre-tax bid-YTW of 6.19% based on a bid of 18.26 and a limitMaturity.

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

3 Responses to “July 11, 2008”

  1. mpisni says:

    Hi James, I am assuming from some of your recent comments about retail investor and volatility you are saying that is the major reason for the price volatility is that retail investors are panicking and that institutional investors ( except for you, of course ) are at the lake.

    If so, how will these institutional investors when they get back with there tans reign the markets back in and establish order , or do they have the power at this point .

  2. jiHymas says:

    What I think will happen is that we will start seeing some good sized bids being put on the board. If so-and-so needs to put $1-million to work, he’s probably not going to be able to do in in one trade … so he’ll put in bids for 10,000 shares each at $20 on five different securities and get filled, to a greater or lesser extent, on these orders.

    We may also see bottom fishers come in to the market. A few stockbrokers might decide that the odds are favourable, so they’ll call their hot-money clients and say ‘Look – the odds are with you for a good 10% capital gain in six months.’

    Right now, the low total volume and the relative absence of block trades is convincing me that the selling is being done by small, not particularly sophisticated investors in an absence of stabilizing buying.

    Remember, though! What if I’m wrong? Don’t mortgage the house on this analysis … this is a very good time to be making small incremental improvements to your portfolio; it is rarely a good time to make big bets on anything.

  3. […] lucrative ten-year loan to a solid company like Pepsico, because they’re terrified that Charles Schumer will provide an investment opinion on their bank and cause a run. All this forces the Fed to reintermediate, with a little help from […]

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