PrefBlog

I posted a little while ago about Central Banks and the Eligibility Premium … today there was a dramatic illustration (maybe!) about the suddenly enormous importance of access to central bank lending facilities in a Bloomberg story on European bank risk:

The Frankfurt-based central bank will cut 12 percent from the value of asset-backed securities it accepts as collateral, ECB President Jean-Claude Trichet said at a press conference today, an increase from as little as 2 percent previously. Hard- to-value assets will have an additional premium of 5 percent, Trichet said. Unsecured bank bonds will have a 5 percent haircut. The new rules apply from Feb. 1, 2009.
…
Credit-default swaps on the Markit iTraxx Financial index of subordinated debt of 25 European banks and insurers climbed 9 basis points to 174, the highest since April 1, according to JPMorgan Chase & Co. prices at 3:02 p.m. in London.

I am by no means convinced that this is direct cause and effect; and I am by no means convinced that the CDS market has any connection with reality; but both possibilities are subject to discussion!

Moody’s has discovered another CPDO programming error:

Moody’s Investors Service said it may cut the ratings of 854 million euros ($1.2 billion) of constant proportion debt obligations after disclosing a second error in the way it assesses the securities.

Moody’s review was “prompted by the identification of a coding error in a model used for monitoring CPDOs,” the New York-based firm said in a statement today. Moody’s will probably downgrade the affected CPDOs by one or two levels, it said.

Their last whoopsee was discussed on PrefBlog on May 21. CPDOs in general have been introduced to Assiduous Readers in connection with disputes over credit quality.

Pity poor Lehman! I confess I haven’t been following the story very closely as it twists in the wind, but given that its Price/Book Ratio is reported as 0.49 with an Enterprise Value of NEGATIVE 210-billion [a misprint?], my suspicion is that it has a lot of highly illiquid assets that investors are assigning a value far below the value management thinks they’re worth. So … they’re going to try to spin them off:

Lehman Brothers Holdings Inc. may shift about $32 billion of commercial mortgages and real estate to a new company that will be spun off in a move similar to the good-bank-bad-bank model used in the 1980s banking crisis, two people briefed on the discussions said.

The bad bank, nicknamed Spinco for now, would have about $8 billion of equity coming from Lehman, the people said, speaking on condition of anonymity because the plan is one of several under consideration. Spinco would borrow the remaining $24 billion from Lehman or outside investors.
…
Korea Development Bank has been in discussions to buy a 25 percent stake in Lehman for $6 billion, according to the people familiar with the talks. That would replace most of the capital Lehman would put into the bad bank.

The OSC has a survey on product suitability (hat tip: Financial Webring Forum). Assiduous Readers now have their long desired chance to tell the regulators that investments should be sold to the public only if they go up. The committee has indicated that anonymous submissions will not only be read, but actually be taken seriously.

Sadly, there is no corresponding survey regarding Advisor Suitability. Force publication of composite performance – publish it on the regulatory website, disk storage of all that data is cheap enough – and most problems disappear instantly.

On a happier note, I’ve decided I like commodity crashes better than financial crises:

The Standard & Poor’s/TSX Composite Index fell 2.5 percent to 12,814.14 in Toronto. Canada’s equity benchmark, which derives about two-thirds of its value from energy, materials and financial stocks, has fallen 7 percent in three days and is 15 percent below its June 18 record.

Even after today’s slight loss, PerpetualDiscounts are up 25bp on the month-to-date, a lack of correlation much more to my tastes than was the case during the dark days of July.

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

This entry was posted on Thursday, September 4th, 2008 at 9:37 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.