September 11, 2008

A Bloomberg story pointed me towards remarks by Mervyn King of the BoE regarding long- and short-term bank funding:

we will also set out arrangements to ensure the banking system as a whole will continue to be able to access liquidity insurance from the Bank of England from October 22nd.

The objective of the new facility will be to provide short-term liquidity insurance to smooth the adjustment of financial institutions hit by unexpected shocks. The facility will be an important part of the contribution which the Bank can make to enhance the stability of the banking system. But it is not the purpose of central bank liquidity insurance to provide a source of long-term funding to the financial system – indeed it cannot do that. Only private savers or taxpayers via the government can provide such funds. So I hope everyone will understand that the proposals to be published next week, important though they are, will not and cannot solve the shortage of funding to finance bank lending, including mortgage lending.

So there’s a warning shot! I suspect that the touted new facility – the Special Liquidity Scheme (SLS) will not make new loans after October 21 – will follow Bagehot and include a far more penalizing rate for liquidity injections. The SLS fee is minimal:

Banks will be required to pay a fee to borrow the Treasury Bills. The fee charged will be the spread between the 3-month London Interbank interest rate (Libor) and the 3-month interest rate for borrowing against the security of government bonds, subject to a floor of 20 basis points.

Meanwhile there is the chance that Fannie & Freddie debt might be explicitly nationalized:

The federal takeover of the government-sponsored enterprises, or GSEs, on Sept. 7 failed to address whether the debt of Fannie and Freddie should be included in the budget, or whether it carries an explicit government guarantee. In an interview this week, Treasury Secretary Henry Paulson cited the “incongruities” in the law and said “we should be clear, is there a government guarantee or isn’t there?”

Any decision to add Fannie and Freddie to the budget wouldn’t automatically translate into an explicit government backing for the companies’ combined $1.7 trillion in unsecured debt and $3.5 trillion of mortgage guarantees. Granting the full faith and credit of the U.S. would require an act of Congress to change the companies’ legal status.

This would bring the Fannie/Freddie debt into a position resembling CMHC mortgage bonds:


CMB have been given Canada’s S&P AAA/Moody’s Aaa credit rating and a 0% capital weighting under the BIS guidelines. CMB are not subject to withholding tax by Canada.

and its direct debt:


Canada credit and a 0% capital weighting under the BIS guidelines

Though mind you, the CMHC is virtually invisible to retail-level Canadians – they buy their mortgages wholesale from the banks, except for those made in order to help cities build slums. The FannieFreddieFiasco has politicized foreclosures in an election year:

U.S. Senate Banking Committee members urged Fannie Mae and Freddie Mac, the mortgage companies placed under federal control this week, to freeze foreclosures on loans in their portfolios for at least 90 days.

“This action would provide immediate relief to many homeowners” and let the companies “turn these non-performing loans into performing assets to minimize losses,” Senators Charles Schumer, Robert Menendez and other panel Democrats said today in a letter to the companies and the Federal Housing Finance Agency, which is overseeing them under the government conservatorship. The companies also should ease their policies on modifying mortgages, the senators wrote.

I guess, if you squint, you can put this politicization in the “unintended consequences” category, together with the Municipal Ratings Mess I posted about today. I just can’t resist noting another unintended consequence of feel-good politics that I learned about today: European Universities get paid for granting diplomas:

Indeed, with the notable exception of the UK, European universities display a poor performance in most international education rankings. According to both the Times Higher Education Supplement and the Shanghai Jiao Tong university rankings, only four institutions in continental Europe would rank among the top 50 universities in the world.

More precisely, the funds allocated to a university [in Italy] increase with the total number of full-time equivalent students (FTE), which is defined as the ratio between the number of exams passed and the number of exams that students should have taken.

The evidence suggests that a financing scheme that was meant to reward universities that produce higher value added is, instead, favouring universities with lower standards.

Surprise, surprise! It reminds me of Communist Russia’s Five Year Plans … tractor factory heads had to meet a production quota measured by weight of shipped products … and responded by building the world’s heaviest tractors.

Lehman continues to twist in the wind and is looking – urgently – for a buyer. The Bank of America has been mentioned. Why not? They’ve warmed up with Countrywide:

“This deal is so rancid and unpredictable,” said Christopher Whalen, managing director at the consulting firm Institutional Risk Analytics. “Bank of America’s executives can’t even articulate what the total liabilities from this deal are.”

Another possibility is for them simply to sell off their crown jewel, but there are financing problems:

Lehman Brothers Holdings originally sought to sell as much as 70% of its investment-management division but scaled that back to a sale of a 55% stake thinking that the private-equity firms mulling a bid would have trouble finding the financing for a bigger deal.

Final bids are due Friday, setting the stage for a weekend of wheeling and dealing if Lehman can fend off today’s brutal market evisceration of its stock, according to people familiar with the matter.

In a comment completely unrelated to Lehman, Blackstone Group COO Tony James said Wednesday that LBO financing has a hard limit of $5 billion these days.

A lot of European junk bond product is now classified as distressed:

More than 30 percent of European high-risk, high-yield bonds are trading at distressed levels, the most in five years, stoking speculation defaults will rise.

Investors demand an extra yield over government debt of more than 10 percentage points to hold 53 of the 169 bonds in Merrill Lynch & Co.’s Euro High Yield Constrained Index. That’s the biggest proportion of distressed debt since March 2003, in the aftermath of the Sept. 11 terror attacks and the dot-com crisis.

A surprisingly quiet day on the market, with very few issues trading in substantial size. PerpetualDiscounts eked out a small gain, closing with a pre-tax bid-YTW of 6.09%, equivalent to interest of 8.53% at the standard 1.4x tax-equivalency factor. Long corporates are at 6.20%, so the spread is still a relatively high 233bp.

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.
The Fixed-Reset index was added effective 2008-9-5 at that day’s closing value of 1,119.4 for the Fixed-Floater index.
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet N/A N/A N/A N/A 0 N/A N/A
Fixed-Floater 4.60% 4.62% 66,121 15.99 6 -0.3212% 1,112.2
Floater 4.39% 4.39% 47,885 16.66 2 +0.3578% 909.4
Op. Retract 4.94% 4.27% 127,059 3.15 14 +0.2362% 1,056.1
Split-Share 5.34% 5.84% 49,328 4.39 14 +0.0387% 1,046.1
Interest Bearing 6.41% 7.15% 51,746 5.19 2 +0.1576% 1,100.7
Perpetual-Premium 6.16% 5.52% 55,870 2.21 1 -0.0788% 1,006.9
Perpetual-Discount 6.02% 6.09% 183,203 13.76 70 +0.0156% 885.0
Fixed-Reset 5.07% 4.89% 1,284,065 13.99 8 +0.0001% 1,120.0
Major Price Changes
Issue Index Change Notes
ELF.PR.G PerpetualDiscount -2.5481% Now with a pre-tax bid-YTW of 7.04% based on a bid of 17.21 and a limitMaturity.
POW.PR.B PerpetualDiscount -1.0314% Now with a pre-tax bid-YTW of 6.18% based on a bid of 22.07 and a limitMaturity.
BCE.PR.Z FixFloat -1.0200%  
FFN.PR.A SplitShare -1.0152% Asset coverage of just under 1.9:1 as of August 31 according to the company. Now with a pre-tax bid-YTW of 5.80% based on a bid of 9.75 and a hardMaturity 2014-12-1 at 10.00.
PWF.PR.H PerpetualDiscount +1.2073% Now with a pre-tax bid-YTW of 5.99% based on a bid of 24.31 and a limitMaturity.
BMO.PR.K PerpetualDiscount +1.2087% Now with a pre-tax bid-YTW of 6.09% based on a bid of 21.77 and a limitMaturity.
BAM.PR.N PerpetualDiscount +1.2219% Now with a pre-tax bid-YTW of 7.08% based on a bid of 16.84 and a limitMaturity.
BAM.PR.J OpRet +2.2248% Now with a pre-tax bid-YTW of 6.02% based on a bid of 23.90 and a softMaturity 2018-3-30 at 25.00. Compare with BAM.PR.H (5.96% to 2012-3-30), BAM.PR.I (5.69% to 2013-12-30) and BAM.PR.O (7.60% to 2013-6-30).
BNA.PR.C SplitShare +2.3270% Asset coverage of 3.2+:1 as of August 29 according to the company. Now with a pre-tax bid-YTW of 9.18% based on a bid of 17.15 and a hardMaturity 2019-1-10 at 25.00. Compare with BNA.PR.A (6.34% to 2010-9-30) and BNA.PR.B (8.89% to 2016-3-25).
Volume Highlights
Issue Index Volume Notes
ENB.PR.A PerpetualDiscount 201,700 Nesbitt crossed 200,000 at 23.57. Now with a pre-tax bid-YTW of 5.87% based on a bid of 23.57 and a limitMaturity.
TD.PR.P PerpetualDiscount 201,000 Nesbitt crossed 200,000 at 23.30. Now with a pre-tax bid-YTW of 5.73% based on a bid of 23.23 and a limitMaturity.
CM.PR.K Fixed-Reset 94,320 New issue settled yesterday. CIBC crossed 50,000 at 24.93.
BNS.PR.R Fixed-Reset 43,400 New issue settled Tuesday. Scotia bought 19,400 from Nesbitt at 25.10.
BNS.PR.Q Fixed-Reset 23,445 RBC crossed 20,000 at 25.10.

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

One Response to “September 11, 2008”

  1. […] on the heels of my speculation yesterday that the BoE was preparing the ground for a more punitive rate for its liquidity operations comes […]

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