September 19, 2008

The previously scheduled end of the world has been postponed.

Accrued Interest foresees a period of intense confusion:

Bonds are highly illiquid right now. Even Treasuries are showing unusual bid/ask spreads. There are many many many players who are going to be caught on the wrong side of this thing.

Some hedge funds are going to get crushed. I mean, anyone who was leveraged short financials may wind up getting busted out. That will result in some weird trading in seemingly unrelated instruments.

The Reserve Primary Fund buck-breaking has caused a huge onslaught of MMF redemptions:

Confidence in money-market funds was shaken this week when Reserve Primary Fund became the first in 14 years that failed to repay investors in full because of losses on debt issued by Lehman Brothers Holdings Inc. Investors responded by pulling a record $89.2 billion from funds on Sept. 17, according to data compiled by the Money Fund Report, a newsletter based in Westborough, Massachusetts. That equaled 2.6 percent of industry assets.

… and so Treasury is writing CDSs on Money Market Instruments:

The U.S. Treasury Department today announced the establishment of a temporary guaranty program for the U.S. money market mutual fund industry. For the next year, the U.S. Treasury will insure the holdings of any publicly offered eligible money market mutual fund – both retail and institutional – that pays a fee to participate in the program.

This is wild. I’m going to have to think about it a little more … but will this lead to a new financial industry? In which CP that’s issued will not only have bank-lines guaranteeing liquidity, but CDSs guaranteeing credit? Maybe this will be a good replacement business for the currently unfashionable municipal bond insurance game!

The American Bankers’ Association is upset because the Treasury move undercuts their FDIC advantage:

“Today’s action will undermine the role of banks during this current crisis and has the potential to have an extremely negative impact,” [ABA CEO Edward] Yingling said in the statement. “Our bankers are, understandably, very upset.”

Banks compete with money funds by offering accounts that are already covered by the Federal Deposit Insurance Corp. The extra margin of safety gives banks a competitive advantage with some consumers who want to avoid any chance of losses. Money- market funds hold about $3.35 trillion in assets.

Maybe that’s what will happen … MMFs will have to sign up with the FDIC / CDIC and all the other deposit guarantors, fill out all those forms and pay the insurance fees, and hire ex-regulators at fat salaries (only the smartest and most knowledgable ones, of course). Maybe they’ll even have to keep some capital with the fund to absorb losses and maintain capital and leverage ratios – and show the MER as a P&L item. Investor advocates will doubtless consider this a step forward. Because then everybody will get free money, right? Extra return without the slightest scrap of risk or necessity of thought is a fundamental human right, isn’t it?

Mind you, I’m not disagreeing with the Treasury move. Clearly, redemptions on the scale reported will have a long term negative effect and a short-term horrific effect … all the usual sales conduits busted, liquidity guarantees exercised, bank balance sheets bloating, the discount window getting a workout to finance the bloat … the move seems to me to be the lesser of the two evils.

And – as I have often said – the ultimate cause of the credit crunch is that there is a lot more demand for short-term investments than there is supply; which has led the industry to create pretend-short-term paper. Heightened uncertainty about the long-term ability to finance short-term will have effects that I’m going to have to think through carefully, but are guaranteed to be … interesting.

Sorry this report is late. I was up all night typing up the list of big winners! … No, I cannot tell a lie. I went home early and was asleep by 9pm and am now bright-eyed, bushy-tailed and eager to find out who goes bust next week.

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 4.70% 4.77% 76,082 15.77 6 +1.0160% 1,087.8
Floater 4.93% 4.93% 48,709 15.64 2 +0.8445% 813.6
Op. Retract 4.98% 4.67% 122,328 3.43 14 +0.2857% 1,048.0
Split-Share 5.46% 6.44% 51,752 4.34 14 +2.6135% 1,025.2
Interest Bearing 6.50% 7.28% 54,209 5.21 2 +2.5011% 1,096.3
Perpetual-Premium 6.24% 6.13% 58,889 2.18 1 +0.2000% 995.0
Perpetual-Discount 6.09% 6.17% 182,722 13.63 70 +0.6906% 874.8
Fixed-Reset 5.07% 4.93% 1,429,945 14.27 9 +0.2524% 1,117.8
Major Price Changes
Issue Index Change Notes
IAG.PR.A PerpetualDiscount -2.5261% Now with a pre-tax bid-YTW of 6.52% based on a bid of 17.75 and a limitMaturity.
CM.PR.E PerpetualDiscount +1.0427% Now with a pre-tax bid-YTW of 6.69% based on a bid of 21.32 and a limitMaturity.
SLF.PR.B PerpetualDiscount +1.1687% Now with a pre-tax bid-YTW of 6.06% based on a bid of 19.91 and a limitMaturity.
CM.PR.P PerpetualDiscount +1.1840% Now with a pre-tax bid-YTW of 6.84% based on a bid of 20.51 and a limitMaturity.
SLF.PR.C PerpetualDiscount 1.3767% Now with a pre-tax bid-YTW of 6.08% based on a bid of 18.41 and a limitMaturity.
W.PR.J PerpetualDiscount +1.4178% Now with a pre-tax bid-YTW of 6.67% based on a bid of 21.46 and a limitMaturity.
CM.PR.I PerpetualDiscount +1.4221% Now with a pre-tax bid-YTW of 6.72% based on a bid of 17.83 and a limitMaturity.
SLF.PR.E PerpetualDiscount +1.4803% Now with a pre-tax bid-YTW of 6.11% based on a bid of 18.51 and a limitMaturity.
SLF.PR.D PerpetualDiscount +1.5470% Now with a pre-tax bid-YTW of 6.09% based on a bid of 18.38 and a limitMaturity.
GWO.PR.I PerpetualDiscount +1.5954% Now with a pre-tax bid-YTW of 6.35% based on a bid of 17.83 and a limitMaturity.
CM.PR.H PerpetualDiscount +1.6375% Now with a pre-tax bid-YTW of 6.80% based on a bid of 18.00 and a limitMaturity.
ENB.PR.A PerpetualDiscount +1.6724% Now with a pre-tax bid-YTW of 5.85% based on a bid of 23.71 and a limitMaturity.
BAM.PR.K Floater +1.7303%  
ELF.PR.G PerpetualDiscount +1.8072% Now with a pre-tax bid-YTW of 7.19% based on a bid of 16.90 and a limitMaturity.
HSB.PR.C PerpetualDiscount +2.0192% Now with a pre-tax bid-YTW of 6.34% based on a bid of 20.21 and a limitMaturity.
FBS.PR.B SplitShare +2.0364% Asset coverage of 1.5+:1 as of September 18, according to TD Securities. Now with a pre-tax bid-YTW of 6.48% based on a bid of 9.52 and a hardMaturity 2011-12-15 at 10.00.
BCE.PR.R FixFloat +2.1277%  
FIG.PR.A InterestBearing +2.1762% Asset coverage of just under 1.9:1 as of September 18, according to Faircourt. Now with a pre-tax bid-YTW of 6.54% (mostly as interest) based on a bid of 9.86 and a hardMaturity 2014-12-31 at 10.00.
BAM.PR.J OpRet +2.1945% Now with a pre-tax bid-YTW of 6.12% based on a bid of 23.75 and a softMaturity 2018-3-30 at 25.00. Compare with BAM.PR.H (6.72% to 2012-3-30), BAM.PR.I (5.86% to 2013-12-30) and BAM.PR.O (8.66% to 2013-6-30).
RY.PR.W PerpetualDiscount +2.2299% Now with a pre-tax bid-YTW of 6.01% based on a bid of 20.63 and a limitMaturity.
DFN.PR.A SplitShare +2.2564% Asset coverage of just under 2.3:1 as of September 15, according to the company. Now with a pre-tax bid-YTW of 5.39% based on a bid of 9.97 and a hardMaturity 2014-12-1 at 10.00.
CM.PR.D PerpetualDiscount +2.3721% Now with a pre-tax bid-YTW of 6.64% based on a bid of 22.01 and a limitMaturity.
SBC.PR.A SplitShare +2.3760% Asset coverage of just under 2.0:1 as of September 18 according to Brompton Group. Now with a pre-tax bid-YTW of 5.79% based on a bid of 9.91 and a limitMaturity.
LBS.PR.A SplitShare +2.4590% Asset coverage of just under 2.0:1 as of September 18, according to Brompton Group. Now with a pre-tax bid-YTW of 5.50% based on a bid of 10.00 and a hardMaturity 2013-11-29 at 10.00.
BSD.PR.A InterestBearing +2.8571% Asset coverage of just under 1.5:1 as of September 12, according to Brookfield Funds. Now with a pre-tax bid-YTW of 8.08% (mostly as interest) based on a bid of 9.00 and a hardMaturity 2015-3-31 at 10.00.
BAM.PR.K Floater +2.8221%  
PWF.PR.E PerpetualDiscount +2.8623% Now with a pre-tax bid-YTW of 6.04% based on a bid of 23.00 and a limitMaturity.
POW.PR.C PerpetualDiscount +2.9320% Now with a pre-tax bid-YTW of 6.38% based on a bid of 23.17 and a limitMaturity.
BCE.PR.G FixFloat +2.9601%  
CM.PR.G PerpetualDiscount +2.9728% Now with a pre-tax bid-YTW of 6.85% based on a bid of 20.09 and a limitMaturity.
POW.PR.A PerpetualDiscount +3.5895% Now with a pre-tax bid-YTW of 6.34% based on a bid of 22.51 and a limitMaturity.
ELF.PR.F PerpetualDiscount +4.1020% Now with a pre-tax bid-YTW of 7.22% based on a bid of 18.78 and a limitMaturity.
FFN.PR.A SplitShare +4.5005% Asset coverage of just under 1.8:1 as of September 15, according to the company. Now with a pre-tax bid-YTW of 6.29% based on a bid of 9.52 and a hardMaturity 2014-12-1 at 10.00.
ALB.PR.A SplitShare +4.6067% Asset coverage of 1.6+:1 as of September 18, according to Scotia. Now with a pre-tax bid-YTW of 6.04% based on a bid of 24.07 and a hardMaturity 2011-2-28 at 25.00.
WFS.PR.A SplitShare +4.8835% Asset coverage of just under 1.6:1 as of September 11 according to Mulvihill. Now with a pre-tax bid-YTW of 7.15% based on a bid of 9.45 and a hardMaturity 2011-6-30 at 10.00.
BNA.PR.C SplitShare +5.5227% Asset coverage of 3.2+:1 as of August 29 according to the company. Now with a pre-tax bid-YTW of 10.10% based on a bid of 16.05 and a hardMaturity 2019-1-10 at 25.00. Compare with BNA.PR.A (7.48% to 2010-9-30) and BNA.PR.B (9.15% to 2019-1-10). Note that, given 2.4 shares of BAM.A per BNA preferred and a price of 28.63 on BAM.A, asset coverage is now 2.7+:1.
BNA.PR.B SplitShare +6.7908% See BNA.PR.C, above
Volume Highlights
Issue Index Volume Notes
RY.PR.I FixedReset 64,551 CIBC bought 20,00 from Nesbitt at 24.95.
PWF.PR.H PerpetualDiscount 98,969 CIBC crossed 41,700 at 24.22. Now with a pre-tax bid-YTW of 6.04% based on a bid of 24.16 and a limitMaturity.
BNS.PR.M PerpetualDiscount 29,486 Anonymous bought 18,600 from TD at 19.76. Now with a pre-tax bid-YTW of 5.79% based on a bid of 19.76 and a limitMaturity.
NA.PR.K PerpetualDiscount 27,366 Now with a pre-tax bid-YTW of 6.22% based on a bid of 23.80 and a limitMaturity.
SLF.PR.A PerpetualDiscount 22,480 Anonymous bought 16,100 from Nesbitt at 19.75. Now with a pre-tax bid-YTW of 6.05% based on a bid of 19.74 and a limitMaturity.

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

4 Responses to “September 19, 2008”

  1. Annette says:

    I feel like Alice in Wonderland:

    … And then the US Treasury pumped billions (if not, trillions) of dollars in the US financial system, the credit rating agencies maintained the AAA rating (as they did with ABCPs and, IIRC, AIG until it became so obvious that you don’t need a credit agency to know it is not going well) of the US Treasury and all the problems were gone. THE END

    I read this morning in the paper that the US debt is increasing by more than one million dollars every MINUTE. The US government will have at some point to cut its deficit by increasing taxes thus lengthening or deepening the recession. Has the US Treasury just bought time?

    I was ok with the Central Bank letting LEH down (I would feel unjustly treated though if I were a shareholder in light of what had been done before with Bear Sterns). What was done with AIG might turn into an excellent deal for the US taxpayers such that I think it was a good move while teaching shareholders another painful lesson. Restricting and suspending shortselling was also a good decision (as matter of fact, it should be prohibited in all cases unless one does cover back the position within the settlement period).

    I don’t believe in miracles though. The US Treasury buying the financials’ problems cannot be THE solution.

    What is your take on this historical week we have just been through?

  2. jiHymas says:

    I don’t have any problem with short-selling per se. Problems arise when it’s not properly over-collateralized … I’m trying to get to the bottom of that one.

    I’ve reminded Assiduous Readers of this blog many times that Canada very nearly hit the wall on debt in 1994. That frightened the mandarins in Finance and the BoC sufficiently that they were able to convince the politicians that yes, there was a genuine problem with Canada’s debt; we’ve had 14 glorious years of virtue ever since; or, at least, they were glorious until ‘What Debt?’ Harper took the helm.

    The US has not hit the wall yet and I think they’re a long way from hitting the wall. But they will need a major brush with disaster before the political elite gets serious about the problem. Hopefully, it will happen when the Democrats are in power – just as with Chretien’s Liberals, they’ve got the political room for such a change that the Republicans do not.

    This week brings the US a little closer to Armageddon. I have no problems with the AIG bail-out. LIBOR + 850bp? That’s pure Bagehot. Lehman going down? That brings some much needed uncertainty into the equation. I find the MMF guarantees of much greater interest; if they’re systemically important enough to be protected like banks, it seems to me that, at the very least, they’ll have to pay deposit insurance like banks.

    As the ABA pointed out, banks compete with MMFs for deposits, offering FDIC protection and lower rates. The Fed looks like it’s finally won its campaign to pay interest on reserve requirements, which will help the banks in their efforts to attract reservable deposits. The way this recent tumult in the relationship between bank deposits and MMFs plays out will have major implications for the economy going forward.

  3. […] PrefBlog Canadian Preferred Shares – Data and Discussion « September 19, 2008 […]

  4. […] I was amazed at the enormous effect that the buck-breaking at Reserve Primary Fund (discussed on September 19) had on the commercial paper […]

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