Remember the BMO Natural Gas fiasco that cost them so much money in the third quarter of 2007? The Fed has announced:
the issuance of a Consent Order of Prohibition against David Lee, former managing director of the Commodities Trading Group and institution-affiliated party of the Chicago, Illinois, branch of the Bank of Montreal (“BMO”).
Mr. Lee, without admitting to any allegations, consented to the issuance of the Order based on his alleged participation in unsafe and unsound banking practices, breaches of fiduciary duty and violations of law, in connection with his natural gas options trading activity at BMO. The Order asserts that Mr. Lee allegedly compromised the independent price verification process BMO relied on to ascertain the true value of his trading book, and also executed and then misvalued exchange of options for options trades in order to conceal the true value of his book, which led to after-tax losses to the bank of at least C$327,000,000.
In addition, the United States Attorney for the Southern District of New York and the District Attorney for New York County announced today that Mr. Lee has agreed to plead guilty to criminal charges relating to this matter. The Commodity Futures Trading Commission and Securities and Exchange Commission also separately announced the filing of civil lawsuits in related matters.
Accrued Interest reviews the function of leverage in the bond market of a deleveraging world and concludes:spreads on credit are permanently higher – not due to credit concerns, but because of financing concerns by leveraged players.
Credit markets got whacked today:
a weakening economy exacerbated concern that the government may not be doing enough to stem the financial crisis.
Top-rated securities backed by subprime or commercial mortgages fell to record lows and the cost of protecting against defaults on leveraged loans and investment-grade company bonds climbed, according to banks and benchmark credit-default swap indexes. Yields on Fannie Mae and Freddie Mac debt over benchmarks also approached records, according to data compiled by Bloomberg.
…
Weakening across debt markets accelerated after commercial- mortgage securities began plunging, following reports that two borrowers with $334 million of loans bundled into bonds were about to default. Yields on top-rated bonds backed by commercial mortgages soared 225 basis points to a record 1,125 basis points more than benchmark interest rates as of 1:26 p.m. in New York, according to a Goldman Sachs Group Inc. note to clients. A basis point is 0.01 percentage point.The ABX-HE-PENAAA 07-2 index tied to subprime bonds rated AAA when created in the first half of 2007 fell about 5.5 percent to a mid-price of 34.25, according to a note to clients today from JPMorgan Chase & Co.
The index is down almost 29 percent this month and indicates the bonds might fetch about 34 cents for each dollar of unpaid balances.
The PENAAA index has been discussed previously.
Scotia has announced:
that its results for the fourth quarter ended October 31, 2008 will include charges of approximately $595 million after tax ($890 million before tax) relating to certain trading activities and valuation adjustments.
The pre-tax charges are comprised of:
- $170-million on the Lehman bankruptcy – not an investment loss, but a failed settlement and trade unwinding. I’m really happy about this one – bankers have been dragging their feet on T+1 settlement for too long and it’s nice to see them get hurt due to their own laziness.
- $560-million on valuation adjustments
- $150-million on trading inventory
- $410-million on mark-to-market on CDOs
- $245-million on CDOs purchased from their US ABCP operation.
- Other CDOs, $165-million
- $160-million on “derivatives used for
asset/liability management purposes that do not qualify for hedge accounting.”
To continue today’s tale of woe, the US Commercial Mortgage-Backed Securities market collapsed:
That is the word that one market participant used to describe the action in the CMBS market today. I am sorry to be writing this so late but I just found it as I checked emails and thought it worth posting.
CMBX AAAs widened by 130 basis points. AJ tranches widened 250 basis points to 350 basis points. ( I am lacking expertise in this area but believe an AJ is sort of a junior AAA piece.) And tranches below AAA widened 150 basis points to 350 basis points.
Cash CMBS underperformed the index and some AAA bonds with 30 percent protection widened 200 basis points. These are AAA bonds (allegedly) trading swaps plus 1050 basis points. That is alot of yield and alot of fear.
These incredible spreads might explain today’s weakness in BAM and related issues. US corporates gapped wider:
The corporate bond market as measured by the IG 11 has begun to crumble. The index is currently quoted 226/228 which is about 19 basis points wider on the day.Why the sharp spike out in that spread today? I think it is partly a result of the significant widening in other spreads.
Canadian Preferred shares … were not immune.
| 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 | 4.89% | 4.81% | 70,214 | 15.87 | 6 | +1.0969% | 1,072.5 |
| Floater | 8.65% | 8.85% | 55,173 | 10.45 | 2 | -2.9255% | 404.3 |
| Op. Retract | 5.29% | 6.14% | 135,300 | 3.93 | 15 | -0.1971% | 1,004.6 |
| Split-Share | 6.57% | 11.78% | 59,305 | 3.86 | 12 | -0.8185% | 908.8 |
| Interest Bearing | 8.21% | 14.85% | 55,631 | 3.15 | 3 | -1.4365% | 866.0 |
| Perpetual-Premium | N/A | N/A | N/A | N/A | N/A | N/A | N/A |
| Perpetual-Discount | 7.24% | 7.32% | 176,908 | 12.20 | 71 | -1.5866% | 756.1 |
| Fixed-Reset | 5.42% | 5.09% | 898,763 | 15.13 | 12 | -0.2423% | 1,075.3 |
| Major Price Changes | |||
| Issue | Index | Change | Notes |
| FFN.PR.A | SplitShare | -7.0661% | Asset coverage of 1.4+:1 as of October 31, according to the company. Now with a pre-tax bid-YTW of 15.86% based on a bid of 6.05 and a hardMaturity 2014-12-1 at 10.00. Closing quote of 6.05-40, 3×125. Day’s range of 6.50-89. I’m really getting annoyed! The Regular Monthly Retraction is supportive. What kind of dim bulb is offering size at $6.40? |
| FTN.PR.A | SplitShare | -5.7718% | Asset coverage of 1.7-:1 as of November according to the company. Now with a pre-tax bid-YTW of 15.86% based on a bid of 6.05 and a hardMaturity 2015-12-1 at 10.00. Closing quote of 7.02-15, 5×16. Day’s range of 7.00-31. |
| PWF.PR.L | PerpetualDiscount | -5.4085% | Now with a pre-tax bid-YTW of 7.70% based on a bid of 16.79 and a limitMaturity. Closing quote 16.79-89, 2X7. Day’s range 16.50-17.51. |
| MFC.PR.B | PerpetualDiscount | -5.0755% | Now with a pre-tax bid-YTW of 7.42% based on a bid of 15.71 and a limitMaturity. Closing Quote 15.71-00, 20×48. Day’s range of 15.70-16.73. |
| GWO.PR.H | PerpetualDiscount | -5.0593% | Now with a pre-tax bid-YTW of 8.15% based on a bid of 15.20 and a limitMaturity. Closing Quote 15.20-49, 2×6. Day’s range of 15.10-00. |
| BAM.PR.M | PerpetualDiscount | -5.0593% | Now with a pre-tax bid-YTW of 10.15% based on a bid of 12.01 and a limitMaturity. Closing Quote 12.01-39. Day’s range of 11.99-80. |
| NA.PR.M | PerpetualDiscount | -4.9602% | Now with a pre-tax bid-YTW of 7.46% based on a bid of 20.31 and a limitMaturity. Closing Quote 20.31-00, 10×9. Day’s range of 20.55-21.60. |
| BNS.PR.J | PerpetualDiscount | -4.8955% | Now with a pre-tax bid-YTW of 7.13% based on a bid of 18.65 and a limitMaturity. Closing Quote 18.65-85, 2X28. Day’s range of 18.85-19.94. |
| BAM.PR.N | PerpetualDiscount | -4.8451% | Now with a pre-tax bid-YTW of 10.18% based on a bid of 11.98 and a limitMaturity. Closing Quote 11.98-38, 1×2. Day’s range of 11.91-12.95. |
| GWO.PR.I | PerpetualDiscount | -4.6227% | Now with a pre-tax bid-YTW of 8.20% based on a bid of 14.03 and a limitMaturity. Closing Quote 14.03-50, 1×10. Day’s range of 14.25-15.39. |
| BAM.PR.K | Floater | -4.0650% | |
| PWF.PR.K | PerpetualDiscount | -3.7356% | Now with a pre-tax bid-YTW of 7.49% based on a bid of 16.75 and a limitMaturity. Closing Quote 16.75-79, 3X5. Day’s range of 16.40-30. |
| FIG.PR.A | InterestBearing | -3.7135% | See discussion of rights offering. Now with a pre-tax bid-YTW of 13.23% based on a bid of 7.26 and a hardMaturity 2014-12-31. Closing quote of 7.26-87, 27×4. Day’s range of 6.96-60. |
| ELF.PR.F | PerpetualDiscount | -3.5714% | Now with a pre-tax bid-YTW of 9.10% based on a bid of 14.85 and a limitMaturity. Closing Quote 14.85-50, 2×2. Day’s range of 15.00-50. |
| PWF.PR.F | PerpetualDiscount | -3.3333% | Now with a pre-tax bid-YTW of 7.64% based on a bid of 17.40 and a limitMaturity. Closing Quote 17.40-90, 4×2. Day’s range of 17.30-00. |
| W.PR.J | PerpetualDiscount | -3.3143% | Now with a pre-tax bid-YTW of 8.43% based on a bid of 16.92 and a limitMaturity. Closing Quote 16.92-00, 2×8. Day’s range of 16.99-50. |
| TD.PR.P | PerpetualDiscount | -3.1984% | Now with a pre-tax bid-YTW of 6.86% based on a bid of 19.37 and a limitMaturity. Closing Quote 19.37-50, 10×4. Day’s range of 19.56-38. |
| BAM.PR.I | OpRet | -3.1674% | Now with a pre-tax bid-YTW of 9.36% based on a bid of 21.40 and a softMaturity 2013-12-30 at 25.00. Closing quote of 21.40-75, 6×61. Day’s range of 21.50-25. |
| GWO.PR.G | PerpetualDiscount | -3.1532% | Now with a pre-tax bid-YTW of 7.72% based on a bid of 17.20 and a limitMaturity. Closing Quote 17.20-60, 8×7. Day’s range of 17.05-98. |
| ALB.PR.A | SplitShare | -3.0895% | Asset coverage of 1.5-:1 as of November 13, according to Scotia Managed Companies. Now with a pre-tax bid-YTW of 11.77% based on a bid of 21.33 and a hardMaturity 2011-2-28 at 25.00. Closing quote of 21.33-22.62 (!) 1×1. Day’s range of 21.33-25. |
| CU.PR.B | PerpetualDiscount | -3.0065% | Now with a pre-tax bid-YTW of 6.76% based on a bid of 22.26 and a limitMaturity. Closing Quote 22.26-50, 2X45. Day’s range of 22.50-20. |
| BCE.PR.I | FixFloat | +4.4889% | |
| BNA.PR.C | SplitShare | +5.1345% | Asset coverage of 2.0+:1 as of October 31 according to the company. Asset coverage currently 1.8-:1 based on BAM.A at 18.62 and 2.4 BAM.A per preferred. Now with a pre-tax bid-YTW of 13.47% based on a bid of 12.90 and a hardMaturity 2019-1-10 at 25.00. Closing quote of 12.90-68, 1×7. Day’s range of 12.50-15. |
| Volume Highlights | |||
| Issue | Index | Volume | Notes |
| SLF.PR.D | PerpetualDiscount | 215,123 | Nesbitt crossed 50,000 at 14.00; then RBC crossed one block of 25,000 and another of 121,500, both at the same price. Now with a pre-tax bid-YTW of 8.03% based on a bid of 13.86 and a limitMaturity. |
| TD.PR.O | PerpetualDiscount | 82,551 | TD crossed 60,000 at 18.25. Now with a pre-tax bid-YTW of 6.78% based on a bid of 18.09 and a limitMaturity. |
| SLF.PR.C | PerpetualDiscount | 76,400 | Nesbit crossed 47,900 at 14.00, then sold 10,000 to RBC at 14.10. Now with a pre-tax bid-YTW of 8.00% based on a bid of 13.90 and a limitMaturity. |
| RY.PR.L | Fixed-Reset | 71,212 | CIBC crossed 14,900 at 25.08. |
| TD.PR.C | FixedReset | 45,665 | |
There were thirty-one other index-included $25-pv-equivalent issues trading over 10,000 shares today.
[…] criticism of bonehead risk control in the industry. Assiduous Readers will recall that on November 18 Scotia announced a big loss on trades – equities, admittedly – that were affected by that there […]