PrefBlog

A nugget of information about Credit Default Swaps on sovereigns is being circulated:

The credit-default swaps traders being blamed by German and French leaders for fueling fears of sovereign debt crises would be doing so with less than 1 percent of the governments’ outstanding debt being wagered.

The CHART OF THE DAY shows the net notional value of credit swaps on 10 European countries including Greece, Spain, Italy and Portugal, as reported by the Depository Trust & Clearing Corp. The $108 billion figure, which is the maximum amount on the line if all of the countries were to default, is 0.98 percent of the $11 trillion in outstanding debt of those countries. In Greece, where the heaviest complaints about credit-swaps trading have been leveled, bets of $9 billion compare with $267 billion of debt.
…
European leaders have said trading in the contracts fuels speculation that can distort perceptions and have warned hedge funds about trying to profit from the problems on the continent.

The last line quoted is the scary part. Remember September 25, 1992? The politicians don’t like it when the market says, instantly, that they’re being stupid. It is infinitely preferable to allow the stupidity to continue until it distorts the real economy and winds up on the backs of the electorate – who, it is assumed, will have long ago forgotten who’s to blame.

Remember Flash orders? There’s a really good explanation of the viewpoint of exchanges offering this order type from William Brodsky of the CBOE – dated 2009-11-18.

Fannie Mae needs more money:

Fannie Mae, the mortgage-finance company under federal conservatorship, said it will seek $15.3 billion in aid from the U.S. Treasury after posting a 10th straight quarterly loss.

A fourth-quarter net loss of $16.3 billion, or $2.87 a share, pushed the company to request its fifth draw on an unlimited lifeline from the government, Washington-based Fannie Mae said in a filing today with the Securities and Exchange Commission.

Fannie Mae, which posted $120.5 billion in losses over the previous nine quarters, has taken $59.9 billion in federal aid since April. Its shares, which peaked at $87.81 in December 2000, closed at 99 cents today in New York Stock Exchange composite trading. The Treasury owns 79.9 percent of Fannie Mae’s outstanding common shares.
…
The fair value of Fannie Mae’s assets was negative $98.8 billion last quarter, compared with negative $90.4 billion at the end of September.

Banks can screw up, certainly, and must bear a lot of the blame for the credit crunch. It’s not as if working for a bank transforms you into a genius – quite the opposite, as far as I’ve ever been able to tell. But for horrific blunders of stupefying dimensions, you need a politician. Funny how all the “Too Big To Fail” handwringing always concerns JPMorgan et al. and not Fannie & Freddie, huh?

Finally something of a (dead cat?) bounce in the preferred share market today, with PerpetualDiscounts gaining 19bp and FixedResets down 1bp, with no losers at all in the performance highlights. Volume was off a bit, but still quite healthy.

PerpetualDiscounts now yield 5.90%, equivalent to 8.26% interest at the standard equivalency factor of 1.4x. Long Corporates yield about 5.9%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 235bp, which is where it was on February 24.

This entry was posted on Friday, February 26th, 2010 at 9:22 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.