Category: Market Action

There was another big whack of retail-sized trades today in POW.PR.C, with Nesbitt buying 20,900 shares on the TMX (against total volume of 34,297) at an average price of 25.555. If CPD is behind the buying, this will almost certainly hurt performance.

Another day of good volume with the FixedResets scoring yet another shut-out on the volume table as – presumably – some players rejigged their portfolios with the closing of the AER.PR.A and BPO.PR.N issues.

PerpetualDiscounts lost 15bp on the day, while FixedResets lost 10bp.

PerpetualDiscounts now yield 5.75%, equivalent to 8.05% interest at the standard equivalency factor of 1.4x. Long Corporates now yield about 5.9% (maybe a hair more), so the pre-tax interest equivalent spread (also called the Seniority Spread) is now about 215bp, a widening from the 205bp reported January 13.

The repo market for mortgage-backed securities is looking a lot healthier:

Wall Street firms are loosening the terms of their lending to mortgage-bond investors as markets heal, an RBS Securities Inc. executive said.

Repurchase agreement, or repo, lending against the debt has expanded so much since freezing in late 2008 that some banks now offer as much as 10-to-1 leverage and terms as long as one year on certain securities backed by prime-jumbo home loans, said Scott Eichel, the Royal Bank of Scotland unit’s global co-head of asset- and mortgage-backed securities.
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As asset values dropped during 2007 and 2008, leverage boosted losses, wiping out hedge funds run by London-based Peloton Partners LLP and New York-based Bears Stearns Cos., and damaged markets by leading to forced sales by firms including Santa Fe, New Mexico-based Thornburg Mortgage Inc., which filed for bankruptcy.

This is of particular interest because MBS have embedded put options reflecting the homeowner’s ability to refinance. This means that when yields on MBS – best reflected by the 10-year treasury – increase, the calculated average term of the mortgage increases, since nobody’s going to refinance a loan with a below-market coupon. To offset this, holders of MBS will short 10-year Treasuries … and the more prices go down, the more they have to short. During the bond market crash of 1994, 10-years behaved an awful lot more like long-term bonds than medium term!

The SEC has found something that is not regulated and is proposing forceful action to address the issue:

The requirement that a brokerdealer’s financial and regulatory risk management controls and procedures be reasonably designed to prevent the entry of orders that fail to comply with the specified conditions would necessarily require the controls be applied on an automated, pre-trade basis before orders route to an exchange or ATS, thereby effectively prohibiting the practice of “unfiltered” or “naked” access to an exchange or ATS.

Volume was heavy today and FixedResets recorded another shut-out on the volume tables, probably related to tomorrow’s closing of the AER 6.50%+375 and BPO 6.15%+307 FixedReset issues. Price action was muted, with PerpetualDiscounts up 2bp and FixedResets down 2bp.

Econbrowser‘s James Hamilton took a look at How the Federal Reserve Earned its Profit.

There was a surprising amount of activity in the Canadian preferred share market today – considering the American holiday – with an equally surprising amount of price action. PerpetualDiscounts lost 2bp while FixedResets gained 14bp and scored a shut-out on the volume highlights table.

Mary Schapiro of the SEC testified to the Crisis Committee. It’s lightweight bureaucratic fluff, especially when compared to Sheila Bair’s testimony, which was a joy to read since it contained actual arguments.

The previously mocked HAMP is looking more sickly by the minute:

About 25 percent of homeowners who received trial loan modifications through President Barack Obama’s main foreclosure prevention plan are failing to keep up with their new reduced payments, the Treasury Department said.

At least 196,000 borrowers have missed some or all of their required payments, according to comments Treasury officials made on a conference call today and calculations from government data. An additional 115,000 homeowners who started trial repayment plans last year have either dropped out or been kicked out of Obama’s Home Affordable Modification Program, the officials said.
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Turning around the U.S. housing market is one of Obama’s top priorities, Lawrence Summers, the president’s top economic adviser, told reporters yesterday. The administration has put off restructuring federally controlled mortgage-finance companies Fannie Mae and Freddie Mac while they are administering the mortgage- modification program.

PerpetualDiscounts had a nothing day on the Canadian preferred share market, losing a quarter of a beep, but FixedResets bounced back strongly, gaining 13bp. Volume was heavy.

Comrade Peace-Price made the punitive taxation of vilified institutions official:

“My commitment is to recover every single dime the American people are owed,” Obama said in a statement released this morning. “My determination to achieve this goal is only heightened when I see reports of massive profits and obscene bonuses at the very firms who owe their continued existence to the American people.”

The levy would be based on bank liabilities and be imposed starting June 30 on companies such as Citigroup Inc., American International Group Inc. and Bank of America Corp. The administration estimates it will raise $90 billion over a minimum of 10 years, said an administration official, who briefed reporters on the condition of anonymity.

As discussed yesterday, the bulk of TARP costs have been for carmakers and individuals, but since when have facts influenced a demagogue?

The SEC has released a Concept Release on Equity Market Structure:

The Securities and Exchange Commission (“Commission”) is conducting a broad review of the current equity market structure. The review includes an evaluation of equity market structure performance in recent years and an assessment of whether market structure rules have kept pace with, among other things, changes in trading technology and practices. To help further its review, the Commission is publishing this concept release to invite public comment on a wide range of market structure issues, including high frequency trading, order routing, market data linkages, and undisplayed, or “dark,” liquidity. The Commission intends to use the public’s comments to help determine whether regulatory initiatives to improve the current equity market structure are needed and, if so, the specific nature of such initiatives.

Meanwhile, the Fed has released a Report to Congress on the Case for a Role for the Federal Reserve in Bank Supervision:

Besides the experience at the Federal Reserve, international developments suggest that a central bank role in supervision can be important. For example, many have suggested that the problems with Northern Rock in the United Kingdom were compounded by a lack of clarity regarding the distribution of powers, responsibilities, and information among the Bank of England, the U.K. Financial Services Authority, and the U.K. Treasury. In response, the Bank of England was given statutory responsibilities in the area of financial stability, its powers to collect information from banks were augmented, and many have called for it to be given increased supervisory authority. In the European Union, a new European Systemic Risk Board is being established under which national central banks and the European Central Bank will play a central role in efforts to protect the financial system from systemic risk. More broadly, in most industrial countries today the central bank has substantial bank supervisory authorities, is responsible for broad financial stability, or both.

There was not a lot of price action in the preferred share market today, at it seems to have found some kind of level after the large gains of early January: PerpetualDiscounts were down 8bp, while FixedResets gained 4bp, on reasonable volume. The day was enlivened by the successful launch of BAM.PR.R.

The Fed’s reintermediation has been good business:

The Federal Reserve paid a record $46.1 billion to the U.S. Treasury last year as aggressive bond purchases and lending to fight the financial crisis swelled its net income by 46.8 percent.

The Fed’s payment represents an increase of $14.4 billion over its 2008 contribution and was the largest since the U.S. central bank was launched in 1914. Its 2009 net income of $52.1 billion also was a record.

The SEC wants to take a more paternalistic approach to investors:

The Securities and Exchange Commission voted to propose banning a practice in which brokers provide investors with unsupervised access to an exchange or alternative trading system.

Chairman Mary Schapiro said so-called naked sponsored access, in which a customer bypasses the pre-trade controls of their brokers and access markets directly, may expose the market and firms that offer the service to too much risk.
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Aite Group LLC, a financial services research firm in Boston, said in a December report that sponsored access represents about half of U.S. equities trading, with unfiltered access accounting for 38 percent.

Comrade Peace-Prize wants the banks to pay for the carmaker bail-out:

The fees, expected to be spread over as many as 10 years, will be based on the leverage or amount of liability each firm has, said the official, who spoke on the condition of anonymity.

Obama will outline his proposal to raise as much as $120 billion at an event at the White House tomorrow, according to the official who spoke on the condition of anonymity.

The final cost of the fees will be based on total losses from the Troubled Asset Relief Program, or TARP, which administration officials expect to drop from the current Treasury estimate of $120 billion. The White House declined to provide a list of banks that would be targeted.
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The U.S. is unlikely to recoup its investment in insurer American International Group Inc. or automakers General Motors Corp. and Chrysler Group LLC. Those losses and money spent to stem mortgage foreclosures are estimated to be about $120 billion.

According to the latest TARP report:

To date, Treasury-OFS has provided approximately $76 billion in loans and equity investments to GM , Chrysler, and their respective financing entities.

According to Table 7 of the report, the total cost of TARP is now estimated to be $68.5-billion, of which $30.4-billion is the “Automotive Industry Financing Program” and $27.1-billion is the “Home Affordable Modification Program” (HAMP has been previously mocked on PrefBlog). If you add in the Fed’s reintermediation profits, aid to the financial system has been zero. I think, if anything, the financial industry should get a medal, or at least a large bonus: the whole point of recessions is to point out who’s been doing things wrong and the big finger points at the carmakers.

Why should we subsidize them? Because they’re good jobs. Why are they good jobs? Because they’re subsidized.

Philip Angelides, head of the Financial Crisis Inquiry Commission and recently treasuror of the financially troubled state of California, said today that portfolio managers are stupid and must have their trades approved by sell-side smiley-boys:

Lloyd Blankfein, the head of Goldman Sachs Group Inc., failed to own up to his firm’s role in selling mortgage securities that helped trigger the global credit crisis, said the chairman of the panel investigating the financial meltdown.

“Mr. Blankfein himself never admitted that there was any responsibility of Goldman Sachs to make sure the products themselves were good products,” Philip Angelides, chairman of the Financial Crisis Inquiry Commission, told reporters after a hearing in Washington today. “That’s very troublesome.”

I find it very troublesome that morons like Angelides are permitted to walk around without a keeper. What’s next? Fining securities firms for selling commercial paper that defaults? Or for selling auction rate securities that suddenly (surprise!) become illiquid? It’s ridiculous.

The market had another down day, with PerpetualDiscounts giving up 4bp total return and FixedResets losing 14bp, on good volume

PerpetualDiscounts now yield 5.75%, equivalent to 8.05% interest at the standard equivalency factor of 1.4x. Long Corporates continue to yield near-as-dammit to 6.0%, so the Pre-Tax Interest-Equivalent spread (also called the Seniority Spread) is now about 205bp, a slow (albeit appreciated!) tightening from the January 6 level of 212bp.

The Kansas City Financial Stress Index declined in December but it still above pre-crisis levels.

Comrade Peace-Prize’s plans for a punitive bank tax are getting clearer:

The plan is to have revenue from the fee dedicated to deficit reduction and to cover the amount that the Treasury Department estimates it will lose from TARP, which is $120 billion. Details will be contained in the fiscal 2011 budget that Obama will submit to Congress next month, the official said.

The government’s $700 billion rescue plan contributed to a record $1.4 trillion deficit last year.

Tax experts, who discussed the possibilities before the president’s plan was disclosed, say all of the administration’s structural options, which include an income surtax, an excise tax, or a fee pegged on the value of assets or some other measure, are likely to be so porous that financial institutions would be able to sidestep most of them.

Not to worry! The FDIC is always willing to grandstand:

The Federal Deposit Insurance Corp., in a bid to help align bank pay practices with risk management, is considering whether to link compensation with fees the agency charges lenders to support the fund protecting deposits.

The FDIC board today voted 3-2 to seek comment for 30 days on the proposal on bank compensation before deciding whether to begin a formal rule-making process, which may take several months.

“This is clearly a contributor to the crisis and to the losses we are suffering,” FDIC Chairman Sheila Bair said.

With all this micromanagement, soon the financial system will be as well run as, say, Toronto’s water distribution!

Hedge funds are increasingly operating as shadow-banks:

Today, hedge fund firms are loaning a record amount of money to unprofitable and bankrupt companies, according to New York-based HedgeFund.net. As banks that are recovering from the credit crackup avoid financing companies in distress, hedge fund firms are filling the gap, says Sean Egan, president of Haverford, Pennsylvania- based Egan-Jones Ratings Co.

Some hedge funds and other nonbank lenders charge interest rates as high as 19 percent in this mostly unregulated corner of the debt market, according to a survey by Malibu, California- based Pepperdine University’s Graziadio School of Business and Management. Firms also layer on fees, including costs as high as 12 percent of the loan for monitoring the value of a borrower’s collateral assets, according to the survey. Some lenders demand closing charges of up to 4 percent.

The preferred share market backtracked a bit today, with PerpetualDiscounts down 2bp and FixedResets losing 27bp – taking their median weighted average yield all the way up to 3.56%! Perhaps three new issues in two days (AER, 6.50%+375, BPO, 6.15%+307 and FTS, 4.25%+145) is just a bit too much, too fast. Volume was heavy.

Having prepared the ground with a programme of vilification, Comrade Obama is suggesting a supertax on banks:

President Barack Obama is considering a fee on financial services companies for inclusion in the budget plan he’s set to release next month as a way to cut the federal deficit, an administration official said.

Obama has vowed to halve the deficit, which was $1.4 trillion last year in part because of stimulus spending, the costs of war in Iraq and Afghanistan and bailouts of financial institutions and companies such as the automakers General Motors Co. and Chrysler Group LLC.

One wonders whether Mayor Bloomberg will have the same courage as Boris Johnson:

The Tory mayor has written to the chair of the Commons Treasury select committee, John McFall, to urge him to open an immediate inquiry into the government’s plans for a new tax on bankers’ bonuses, the 50p top tax rate, which will primarily affect London and the UK’s financial sector, and regulatory changes.
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The mayor estimates that up to 9,000 staff, many highly skilled, could leave the UK, potentially costing the exchequer over £1.2bn in lost tax and national insurance contributions annually – although the latest predictions are that the government could take in £2bn from the bonus tax.

Johnson said that, although London would remain one of the most attractive cities to do business in, “these ‘salami-slicing’, shortsighted proposals could potentially and permanently damage the competitiveness of London as a financial centre by driving away the city’s unique cluster of highly skilled people, ideas and expertise.”

The Canadian preferred share market was able to eke out a small gain on the day, with PerpetualDiscounts up 3bp and FixedResets up 4bp, as volume remained good.

One way of recruiting in a bonus-hostile environment is to double base pay:

London’s investment banks are luring back traders and analysts they lost to brokerage firms during the credit crisis, compensating for lower bonuses by as much as doubling base salaries.
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The hires show how London’s investment banks are regrouping after boutique firms poached traders during the credit crisis with the promise of greater job security and a bonus. London’s investment banks cut about 49,000 jobs and logged more than $560 billion of writedowns during the credit crisis, according to data compiled by Bloomberg. Brokers including Eden Financial Ltd. and Liberum Capital Ltd. added sales traders and analysts to win clients from rivals that had received taxpayer bailouts.
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While bankers are considering their options on relocating to Germany or Switzerland to avoid the tax, [headhunter Jason] Kennedy said the bonus levy isn’t an issue for traders and bankers looking to move after April to larger firms because the government has said the charge will apply only to this year’s bonuses.

Holy smokes, this market’s on wheels. PerpetualDiscounts were up 46bp today and FixedResets gained 11bp, this being accomplished in a fairly well-behaved manner – there are only eight entries on the performance highlights table. Volume eased off a bit, but was still reasonably respectable.

Assiduous Reader prefhound points out that I didn’t reproduce his chart when appending his comment to the January 4 post. Well, it’s reproduced now!

A grizzled and cynical old lawyer once told me that the first thing you learn in law school is that a contract is holy. The first thing you learn as a practicing lawyer is that a contract is where you start. And, it appears, Citigroup is as duplicious as any of them:

Last June, Citi was supposed to pay five former senior executives millions in severance payouts, but what the bank decided to do, instead, was not make those payment. The ex-employees were owed about $100 million (half of which had been paid out) but not wanting to be compared to AIG which, at the time, was in the midst of receiving death threats over bonuses, Citi chose to inform the group that it shouldn’t count on the remainder of the cash.

Deferred compensation at banks will give a massive competitive advantage to hedge funds and shadow banks.

Another zippetty-doo-dah-day for Canadian Preferreds, with PerpetualDiscounts up 33bp and FixedResets up 1bp. Volume was good.