Category: Market Action

BofA was able to raise significant equity capital yesterday:

Bank of America Corp., the biggest U.S. bank by assets, said it raised about $13.5 billion in a sale of common stock as part of an effort to boost capital and weather an extended recession.

The bank issued 1.25 billion shares at an average price of $10.77 each, according to a statement today. The Charlotte, North Carolina-based company plans to boost common equity capital by $17 billion through the sale of stock and by converting preferred shares mostly held by institutional investors, Chief Executive Officer Kenneth Lewis said May 7.
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Bank of America expects to add $10 billion more in capital through asset sales and at least $7 billion from improved pretax profits, the company said on May 7. Those numbers may change as the bank considers options to achieve its $33.9 billion target, spokesman Jerry Dubrowski said.

The Pension Benefit Guaranty Fund in the States is having about as much fun as other guarantors:

Pension Benefit Guaranty Corp.’s deficit tripled to $33.5 billion in the past six months as more companies canceled retirement plans amid the U.S. recession, according to the head of the government-owned corporation.

About $11 billion is for “completed and probable terminations,” and $7 billion is from an increase in interest rates that boosted liabilities, Vince Snowbarger, the acting PBGC director, said in written testimony to be delivered tomorrow to the Senate Special Committee on Aging.
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The potential for General Motors Corp. and Chrysler LLC to end their plans has left the PBGC facing the prospect of adding 900,000 current and future beneficiaries. The PBGC, which pays retirement income to almost 44 million Americans, estimates that $77 billion of the automotive industry’s pensions are underfunded, with about $42 billion of that not funded at all.

There’s a report by internal audit of the fund that claims former PBGC director Millard was, at least, sloppy in separating his various activities – with the Placement Agent scandal still being whipped up, the response could be draconian.

Looks like the SEC is losing the jurisdictional catfight with the Fed:

The Obama administration may call for stripping the Securities and Exchange Commission of some of its powers under a regulatory reorganization that could be unveiled as soon as next week, people familiar with the matter said.

The proposal, still being drafted, is likely to give the Federal Reserve more authority to supervise financial firms deemed too big to fail. The Fed may inherit some SEC functions, with others going to other agencies, the people said. On the table: giving oversight of mutual funds to a bank regulator or a new agency to police consumer-finance products, two people said.

The politicians have to assign blame and shuffle responsibilities in order to make it clear that nothing was their fault.

The Obama administrations shameful conduct in the Chrysler bankruptcy is having some repercussions:

Hedge fund manager George Schultze says he may avoid lending to any more unionized companies after being burned by President Barack Obama in Chrysler LLC’s bankruptcy.

Obama put Chrysler under court protection on April 30 after lenders balked at a proposal giving them about 29 cents on the dollar for their $6.9 billion in debt. The investors said the president’s plan favored a union retiree medical fund whose claims ranked behind them for repayment. It was offered a 55 percent equity stake in the automaker.

Pacific Investment Management Co., Barclays Capital and Fridson Investment Advisors have joined Schultze Asset Management LLC in saying lenders may be unwilling to back unionized companies with underfunded pension and medical obligations, such as airlines and auto-industry suppliers, because Chrysler’s creditors failed to block Obama’s move.

Whether or not the rhetoric influences yield spreads and whether those yield spreads influence conduct is something we’ll just have to wait and see.

Anne Sibert pens a provocative thesis on VoxEU, Why did the bankers behave so badly?:

Greedy bankers are getting most of the blame for the current financial crisis. This column explains bankers did behave badly for mainly three reasons. They committed cognitive errors involving biases towards their own prior beliefs; too many male bankers high on testosterone took too much risk, and a flawed compensation structure rewarded perceived short-term competency rather than long-run results.
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In a fascinating and innovative study, Coates and Herbert (2008) advance the notion that steroid feedback loops may help explain why male bankers behave irrationally when caught up in bubbles. These authors took samples of testosterone levels of 17 male traders on a typical London trading floor (which had 260 traders, only four of whom were female). They found that testosterone was significantly higher on days when traders made more than their daily one-month average profit and that higher levels of testosterone also led to greater profitability – presumably because of greater confidence and risk taking. The authors hypothesise that if raised testosterone were to persist for several weeks the elevated appetite for risk taking might have important behavioural consequences and that there might be cognitive implications as well; testosterone, they say, has receptors throughout the areas of the brain that neuro-economic research has identified as contributing to irrational financial decisions.

Well, I don’t know what’s up with the Toronto Stock Exchange. There was a problem last Friday retrieving prices that were available and today there’s a problem with availability. So I’m using an approximate, late-in-day-update to prepare today’s report. I did update the details for SLF.PR.F, though, since that one’s important.

It was another really good day for the preferred share market – and here’s a landmark for you: BAM floaters are now trading in the double digits! The low close of 6.40-69 was reached on 2008-12-18 on volume of 27,351 shares.

PerpetualDiscounts now yield 6.39% (pre-tax bid-YTW), equivalent to 8.95% interest at the standard equivalency factor of 1.4x. Long Corporates are now at 7.0%, having returned 4.63% Month-to-date and 9.29% Year-to-Date, so the pre-tax interest-equivalent spread is now about 195bp.

The Bank for International Settlements has released its report on OTC derivatives market activity in the second half of 2008:

Facing significant price drops, markets for commodity and equity derivatives recorded volumes which were 66.5% and 36.2% lower, respectively. Against a background of severely strained credit markets combined with efforts to improve multilateral netting of offsetting contracts, credit default swap (CDS) volumes decreased by 26.9%. Foreign exchange and interest rate derivatives markets recorded their first significant downturns. Amounts outstanding of foreign exchange contracts fell by 21.0%, while amounts outstanding of
interest rate contracts slid by 8.6%.

Gross market values, which measure the cost of replacing all existing contracts, represent a better measure of market risk than notional amounts. Despite the drop in amounts outstanding, significant price movements resulted in notably higher gross market values, which increased by 66.5% to $33.9 trillion at the end of December 2008 (Graph 1, right-hand panel). The higher market values were also reflected in gross credit exposures, which grew 29.7% to $5.0 trillion.
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In the second half of 2008 the market for OTC interest rate derivatives declined for the first time, after recording an above average rate of growth in the first half of the year. Notional amounts of these instruments fell to $418.7 trillion at the end of December 2008, 8.6% lower than six months before (Graph 2 and Table 3). Despite the decrease in notional amounts outstanding, declining interest rates resulted in a notable 98.9% increase in the gross market value of interest rate derivatives, to $18.4 trillion.

Their statement Gross market values, which measure the cost of replacing all existing contracts, represent a better measure of market risk than notional amounts. is incorrect. If I short a bond future, the market value at time of execution is zero, but I have full market exposure and counterparty risk to the extent that I might win money that doesn’t get paid. If the market moves in my favour, that increases my counterparty risk but doesn’t affect my market exposure.

There are straws in the wind that the too-big-to-fail problem will not be addressed by fixing extant rules, but by adding another layer of new rules that will grant politicians more discretionary power:

Neel Kashkari, former administrator of the $700 billion U.S. bank-rescue program, said firms deemed too big to fail have an unfair advantage over smaller rivals because they can more cheaply raise money in the debt markets.

Kashkari, who left government May 1, said in a speech last night that some officials have discussed the possibility of a “debt tax” or “systemic tax” on those institutions, without saying if he supported that approach.

“If you have some huge, global institution that is systemically important, too big to fail, too interconnected to fail, in a sense it will always be able to issue debt cheaper,” said Kashkari, 35, at the San Francisco campus of the University of Pennsylvania’s Wharton School. “People who buy that debt believe that the government is standing behind it.”

“Debt Tax”? “Systemic Tax”? Presumably this is much the same idea as existing deposit insurance, except that the degree of protection received in exchange for premia will not be spelled out. It is very simple to address the TBTF problem and systemic risk problem by adjusting extant rules:

• End the practice of risk-weighting bank debt according to the credit of the sovereign
• Impose an upwards adjustment to Risk-Weighted Assets based on size of the bank

Here’s a scary proposal: inflation targetting of 6%:

What the U.S. economy may need is a dose of good old-fashioned inflation.

So say economists including Gregory Mankiw, former White House adviser, and Kenneth Rogoff, who was chief economist at the International Monetary Fund. They argue that a looser rein on inflation would make it easier for debt-strapped consumers and governments to meet their obligations. It might also help the economy by encouraging Americans to spend now rather than later when prices go up.

“I’m advocating 6 percent inflation for at least a couple of years,” says Rogoff, 56, who’s now a professor at Harvard University. “It would ameliorate the debt bomb and help us work through the deleveraging process.”

Another strong day in the preferred market, with volume returning to elevated levels after the long weekend.

Those contemplating reverse mortgages would do well to incorporate the new OSFI advisory into their planning … the rules for qualification for optimal capital treatment will indubitably influence the packages offered by banks, notably:

• initial loan-to-value of less than 40%
• Ongoing loan-to-value of less than 60%

I regret that it is not possible for me to prepare the market report. There is a difficulty recovering prices from the TSX.

Update, 2009-5-16: Well, it took a little while, but eventually the TSX’s little computer that could spit out the data: Volume was down sharply in pre-holiday trading (which is always something of a mystery to me) but PerpetualDiscounts had a good up-day while FixedResets were flattish.

The Bank for International Settlements has announced standardized guidelines for debt market statistics:

The Handbook is the first publication of its kind dealing exclusively with the conceptual framework for the compilation and presentation of securities statistics. As such, it directly addresses a recommendation of one of the Group of Twenty (G20) working groups concerning the need to fill data gaps and strengthen data collection. The aim of the Handbook is to assist national and international agencies in the production of relevant, coherent, and internationally comparable securities statistics for use in financial stability analysis and monetary policy formulation.

The Handbook is available from the IMF. It is not clear whether Canada will be producing and publishing statistics in accordance with the guidelines; both the Bank of Canada and Statistics Canada participated in the development of the guidelines.

Judicial Watch has released documents regarding the inauguration of TARP. Paulson made the first injection of TARP money an offer they couldn’t refuse:

This is a combined program (bank liability guarantee and capital purchase). Your firms need to agree to both.

• We don’t believe it is tenable to opt out because doing so would leave you vulnerable and exposed.
• If a capital infusion is not appealing, you should be aware that your regulator will require it in any circumstances

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And, we want each of you to contact your Boards of Directors and confirm your participation this evening

Further to the Exchange Traded CDS idea the SEC is musing about a TRACE-like system:

U.S. regulators may impose the same price reporting and transparency requirements on over-the- counter derivatives that reduced bank profits by almost half in the corporate bond market when the Trace system was adopted seven years ago.

“I think it’s something we’ll look at very closely as a potential model,” Securities and Exchange Chairwoman Mary Schapiro said yesterday at a news conference in Washington, in which regulators laid out potential structural changes to improve policing of the $684 trillion OTC derivatives market.

Trace, the bond-price reporting system of the Financial Industry Regulatory Authority, gives anyone with an Internet connection access to trading data for corporate bonds. The system, in full operation since February 2005, reduced the difference in prices that banks charge to buy and sell bonds by almost half.

The BoC has published a working paper by Fuchun Li titled Testing for Financial Contagion with Applications to the Canadian Banking System:

The author’s new test is applied to investigate contagion from a variety of recent financial crises to the Canadian banking system. Three empirical results are obtained. First, compared to recent financial crises, including the 1987 U.S. stock market crash, 1994 Mexican peso crisis, and 1997 East Asian crisis, the ongoing 2007 subprime crisis has been having more persistent and stronger contagion impacts on the Canadian banking system. Second, the October 1997 East Asian crisis induced contagion in Asian countries, and it quickly spread to Latin American and G-7 countries. The contagion from the East Asian crisis to the Canadian banking system was not as strong or as persistent as that of the ongoing subprime crisis. However, it had a stronger impact on emerging markets. Third, there is no evidence of contagion from the 1994 Mexican peso crisis to the Canadian banking system. Contagion from that crisis occurred in Argentina, Brazil, and Chile, but the contagion effects of that crisis were limited to the Latin American region.
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The stock returns of Canadian banks are used to measure the banks’s vulnerability to a financial crisis.

As in Forbes (2001), and Hartmann, Straetmans, and de Vries (2005), a stock return is chosen as an indicator to investigate whether there exists contagion for several reasons. First, since stock returns are measured at a much high frequency, they can more accurately pinpoint the effects of a specific crisis and are available for a large sample of countries. Second, since stock returns incorporate the immediate impact of a crisis as well as its expected longer-term effects, stock returns should capture the total impact of a crisis on a particular country. Third, the choice of bank stock prices for measuring banking system risk is also motivated by Merton’s (1974) option theoretic framework toward default. This approach has played an important role in risk analysis.

I question the utility of stock market prices in demonstrating anything other than stock price contagion. Evidence of contagion of effects impacting the real economy would be much more useful – not that I disagree that such is the case now, mind you, but stock market hiccups are not, in and of themselves, really all that important.

Financial Webring brings to my attention an essay by Keith Ambachtsheer & Rob Bower, Losing Ground (published in the Spring, 2007, Canadian Investment Review), that makes the claim:

The measured Canadian mutual fund average return
shortfall (before sales charges) of 3.8% per annum relative to similar mandates executed by Canadian pension funds suggests the average Canadian mutual fund has not been producing fair value for its customers.

Well, all I can say is … substituting “the benchmark” for “similar mandates executed by Canadian pension funds”, that’s not the experience of my fund, MAPF, which, somewhat to my chagrin, is still accepting new clients. Why do Canadians typically get lousy performance on their managed investment? Because that’s what they want.

A regulatory initiative that would help would be the regulatorially mandated disclosure of performance for all funds under management vs. appropriate benchmarks, for all time (i.e., a composite compliant with CFA Institute Standards) for all advisors. I should be able to click on “Joe Broker” and determine whether or not his claims of stock market acuity are backed up by actual dollar-and-cents returns. And that goes double for somebody with discretionary power over client assets.

I have previously written of the soon-to-be Exchange-Traded CDS market and debt decoupling (the idea that bankruptcy rules are based on actual creditors having a vote and using it in the best interests of holders of the debt; an assumption that is not necessarily true if they are hedged or – particularly – over-hedged). There are some new twists on this process with respect to Elliott Management and Clear Channel:

Elliott Management Corp., the hedge fund that almost pushed the government of Peru into default in 2000, is now seeking to profit from the failure of distressed companies.

About 11 percent of Elliott’s $13 billion of assets were in so-called basis trades at the end of the first quarter, meaning it bought bonds and credit-default swaps that protect against losses on the debt, according to a report dated April 29 sent to investors and obtained by Bloomberg News.
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“Investors will hold out if they would benefit more if there’s a default than a successful distressed debt exchange,” said Kingman Penniman, president of high-yield research firm KDP Investment Advisors in Montpelier, Vermont. “It’s an easy decision to say ‘No’ and put the company into bankruptcy.”
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CreditSights Inc. and Barclays Capital analysts have cited the rise in basis trades for restructuring attempts that floundered. Residential Capital LLC faced bondholder resistance to its debt-exchange proposal in December partly because the investors also held derivatives, Bradley Rogoff, an analyst at Barclays in New York, said in a report that month. Minneapolis- based mortgage lender ResCap was later bailed out by taxpayers.
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In some cases, the wide basis has helped companies refinance because it boosts demand from investors who can buy the new debt while also purchasing relatively cheap insurance against default, Barclays’ Rogoff said in an interview in March.
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In mid-November, investors could buy both Clear Channel’s 5.5 percent bonds due in 2014 and protection against a default for five years for about 80 cents on the dollar, according to CMA DataVision and Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

As default concerns increased, the combined cost jumped to 94 cents on the dollar. Investors can sell the bonds and unwind the credit-swap trade to cash in on that profit. Or, if they think a default remains likely, they could hold out for par.

Volume continued to be elevated today and the market continued its previously schedule ascent. PerpetualDiscounts now yield 6.51%, equivalent to 9.11% interest at the standard equivalency factor of 1.4x. Long corporates, however, are on fire, now yielding 7.0% (with a 4.13% Month-to-Date return), so the Pre-Tax Interest-Equivalent spread is now about 211bp.

Former SEC Chairman Arthur Levitt, who has been sharply criticized on PrefBlog, has said something sensible:

Arthur Levitt warned the Obama administration and U.S. regulators against attempting to change the way executives at financial firms are compensated.

“Government can jawbone but for government to regulate I think is overkill and very mistaken because you don’t know where it’s going to end,” Levitt said in an interview with Bloomberg Television today. Efforts by the Obama administration to change Wall Street pay practices are “totally wrongheaded,” he said.
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Government attempting to regulate executive pay “has never worked and it cannot work,” Levitt said. “You just can’t micromanage in that way.”

Undismayed by fears of micromanagement, Geithner is pushing for OTC Derivative transparency:

The U.S. Treasury will tell banks to increase transparency in the over-the-counter derivatives market by making prices available on centralized computer platforms, according to people familiar with the plan.

Treasury Secretary Timothy Geithner may announce the decision as soon as today, said the people, who declined to be identified because they weren’t authorized to speak publicly.
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Electronic execution of trades including interest-rate and credit-default swaps would allow users of the financial instruments to get greater price transparency and make processing trades easier. Transactions in the $684 trillion over-the-counter derivatives market are now typically conducted over the phone between banks and customers.

“Anything that will bring transparency to this market will help the market, but the dealers who broker the deals would make less money,” said Paul Zubulake, a senior analyst with Boston- based Aite Group. “More transparency for the buy-side is less profit for the sell-side.”

Zubulake said any mandated changes “are not good for business in general.”

There’s an interesting piece on VoxEU today by Adrian R. Bell, Chris Brooks & Tony Moore: The credit crunch of 1294: Causes, consequences and the aftermath. Plus ca change, plus ca meme chose! The direct parallels to the current crunch drawn by the authors seem to me to be a little contrived, but nevertheless all knowledge is good knowledge.

Volume eased off a bit today, but remains above average levels. Price action was flattish, but with a fair amount of dispersion.

Julia Dickson of OSFI gave a good speech at the Asian Banker Summit, with the central point:

As pointed out by Counterparty Risk Management Policy Group (CPRMG) III “financial excesses fundamentally grow out of human behaviour…which on the upside of the cycle, fosters risk taking and on the downside fosters risk aversion”. The CPRMGIII report goes on to make a number of very basic recommendations: know the risk you are taking, determine a risk appetite and monitor it, have good corporate governance, and ensure that control functions have authority and independence from the business units, communicate well within the firm, among others. What were we doing before this crisis if we did not know the value of these recommendations? We keep learning that we should not assume risks that we do not understand, that we should be diversified, and more… and we keep relearning!

Unfortunately, she continued with the regulators’ obsession with the fact that some people make more money than they do and are sexier:

Why is it that people do not learn these lessons; is it because they have short memories? Memory does fade with time, but I would also suggest it is because powerful incentives are at play. Perhaps we should be looking at how these incentives can blind us to some basic common sense principles.

Looking at incentives requires us to look at a lot more than just bankers’ compensation packages. It requires us to go down some paths that might be quite sensitive; many of them involve the depth to which the financial sector has pervaded our culture.

If I thought all this musing would end with a de facto separation of investment banking and commercial banking, I wouldn’t be so worried. However, the trend seems to be towards further increases in staffing investment banks – and the associated asset management firms – with unmotivated 18-year-old bank tellers. Ultimately, this will cost us a lot of money; and we won’t, ultimately, get fewer instances of rampant idiocy, we’ll just get different ones. Chrysler & GM, propped up for years by the political allure of good jobs, are going to cost taxpayers a lot more money than any of the banks.

Ms. Dickson spoke approvingly of an essay by Claudio Borio of BIS, The macroprudential approach to regulation and supervision, who notes:

Just as an asset manager, who cares about the loss on her portfolio as a whole, focuses on the co-movement of the portfolio’s securities, so a macroprudential regulator would focus on the joint failure of institutions, which determines the loss for the financial system as a whole. The main policy question is how to design the prudential framework to limit the risk of losses on a significant portion of the overall financial system and hence its “tail risk”.

Some might wonder how a desirable object such as heterogeneity of banks might possibly be accomplished with homogeneous banking rules; but it seems to be the regulators’ position that “Regulatory Arbitrage” is a bad thing.

The WSJ has published some criticism of the European response to the Credit Crunch; in return, C-EBS has published a statement on stress-testing:

The Committee of European Banking Supervisors (CEBS) today publishes its statement on stress testing exercise.

– Supervisory authorities in the EU are, in the context of their regular risk assessment of the financial sector, carrying out an EU-wide forward looking stress testing exercise on the aggregate banking system.

– This is not a stress test to identify individual banks that may need recapitalization, as the assessment of specific institutions’ needs for recapitalization remains a responsibility of national authorities.

– This test builds on common scenarios and guidelines developed by the Committee of European Banking Supervisors (CEBS).

– The objective is an EU-wide exercise with common guidelines and scenarios, so as to increase the level of aggregate information among policy makers in assessing the European financial system’s potential resilience to shocks and to contribute to the convergence of best practices in the EU.

– CEBS’ next regular risk assessment will be ready by September 2009. The outcomes are confidential.

DBRS downgraded a big batch of sub-prime RMBS today:

DBRS has today downgraded 1,441 classes from 195 residential mortgage-backed securities (RMBS) transactions. Of the 195 affected transactions, 125 are backed by first-lien subprime collateral, 53 are backed by Alt-A collateral, 12 are backed by prime collateral and five are backed by second-lien subprime collateral.

The classes have been downgraded as a result of the continued rapid increase in serious delinquencies and cumulative losses relative to the available credit enhancement. Additionally, the persistent negative outlooks of the housing market and unemployment rates, coupled with low prepayment speeds, have contributed significantly to the increased default and loss expectations.

As a result, current credit support is not expected to sufficiently cover the anticipated losses. In many cases, subordinate classes have already been impaired, further weakening the available credit support for the remaining senior and mezzanine classes.

They also downgraded Toyota from AAA.

Morningstar reports:

Mutual fund rating agency Morningstar has ranked Canada mid-pack among 16 major countries as a good place for fund investors – but with a failing grade for fees and expenses.

Canada rates high for investor protection and investment transparency, and its overall grade was B-minus, based on criteria which also included taxation and investment choices.
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Canada, by contrast, got the only F grade for fees among the 16 countries studied.

The typical Canadian fund investor pays a management expense ratio of 1.25 to 1.49 per cent for a bond fund, and between two and 2.5 per cent for an equity fund.

Canadians also typically face a front-end load of between four and five per cent, “primarily because investors are unaware that this fee is negotiable,” the Morningstar study adds.

And it notes that Canadian MERs contain trailer fees – “which are fees fairly specific to the Canadian market” – that are paid by fund companies on an ongoing basis to the advisers that sold the funds.

“Canadian investors are comfortable with the fees because they don’t know how low these fees should actually be,” the Morningstar study asserts.

“Assets tend to flow into average-or higher-fee funds because Canadian investors use financial advisers to help them make decisions,” it adds.

“Advisers direct client assets to funds that pay better trailers. And since the trailer is included in the MER, the result is that assets flow into higher-fee funds.”

I note that MAPF now has another competitor, AIC Preferred Income Fund, which pays a trailer of up to 1% out of a management fee of 2.00% plus expenses.

Price changes were mixed today in the preferred share market, netting out to about flat; volume was very good.

About a year ago, there were wild claims being made (e.g., Naked Capitalism) that grading US municipalities on a global scale would bring about Nirvana and the end of useless and expensive municipal bond insurance. It turns out – surprise, surprise – that despite the changes, there are still credit differences between municipalities and the weaker credits still need insurance to flog their bonds:

An early contender to replace them, Warren Buffett’s Berkshire Hathaway Assurance Corp., was downgraded to Aa1 by Moody’s Investors Service in April. The billionaire investor in February called tax-exempt bond guarantees “a dangerous business.” His firm insured $3.3 billion in issues last year, ranking third in the industry.

Buffett’s warning isn’t stopping Macquarie Group Ltd., Australia’s biggest securities firm, from backing a new guarantor: Municipal and Infrastructure Assurance Corp. plans to sell its first policy by July, said Richard E. Kolman, the New York-based startup’s executive vice chairman.

“It is surprising to find that municipal bond insurance is anything but moribund in the early going in 2009,” wrote Philip J. Fischer, a Merrill Lynch & Co. municipal strategist in New York, in an April 6 report.

The overall market price changes were minimal today, although volume continued strong. It was most interesting to see that FixedResets were shut out of the volume-leaders table … that hasn’t happened in a while!

In the wake of the Fed’s stress tests, there has been a flurry of American bank issues:

Wells Fargo & Co. and Morgan Stanley, ordered to increase capital after the U.S. stress tests, raised $15 billion in stock and bond sales today, the first banks to respond to the government’s mandate.

Wells Fargo sold $7.5 billion of common stock, 25 percent more than it originally planned, according to a person close to the situation, and Morgan Stanley raised $7.5 billion by selling stocks and bonds, up from $5 billion it said yesterday that it would raise. Citigroup Inc. is exchanging an additional $5.5 billion of preferred securities into common stock. Bank of America Corp. plans to sell as many as 1.25 billion shares of common stock in a shelf registration and an undetermined amount of debt that wouldn’t be guaranteed by the Federal Deposit Corp.

I’m more impressed by the ease of raising capital than the stress test results. However, USD LIBOR has dropped significantly:

The London interbank offered rate, or Libor, that banks charge for three-month loans fell two basis points to 0.94 percent today, according to the British Bankers’ Association, bringing its decline in the week to seven basis points, the most since the five days through March 20. The Libor-OIS spread, a barometer of the unwillingness of banks to lend, fell today to the lowest level in more than nine months.

Many Readers, even Assiduous ones, will not really appreciate how good it feels to be talking about significant moves while citing single-figure-beep changes!

Another strong day on continued heavy volume.

Across the Curve notes that today’s 30-year treasury auction was a disaster, perhaps due to considerations of sharply increased supply:

Today’s auction began the Treasury’s monthly sales of the so-called long bond, up from quarterly offerings at the end of last year. That means the government will boost sales of the security from $35 billion in 2008 to $120 billion this year, according to Michael Pond, an interest-rate strategist in New York at Barclays Capital Inc., one of the 16 primary dealers that trade with the central bank and are required to participate in Treasury auctions.

After the close, the Fed released results of the stress tests.

Sorry this is so late, folks! Many, many things going on.

To my mind, one of the more fascinating fields of research in the financial sector is market design. I’ve posted about Pegged Orders, proposed regulation of the retail bond market and the BoC’s analysis of bond auction formats, among others. So I was highly entertained – and educated! – by a piece on VoxEU by Trevon D. Logan, Information and Illegal Market Mechanisms:

This column studies the online (illegal) market for male sex work. It shows that participants find ways to get the prices right, even in the absence of formal enforcement mechanisms, using technology to share and disseminate information. The risk of fraud is disciplined by client reviews and demand for photos in escorts’ advertisements.
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While previous empirical work has looked at how information technology improves market functions (Brown and Goolsbee 2002, Jensen 2007, Lewis 2009, Goyal 2008), we provide the first evidence that an illegal online market is just as responsive to information as a legal online market. We believe that this work suggest that, irrespective of the institutions involved, market participants find ways to get the prices right if they have access to technology that allows them to share and disseminate information even in the absence of formal enforcement. Even in markets with formal contracts and enforcement, the types of forums created by the clients of male sex workers are common (e.g., AngiesList.com). In this illegal market, we found that the participants are quite good at policing the market themselves. This informal policing, we believe, is critical to the functioning of this market. While formal institutions in general are undoubtedly important, large economic gains could be made in short order by allowing market participants better access to technology and information, allowing participants to share information and police themselves until formal institutions are well developed enough for contracts to be formalised and enforced.

Speaking of market structure, it is my understanding that there is at least one discount brokerage that will process iceberg orders for retail – not on-line, but when you speak to a “trader” anyway. Where there’s one, there’s probably more … if anybody wants to do the legwork for a survey of discount brokerages, I’ll publish it with credit.

PerpetualDiscounts experienced an interuption of their run-up today and Fixed-Resets were able to catch up a little in performance following a very good month – and Month-to-Date – for the market in general, amidst continued heavy volume. PerpetualDiscounts now yield 6.60%, equivalent to 9.24% interest at the standard equivalency factor of 1.4x. Long Corporates are on a tear as well, returning 2.13% month-to-date (6.68% year-to-date) and now yield about 7.2-7.3%, meaning the the pre-tax interest-equivalent spread is now about 194-204bp … it hasn’t been that low for a while!