Category: Market Action

Alea points out that the February 5 H.4.1 Fed release shows that the Fed Balance sheet continues to shrink. “Central Bank Liquidity Swaps” on the asset side and “Deposits – Depository Institutions” on the liability side are down $78-billion and $93-billion respectively.

Unfortunately – and somewhat surprisingly – Commercial Paper holdings increased by about $10.6-billion … but still way down from the peak.

The UK Financial Services Authority has released a consultation paper on Temporary Short-Selling Measures. It appears that they favour continuation of the “Disclosure Obligation” (large short positions must be disclosed), which I don’t have any problem with.

Speaking of disclosure obligations, the SEC has unveiled a raft of NRSRO rules, designed to ensure that future scapegoating will be easier to implement. Lots of disclosures that nobody will ever read, but good practice for the next regulation: a requirement that prices only go up. Surely this ultimate goal is only a few more box-ticks away!

All in all, it was a pretty quiet end to the week. Not much volume, not much movement.

The Russian Central Bank has come up with a novel bank recapitalization technique:

Russia’s central bank is exacerbating the ruble’s 34 percent plunge since August, even as it struggles to defend the exchange rate, by providing loans to banks that speculate on the currency, say Alfa Bank and UniCredit SpA.

Bank Rossii lent 7.7 trillion rubles ($214 billion) in overnight and seven-day loans secured with bonds or other collateral in the 16 trading days last month, about double the 4.8 trillion rubles provided in so-called repurchase auctions in December, central bank data show. Banks used “almost all” the money to bet against the ruble, said Natalia Orlova, chief economist at Alfa, Russia’s largest non-government bank. The ruble fell 18 percent against the dollar in January.

“A significant amount, if not all, of the speculative attacks on the ruble are funded by the central bank itself,” said Vladimir Osakovsky, Moscow-based economist for UniCredit, Italy’s largest bank.

Across the Curve believes that Treasury issuance is going to lead to higher government bond yields in the near future.

PerpetualDiscounts edged slightly lower today. Market volume was reasonable, but dominated by the recent Fixed-Reset issues.

It seems that PrefBlog is persuading the world that Bad Bank = Bad Idea:

The Obama administration, aiming to overhaul the $700 billion financial-rescue program, is refocusing on an effort to guarantee illiquid assets against losses without taking them off banks’ balance sheets.

Treasury Secretary Timothy Geithner is skeptical of setting up a so-called bad bank to hold the toxic securities, an option that still may form part of the final package, people familiar with the matter said. Senator Charles Schumer yesterday said debt guarantees are becoming “a favorite choice” of options because a bad bank would be too costly.

Across the curve is skeptical:

The process of repairing the banking system (read the nursery rhyme Humpty Dumpty) is proving to be a challenge for the Obama Administration. News reports indicate that the bad bank idea is losing followers and that the Administration seems to be turning to idea of massive guarantees of the flotsam and jetsam in bank portfolios. As one commentator noted, that has not worked out so well for the stock price of Citibank and B of A.

PerpetualDiscounts were off slightly today on good volume and now yield 6.98% – the equivalent of 9.77% interest at the standard equivalency factor of 1.4x. Long Corporates remain fairly steady at 7.6%, so the Pre-Tax Interest-Equivalent Spread has widened slightly to +217bp.

The Fed has announced that the alphabet soup of liquidity support will be with us for some time yet:

The Board of Governors approved the extension through October 30 of the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), the Commercial Paper Funding Facility (CPFF), the Money Market Investor Funding Facility (MMIFF), the Primary Dealer Credit Facility (PDCF), and the Term Securities Lending Facility (TSLF). The FOMC also took action to extend the TSLF, which is established under the joint authority of the Board and the FOMC.

These are tough times for Tier 1 Capital at the banks in the eye of the storm:

The market for securities with characteristics of both debt and equity that Citigroup Inc., Bank of America Corp. and other financial companies used to bolster their capital is in freefall on concern governments will stop banks that took public cash from paying interest. The hybrids, which typically count as regulatory capital to cushion against losses, fell 11 percent last month in the U.S., more than they did in all of 2008, according to Merrill Lynch & Co. index data. Citigroup and Bank of America bonds lost as much as 34 percent of their value.
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Only $694 million of preferred securities were sold in the U.S. since September, when the government closed the market by seizing Fannie Mae and Freddie Mac. That compares with about $44 billion in the first three quarters of last year, according to data compiled by Bloomberg.

$694-million preferreds [and in the States, remember, this figure will include what we call Innovative Tier 1 Capital] in 4Q08? Hell, up here in Canada we do that in a week!

It’s not often Canadians have the opportunity to lord it over the global titans, so let’s enjoy it while we can!

Econbrowser‘s Menzie Chinn writes a piece on multipliers that I can only hope Pussycat and What-Debt? will read:

For some people, the answer to every question is…a tax cut!
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I think the “wrong” kind of interventions include a slavish devotion to tax cuts — especially when the [Marginal Propensity to Consume] [3] could be argued to be low in the aggregate (although I still believe it would be relative high for liquidity constrained households).

Accrued Interest likes the “Bad Bank” idea but I continue to believe:

• All previous efforts to entice banks into selling “toxic assets” have failed
• Caballero’s idea of ‘tail-insurance’ is the best way forward.

Donato Masciantdaro and Marc Quintyn write a piece on VoxEU introducing their formal paper on bank supervision:

Our CEPR Policy Insight No. 30, released today, summarises the answers provided so far. One of the interesting features of the current supervisory landscape is the emerging dichotomy between the role of the central bank in supervision and the trend toward supervisory unification. In a majority of countries that have opted for a unified supervisor, the central bank has been given no role in supervision. On the other side of the spectrum, in those countries that stayed close to the “silo” approach to supervision, the central bank is the main (or sole) bank supervisor in a majority of cases. This phenomenon – that the degree of supervision unification seems to be inversely correlated with central bank involvement – has been labelled the “central bank fragmentation effect”

Similarly, Patrick Bajari, Chenguan Sean Chu and Minjung Park introduce their NBER Paper An Empirical Model of Subprime Mortgage Default from 2000 to 2007 in a VoxEU piece Quantifying the triggers of subprime mortgage defaults:

A decomposition using our estimation results indicates that the nationwide decrease in home prices accounts for roughly half the increase in default propensity of loans originated in 2006 compared to 2004-vintage loans. With home prices down by more than 20% from their peaks in many US cities, borrowers whose outstanding mortgage liabilities now exceed their home values can in effect increase their wealth by walking away from their loans. Our estimates indicate that, for a borrower who purchased a home one year earlier with a 30-year fixed-rate mortgage and no down payment, a 20% decline in home price makes the borrower 15.4% more likely to default than an otherwise identical borrower whose home price remained stable.

However, we also find that household illiquidity is an equally important factor behind the increasing propensity of borrowers to default. Our parameter estimates indicate that roughly half the increase in default probability for 2006-vintage loans relative to 2004-vintage loans can be attributed to deterioration over time in observed characteristics of the borrower pool. In particular, later borrowers tend to have lower credit scores and a higher probability of having undocumented loans or additional liens on their properties—indicators of a greater risk of illiquidity due to insufficient income or lack of access to other forms of credit. We also see an increase over time in the proportion of adjustable-rate mortgages among new originations. Adjustable-rate mortgages are generally chosen by more liquidity-constrained borrowers, and often come with large, periodic increases to monthly payments, forcing liquidity-constrained borrowers to default.
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Because we find empirical importance for both illiquidity and net equity as drivers of default, this suggests that effectively mitigating foreclosures would require either some combination of policies targeting each cause, or a single instrument that targets both. For example, loan modifications that merely increase payment affordability by extending loan lengths would not be very effective as a standalone measure, as they would leave borrowers’ equity positions unchanged. On the other hand, write-downs on loan principal amounts would address both causes simultaneously, with the reduction in loan size serving both to increase the borrower’s net equity as well as reduce monthly payments.

But today’s prize-winning essay – give that man a kewpie doll! – is from Thomas Philippon, who eschews slogan-shouting while asking the question Are bankers paid too much?:

Evidence from a new century-long dataset suggests that the key factors driving relative wages in the financial sector have been regulation and corporate finance activity, followed by financial innovation. Over the past decade, however, “rents” account for 30% to 50% of the sector’s wage differential. In this sense, financiers are overpaid.

Our investigation reveals a very tight link between deregulation and human capital in the financial sector. Highly skilled labour left the financial sector in the wake of Depression era regulations, and started flowing back precisely when these regulations were removed. This link holds both for finance as a whole, as well as for subsectors within finance. Along with our relative complexity indices, this suggests that regulation inhibits the ability to exploit the creativity and innovation of educated and skilled workers. Deregulation unleashes creativity and innovation and increases demand for skilled workers.

The second set of forces that appear to have a large influence on the demand for skills in finance are non-financial corporate activities: in particular, IPOs and credit risk. New firms are difficult to value because they are often associated with new technologies or new business models, and also for the obvious reason that they do not have a track record. Similarly, pricing and hedging risky debt is an order of magnitude harder than pricing and hedging government debt. Indeed, we find that increases in aggregate IPO activities and credit risk predict increases in human capital intensity in the financial industry. Computers and information technology also play a role, albeit a more limited one. Contrary to common wisdom, computers cannot account for the evolution of the financial industry. The financial industry of the 1920s appears remarkably similar to the financial industry of the 1990s despite the lack of computers in the early part of the sample.

Not a great day for prefs.

Spend-Every-Penny is urging Canadian investors to ignore banks’ capital ratios:

“We have said that we’ll do what’s necessary to protect the Canadian banking system,” Mr. Flaherty reiterated on Saturday from Davos during a conference call with reporters.

It seems like only a few months back he was saying that his government would no more run a deficit than a man could have a baby.

With a hat-tip to Econbrowser, a graph from Calculated Risk puts the current crash in perspective:

Click for big

Volume was off today – month-end window dressing is done for another three weeks? – and PerpetualDiscounts eased off slightly. Recent increases in the Canada 5-year yield have triggered legitimate expectations (subject to volatility!) of five-year calls in the Fixed-Reset market.

I’m very annoyed with DBRS. I had been hoping they would come to some resolution of their mass reviews of Split Corporations (two of them: October and December), but here we are at month-end and … nothing.

So we’ll go through February with, for instance, FBS.PR.B sporting an asset coverage just a hair over 1.0:1 and still rated Pfd-2(low). As a portfolio manager, of course, I couldn’t be happier – such a grossly mis-rated issue in the universe increases my chance to outperform – but as an index calculator, it’s very annoying. It will be in the Split-Share sub-index for at least another month.

The concept of incentive is under continued attack:

NYSE Euronext Chief Executive Officer Duncan Niederauer said today in Davos that “some compensation models need to be completely overhauled.” He added that this would be difficult to legislate and companies will have to take the lead.

“While a number of people clearly do create wealth by brain power, by use of the company’s balance sheet and by other resources, other people have been receiving incentives for basically turning up,” Barclays Plc Chairman Marcus Agius said at the World Economic Forum. “That I don’t think is very smart. An incentive system properly designed and fairly calibrated is absolutely fundamental.”

Interesting charge/countercharge in the Money Market Fund world:

James “Jes” Staley, head of JPMorgan Chase & Co.’s investment unit, said the $4 trillion money-market fund industry is the “greatest systemic risk” to the financial system that hasn’t been adequately addressed.
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JPMorgan’s Staley blamed money funds for Lehman’s collapse and the near bankruptcy of Bear Stearns Cos. last year. The funds, which typically hold highly rated, short-term debt instruments, were forced to pull their money from the firms when they saw signs of trouble, he said.

“The people who brought down Lehman and almost Bear Stearns weren’t the banks, they were the money funds,” Staley said.

David Glocke, head of taxable money-market investments at Valley Forge, Pennsylvania-based Vanguard Group defended the industry.

“I’m aware there are those who want to blame the money- market industry for taking away the punch bowl,” he said. “But issuers need to maintain diverse sources of funding.”

The G-30 report on MMFs has been discussed on PrefBlog. The interesting thing about Mr. Glocke’s remark is that – taken at face value – it appears to accept that MMFs are a portfolio management monoculture; it would be highly surprising is the same thing were to be said, for instance, about an equity issue … but, of course, equities only go down due to short selling, so the short-seller can get one of them bonus thingies, right?

PerpetualDiscounts closed the month with a marginal loss, closing to yield 6.85%, equivalent to 9.59% at the standard 1.4x equivalency factor. Long corporates now yield about 7.6%, so the pre-tax interest-equivalent spread is now at about 200bp.

There’s a draft bill in Congress that will kill the CDS market:

House of Representatives Agriculture Committee Chairman Collin Peterson of Minnesota circulated an updated draft bill yesterday that would ban credit-default swap trading unless investors owned the underlying bonds. The document, distributed by e-mail by the committee staff in Washington, would also force U.S. trading in the $684 trillion over-the-counter derivatives market to be processed by a clearinghouse.

Presumably, the requirement to own the underlying bonds would apply only to buyers. The industry response notes the obvious:

The standardization necessary to process a contract in a clearinghouse may harm the market and drive the trading overseas, Weber said.

“It’s a big deal because the OTC market has developed almost as an alternative to the exchange market with its clearinghouses,” he said. “It would be advantageous for places like London, Hong Kong or Singapore where OTC trading wouldn’t have that kind of restriction.”

Menzie Chinn of Econbrowser provides an an update on multipliers from a credible source:

Accrued Interest points out that absolute yields on US corporates are nowhere near as interesting as the spreads imply:

Click for big

… although, mind you, that’s a four year issue he’s talking about. He concludes:

So what does the corporate bond market offer? For those who want to just collect income, corporates are a much better choice than either Treasuries or Agency bonds. There are enough solid names to build a diversified portfolio. But this trade is all about the income collection, or the carry. It isn’t about making a great trade.

Or its about making the right credit call at the right time. Picking the beaten up name than can recover. But in that case, it isn’t an easy trade, its a gutsy call that could wind up with a big capital gain or else a large loss in bankruptcy.

I will suggest that fixed income investing in general is all about income collection. Those wishing to make a “great trade” should stick to a more appropriate asset class. I get a lot of calls asking for my ONE GREAT IDEA that will MAKE A FORTUNE!!!! Guys, guys, guys … that’s not what fixed-income is all about.

Treasury will write a global liquidity guarantee on a SIV, a move that has interesting implications. Clearly, there is huge demand for maturity transformation that is traditionally intermediated by banks, but in the glory days saw some intermediation by SIVs, among other vehicles. Clearly, these are unusual times and no conclusions for the future can be drawn; but it will be interesting to see how the eternal struggle between lenders wanting short-term and borrowers seeking long-term plays out over the next few years.

Vancouverites wondering about funding the Olympic Village will be unsurprised to hear that Fortress Investment Group really, really needs more cash. Hat tips: Zero Hedge and Dealbreaker, although I suspect they’re a little over-excited.

Treasuries got whacked today, with the long bond yield up 17bp to 3.59%. Mortgage paper is worse. Long Canadas did relatively well, yield up 8bp to 3.71%. Long Corporates have returned -2.05% month-to-date and now yield 7.6%.

However, PerpetualDiscounts – along with every other sector – was up today and now yield 6.88%, equivalent to 9.63% interest at the standard 1.4x equivalency factor, implying a pre-tax interest-equivalent spread of ~200bp.

Tomorrow will be an interesting day – there are no less than three new issues settling. The BNS 6.25%+446 will trade as BNS.PR.X; the TD 6.25%+438 will trade as TD.PR.G; and the NA 6.60%+479 will trade as NA.PR.P.

And who knows? If they trade nicely, maybe we’ll see some more!

Pussycat, in a desperate attempt to sound tough, is putting What-Debt? on “probation”:

[Pussycat] said his party is prepared to “swallow hard” and support the Conservative government, provided they agree to table regular updates outlining how they are living up to their commitments outlined in the federal budget.

We have now officially forgotten the lesson of hitting the wall in 1994 – I confidently predict twenty years of deficits until we hit the wall again.

Rubin has spoken out against fair-value accounting:

“I spent my whole life at Goldman Sachs believing in mark- to-market accounting, and having said that, if you look at the experience from the last two years, I think mark-to-market accounting has led to terrible vicious cycles in asset prices,” Rubin, the former U.S. Treasury secretary, said during a discussion at the 92nd St. YMCA late yesterday.

Companies including Citigroup and American International Group Inc. say mark-to-market, also known as fair-value accounting, doesn’t work when few buyers are willing to trade assets like subprime mortgages. Proponents such as the U.S. Financial Accounting Standards Board say the rule adds to transparency and gives investors information about companies.
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Under reserve accounting, assets like loans are carried at cost, offset by reserves for potential losses.

I have stated many times that the regulatory regime should differentiate between banks and investment firms. Fair value accounting is appropriate for investment firms, at which the default assumption is that they hold assets for a short period, then sell them. Reserve accounting is often (though not always) more appropriate for banks, at which the default assumption is that they hold assets until maturity.

The FOMC released its monetary policy statement today – no real surprises.

The BoC has released an analysis of bond auction formats by Olivier Armantier and Nourredine Lafhel, examining the methods by which bonds can be auctioned. Three systems are considered:

• discriminatory auctions: the highest bids are filled at the price bid until supply is exhausted
• at uniform-price auctions, bidders pay the stop-out price for all units they requested at prices exceeding the stop-out price.
• At Spanish auctions, bidders pay the average price of the bids for all their bids above the average and their bid price if it below the accepted average

it appears that the ranking of the two auction formats may only be established on a case-by-case basis.3 As demonstrated by A&S (2005), the presence of asymmetries across participants is an important factor in ranking auction formats in terms of the revenues they generate. Indeed, A&S show that risk averse and/or less-informed bidders may become relatively more aggressive at uniform-price auctions, since they do not have to pay their bids.
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Table 7 also indicates that, had the Canadian government conducted the 100 auctions in our sample under the Spanish format instead of the discriminatory format, it would have significantly increased its revenues by an average of 2:34%; or close to 52:71 million dollars, per auction. Furthermore, we can see in Table 8 that, given the assumptions underlying the model, Canadian government revenues would have been higher in roughly 62% of the auctions if it had conducted them under the Spanish format. Observe also that the Spanish format dominates in an additional dimension. Indeed, we can see in Table 7 that the standard deviation of the revenues generated across the 100 auctions is the smallest under the Spanish format. In other words, the stream of revenues generated by the Canadian government from one auction to the next would have been more stable than under the current pricing rule. Finally, Table 7 indicates that the additional revenues the Canadian government would generate by switching from the discriminatory to the Spanish format, would be almost equally spread across maturities. Indeed, we are unable to detect any clear pattern in the additional revenues generated at auctions for 30, 10, 5 or 2 years bonds.
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In other words, as found by Armantier and Sbaï (2006), the Spanish format appears to provide an appropriate compromise between asking bidders to pay up to their bids, and promoting aggressive behaviour by o¤ering participants the guarantee that they will not have to pay more than the average winning bid.

SplitShares did well today, presumably on hopes that the bad-bank bailout plan will lead to a world of smiling bankers and bonuses for everybody. Well … I wouldn’t want to say it’s a completely insane hope. I’ll just say that every effort yet to persuade banks to sell their so-called toxic assets in bulk and at a politically acceptable price has failed. I think that Caballero’s plan has a better chance of success.

Fixed-Resets were down again today while PerpetualDiscounts were up, in a continuing fine reversal of their standard form in 2008. Volume continued high. The new RY Fixed-Reset 6.25%+450 will commence trading tomorrow with the symbol RY.PR.R.

There will be a chance to see a milestone in the recovery of the credit market this week – commercial paper held by the Fed will mature:

About $245 billion of 90-day commercial paper that companies sold to the Federal Reserve starting in October will mature this week and next, central bank data show. As much as $50 billion to $70 billion of the debt may be rolled over and bought by investors, according to Barclays Capital in New York.
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Rates on AA ranked financial commercial paper due in 90 days fell to a record low of 0.28 percent on Jan. 8, or 21 basis points more than the U.S. borrowing rate, Fed data show. They have since jumped to 1.04 percent, or 94 basis points more than the government yield on 90-day Treasury bills, as investors prepared to absorb at least $486 billion of overall paper coming due this week, according to Fed data. The gap peaked at 374 basis points on Oct. 15.

The Fed demands 2.24 percent to own unsecured debt, including a one percentage point fee, under its Commercial Paper Funding Facility.
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Fed purchases declined in the first two weeks of the year as investors picked up the slack, reducing government buying to $179 million. First-tier commercial paper assets in prime money- market funds increased 26 percent to $790.6 billion as of Jan. 13, iMoneyNet data show.

Purchases jumped last week to $15.7 billion, the most since November, as some companies remained unable to sell 90-day commercial paper to investors at rates below the cost of issuing to the Fed.
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Policy makers also may force companies to wean themselves from federal help by making it “increasingly expensive” to use the CPFF, said Louis Crandall, the chief economist at Jersey City, New Jersey-based Wrightson ICAP, a research unit of ICAP Plc, the world’s largest inter-dealer broker.

The Fed should indeed be increasing its spread to get the banks inter alia to pick up the slack. This would be an important step in removing the Fed from routine intermediation and shrinking the balance sheet. Across the Curve, however, cites some street chatter to the effect that the rollover will be a non-event. But … that’s what we like. Non-events. Aren’t they lovely?

There is an encouraging sign! $150-billion in 84-day TAF money attracted only $136-billion bids and went at 0.25%. This follows a bid-to-cover of 0.72 on January 12, 0.69 on Dec 29, 0.42 on Dec 15 and 0.44 on Dec 2. So this is good. Unfortunately, the Fed is having to purchase agencies in size so don’t celebrate too soon! On the other hand – any more hands and I’ll become an economist – today’s $40-billion 2-Year auction went well and lit up the Treasury market.

I will admit though, that I am becoming a little concerned. Across the Curve contains several ecstatic references to positive carry today – for example, here and here. I heard a lot of remarks about positive carry in 1993 … and we all know what happened in 1994, don’t we?

Carney gave a speech on deflation:

It is worth noting that our lower overnight rates have largely been passed through at shorter maturities. Since the easing cycle began in December 2007, we have lowered the overnight rate by 350 basis points. The prime rate has fallen by 325 basis points, Bankers Acceptance rates (key short-term financing instruments for corporations) have fallen by about 380 basis points, and variable rate mortgages by about 185 basis points.

At longer maturities, the declines have been more modest. In part, this reflects the typical pattern, as long-term rates tend to be less volatile than short-term rates over the business cycle. For example, five-year fixed-rate mortgages have fallen by just over one and a half percentage points. Corporate bond yields have been virtually flat, as a substantial increase in the risk premium charged by investors has offset the decline in government bond yields. While the widening of spreads at longer maturities is larger than usual, this partly reflects the fact that these spreads were unusually narrow to begin with.

The Bank has taken into consideration the higher risk premiums demanded in today’s markets in setting its overnight rate. As well, it has taken into account the effect on future Canadian inflation of the lower level of foreign demand that has resulted, in part, from financial difficulties in other countries. The policy rate is lower than it otherwise would be in the absence of these difficulties.
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To conclude, let me say that the inflation target that has served Canada so well when inflation was above the 1 to 3 per cent control range, will also serve it well when inflation falls temporarily below that range. So let me leave no doubt, no uncertainty about the Bank’s commitment. Our focus is clear, our actions consistent, and our objective explicit: 2 per cent CPI inflation.

And the Bank published another working paper, What Accounts for the U.S.-Canada Education-Premium Difference?:

This paper analyzes the differences in wage ratios of university graduates to less than university graduates, the education premium, in Canada and the United States from 1980 to 2000. Both countries experienced a similar increase in the fraction of university graduates and a similar increase in skill biased technological change based on capital-embodied technological progress, but only the United States had a large increase in the education premium. Using a calibrated Krussel et al. (2000) model, the paper finds that the cross country difference is in equal proportion due to the effective stock of capital equipment, the growth in skilled labor supply relative to unskilled labor and the relative abundance of skilled population in 1980. Growth in the working age population is unimportant for the difference.

In other words, we don’t really need a lot more graduates; what we need is money to buy equipment for existing graduates to put their skills to use. I confidently predict that this nuance will be ignored in all future political debates.

Spend-Every-Penny introduced his pre-election budget today. There are some good things … some bad things. In summary:

After taking into account the cost of the measures proposed in Budget 2009 to support the economy, the Government is projecting deficits of $1.1 billion in 2008–09, $33.7 billion in 2009–10, $29.8 billion in 2010–11, $13.0 billion in 2011–12, $7.3 billion in 2012–13 and a surplus of $0.7 billion in 2013–14.

It will take many years of $0.7-billion surpluses to pay for the planned spending, but it didn’t stop him from cutting taxes, just like Mr. Bush:

Taxpayers will begin to benefit from the proposed personal income tax reductions as soon as the Canada Revenue Agency revises its tax withholding tables, in spring 2009.

It is estimated that, together, these measures will cost $470 million in 2008–09, $1,885 million in 2009–10 and $1,950 million in 2010–11.

There is funding for new infrastructure, but no indication that recipients must have a credible plan to pay for maintenance. The word “dividend” does not appear in the document, so I will assume that implications for preferred share investment are minor.

I will reserve special scorn for the “Extraordinary Financing Framework”, partially because it is doomed to be ignored by most. Essentially, the government will provide up to $200-billion worth of intermediation, taking assets onto its books financed by sale of Canada bonds. There’s nothing wrong with that, in principle. However:

To help manage the EFF, the Government will form the Advisory Committee on Financing. This committee will include users and suppliers of financing, along with other experts. The committee will advise on financing conditions and the design, scope and scale of initiatives under the EFF.

There’s already a competent body to administer the programme: it’s called the Bank of Canada. What-Debt’s politicization of monetary policy is absurd – but, after all, he’s the guy who went out of his way to politicize nuclear power regulation.

PerpetualDiscounts managed to eke out a marginal gain today, while FixedResets continued their recent decline.

I complained on January 19 that the political leverage given to politicians by the TARP funds would lead to calls to expand non-economic but politically attractive business methodologies. Dealbreaker passes along more commentary on this subject:

Surprise! Now anyone with public money is bathing in the gelatinous “squish” of a million squirming appetites, forced to submit to a literal morass of legislative tentacle sex with hundreds of pet projects, social theory experiments and personal causes (from the left and the right), not to mention the utter chaos and unpredictability of having every idiot in the House pop off about what new rule you should be following this week. Predicting what is or will be expected of you (or what you may or may not be paid) is a nightmarish prospect.

Dealbreaker also comments on the Caballero Insurance Plan that I have previously written about:

Typically when Congress can’t get the political backing to actually pass a bill to pay for something, they do the next best thing: get the political backing to guarantee something, or insure any losses. At the very least this reduces the cost of capital for the activity. Throw some tax benefits in and you go a long way to encouraging the behavior you are trying to stimulate. So potent can the effect be that you don’t even necessarily need a direct guarantee. (The “too big to fail” condition and the “implicit guarantee” of a Fannie Mae is a good example here).
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The problem with this level of insurance is that while it preserves public capital (and prevents dilution) you can write a lot of insurance before anyone starts to notice that you are on the hook for, well, a lot of insurance. (See e.g., Fannie and Freddie).

An interesting day in the preferred market! Split shares got hurt, presumably due to continued equity weakness – a lot of the January 22 NAVs are coming out and don’t look very pretty. FBS.PR.B is now valued below the preferred par value, but is still rated Pfd-2(low) by DBRS, and has been under review negative for three months now.

Fixed-Resets got hurt, presumably due to continued heavy issuance: a new CIBC fixed-reset 650+447 was announced today, bringing the total number of pending issues to five. Amidst all this, PerpetualDiscounts were up on the day, albeit marginally and with a certain sloppiness.

TD went into a frenzy of activity, trading a huge number of blocks after the close – remember that after hours trading is fine, but it all has to occur at the same price as the last trade of a board lot.