Category: Market Action

FixedResets outperformed PerpetualDiscounts today, +13bp vs. -8bp, and grabbed the top three spots in the volume table. Volume eased off a little.

The FDIC is reducing the capitalization requirements for private equity firms buying banks:

The FDIC board approved the rules today at a meeting in Washington, agreeing to lower to 10 percent from the proposed 15 percent the Tier 1 capital ratio private-equity investors must maintain after buying a bank.

This issue was last discussed on PrefBlog on July 28.

I’m not usually a big fan of bureaucrats, but Jed Rakoff, the US District Judge hearing the SEC / BAC / MER case is saying some unusually sensible things:

U.S. District Judge Jed Rakoff has twice refused to approve the Securities and Exchange Commission’s $33 million settlement over the bank’s failure to better disclose bonuses it had authorized Merrill Lynch & Co, which it was acquiring, to pay.

Rakoff has faulted the SEC for appearing to let the bank off too easily, and dismissed as nonsensical why the bank would agree to pay anything without admitting it had done anything wrong.

Hear, hear, Mr. Rakoff! Regulators are quick to tout their negotiated settlements, but a negotiated settlement without admission of guilt is either a license to cheat or simple regulatory extortion. The politicians who ultimately bear responsibility for the conduct of their regulators should revise legislation such that negotiated settlements are banned.

Not content with saying one sensible thing, Judge Rakoff continued:

In the Bank of America case, executives said they relied on lawyers’ judgments as to what bonus details should be revealed. Yet the bank did not waive attorney-client privilege, meaning the names of the decision makers remained secret. An exasperated Judge Rakoff questioned why the SEC would agree to this.

“If the company does not waive the privilege,” the Manhattan judge wrote, “the culpability of both the corporate officer and the company counsel will remain beyond scrutiny. This seems so at war with common sense.”

The SEC’s position, if it has been reported correctly by Reuters, is nothing short of insane. Everything’s OK as long as you sought legal counsel? This implies that the SEC has out-sourced the interpretation, prosecution and judgement of securities law to any two-bit shyster with a law degree who happens to be consulted. By the SEC’s reasoning, if I put every cent of client money into sub-prime paper and lose the whole whack, I should be able to claim that I consulted the rating agencies and so did nothing wrong!

Where is the responsibility here? Regardless of what was discussed with whom, the fact is that BofA – and BofA’s executives – knew X and disclosed Y. The consultation of legal advisors is irrelevant to the question of whether X is sufficiently close to Y to meet their legal obligations; the consultation is not wholly irrelevant to personal responsibility, but it is merely a detail.

The preferred share market halted its decline today, with FixedResets up 11bp and PerpetualDiscounts eking out a 6bp gain. This left PerpetualDiscounts yielding 5.66%, equivalent to 7.92% interest at the standard equivalency factor of 1.4x. Long Corporates are a little under 6%, call it 5.95%, so the pre-tax interest-equivalent spread is now near-as-dammit to 200bp, widening 12bp from August 19 and bang on what I have come to call ‘Credit Crunch Normal’.

Bernanke has been nominated for a second term as Fed Chairman:

Federal Reserve Chairman Ben S. Bernanke, who led the biggest expansion of the central bank’s power in its 95-year history to battle the worst economic slump since the Great Depression, was nominated to a second term today by President Barack Obama.

“Ben approached a financial system on the verge of collapse with calm and wisdom, with bold action and out-of-the box thinking that has helped put the brakes on our economic freefall,” Obama said in Martha’s Vineyard, Massachusetts, with Bernanke at his side.

In his acknowledgement of the nomination, Bernanke noted that Central Banking has been more exciting than usual lately:

It has been a particular privilege for me to serve with extraordinary colleagues throughout the Federal Reserve System. They have demonstrated remarkable resourcefulness, dedication, and stamina under trying conditions. Through the long nights and weekends and the time away from their families, they have never lost sight of the critical importance of the work of the Fed for the economic well-being of all Americans. I am deeply grateful for their efforts.

The old debate about Central Bank transparency is heating up:

A federal judge on Monday ruled against an effort by the U.S. Federal Reserve to block disclosure of companies that participated in and securities covered by a series of emergency funding programs as the global credit crisis began to intensify.

In a 47-page opinion, Chief District Judge Loretta Preska of the federal court in Manhattan said the central bank failed to show that disclosure would cause borrowers in the Federal Reserve System to suffer “imminent competitive harm,” by stigmatizing them for using Fed lending programs.

This has been a bone of contention since at least 1825.

An acquaintance wishes to transfer stock from his full service account at RBC to TD Waterhouse. This issue trades on the TSX, is not particularly illiquid, the position is fully paid for and therefore the stock should be segregated. He has been advised that the transfer should take four to six weeks.

Of all the sleazy tactics used by the brokerage industry, delays on account transfer have to count among the sleaziest; it’s totally unnecessary – any delay beyond three business days (normal settlement time if the client sold the position) has no explanation other than a deliberate corporate policy of delay. A list of RBC Wealth Management key executives shows that responsibility for the deliberately shitty client service at their firm lies with:

• M. George Lewis
• David Agnew
• John Taft
• Michael J. Lagopoulos
• John Montalbano
• Brenda Vince
• Dan Chornous

Any of these individuals is invited to write in – or, better and more likely, write an essay for public consumption – and explain why they are not sleazebags. Note that ‘because everybody else does it’ is not considered an excuse even in kindergarten.

It’s mostly the clients’ fault anyway … if all such instances of deliberate incompetence were met with a barrage of angry letters and genuine loss of business – as opposed to the usual ineffectual grumbling and occasional abuse of helpless front-line staff – things would change. And if pigs had wings, they could fly.

PerpetualDiscounts eased off again today in their second down day of the month, bringing total return since July 31 to a miserable +6.36%. I will not indulge myself with the usual journalistic pseudo-wisdom and claim it was due to profit-taking … the market went down because it felt like going down, OK? Volume continued high, with straights again dominating the table of volume highlights.

I mentioned the current exodus of hedge funds from London to Switzerland on July 27. Now (hat tip: Dealbreaker) there’s more:

The advent of the 50% tax rate appears to be the final straw for many hedge funds and other money firms who are being actively lobbied by the Swiss authorities to decamp to Zug, Zurich or Geneva.

They are being promised that in Switzerland they can hide from increasing European Union regulation or the intervention of watchdog agencies like Britain’s Financial Services Authority.

Richard Jordan a partner at law firm Thomas Eggar told Financial News: “Around 40% of my work involves advising people on ways to leave the country. We have reached a tipping point in terms of hostility to the UK tax system.” Financial News estimates that hedge funds managing nearly £10 billion of assets have moved to the tax haven of Switzerland in the past year.

Another Senator has come out against flash orders:

[Delaware Democrat Senator Ted] Kaufman said the SEC also should examine the co-location of servers at the exchanges, liquidity rebates paid on the basis of order flow, possible conflicts of interest arising from the disclosure of retail order flow, and how much trading occurs without the involvement of a brokerage firm.
…
James Angel, a finance professor at Georgetown University in Washington who studies market structure and regulation, says that lawmakers’ concerns over flash orders are misplaced.

“This notion that somebody else is getting a secret peek at Aunt Sally’s order is just wrong,” Angel said. “The people using flash orders are sophisticated investors who are very comfortable with the fact they can wait half a second for a better price.”

A US mortgage originator has gone bust:

Taylor, Bean & Whitaker Mortgage Corp., the 12th largest U.S. mortgage lender, filed for bankruptcy protection from creditors as regulators question its involvement with Colonial BancGroup Inc.
…
The announcement comes after Taylor Bean, based on Ocala, Florida, was expelled from the ranks of mortgage lenders approved to do business with government-sponsored mortgage agencies earlier this month. The government cited concerns about possible fraud.

Taylor Bean said today it believes the decisions were related to its involvement with Colonial and that it has, or will soon, appeal the action. The government actions led Taylor Bean to fire about 2,000 employees on Aug. 5, the company said.

The terminations followed a failed attempt by Taylor Bean to lead an investor group that would pay $300 million for a controlling stake in Colonial, one of its lenders that has since failed and been taken over by BB&T Corp.

Taylor Bean said it is in talks with the Federal Deposit Insurance Corp., the receiver for Colonial, on getting access to about 100 accounts frozen by Colonial.

KER-RUNCH! The Great PerpetualDiscount Rally of 2009 came to a close today, with the class down 62bp in total return, erasing all of its gains since, er, last Tuesday. Had to happen some time! Straights again dominated the volume table. Volume continued to be elevated, with RBC having a good client-service day.

PerpetualDiscounts managed to keep the rally going today, with a gain of 18bp taking yields down to 5.61%. Today was the eighteenth consecutive trading day of advances, with the index gaining 9.71% total return in this span, with yields declining from 6.15% on July 27 to 5.61% today.

The preferred share market just kept on keeping on today, with PerpetualDiscounts gaining 42bp to close with a yield of 5.65%. The last time yields on this index were this low was May 28, 2008. FixedResets are in something of a holding pattern, seeming reluctant to reduce yields below 4%.

The Congressional Budget Office has released a major report on budget options for Congress. Among the more interesting are:

• Reduce the Mortgage Interest Deduction or Replace It with a Tax Credit
• Replace the Tax Exclusion for Interest Income on State and Local Bonds with a Tax Credit

The second alternative [converting the mortgage interest deduction to a credit] would replace the deduction with a 15 percent tax credit for interest on mortgages below the declining limits in the first alternative. (In 2005, the President’s Advisory Panel on Federal Tax Reform proposed a variant of that approach.) The change would reduce taxes for some owners and raise them for others, with a net increase of $13 billion in 2013 and $388 billion over the period from 2013 to 2019.

Creating a tax credit for the interest paid on state and local debt could have several advantages. First, it could lower states’ and localities’ borrowing costs by about the same amount as the current tax exclusion but cause a smaller reduction in federal revenues. The reduction would be smaller because switching to the credit would prevent bondholders in higher tax brackets from receiving gains that exceeded the investment return necessary to induce them to buy the bonds. Second, the size of the tax credit could be varied to allow lawmakers to adjust the extent of the federal subsidy—on the basis of its perceived benefit to the public—for different categories of borrowing by state and local governments. (Even with a tax credit, however, the federal subsidy would remain akin to an entitlement; that is, it would not automatically be subject to annual Congressional scrutiny.)

Good ideas, but I don’t think they’ll go anywhere until Treasury reports a significant risk of bond auction failure.

How ’bout that preferred share market, eh? PerpetualDiscounts dominated the volume table while roaring up another 60bp today, taking their yield down to 5.63%, equivalent to 7.88% interest at the standard equivalency factor of 1.4x. Long Corporates now yield 6.0% – well, maybe just a hair less – so the pre-tax interest-equivalent spread is now 188bp, a decisive break through the ‘credit-crunch-normal’ level of about 200bp and considerably tighter than the 215bp recorded on August 12.

Dealbreaker is a gossipy tabloid style website billing itself as a tabloid – most of the offerings are vapid commentaries on topics as diverse as Bernie Madoff’s pants and the amount of cleavage being shown by business news commentators. Every now and then, though, they come up with something good; today there is an interesting post on the Nigerian banking system.

If anything, the preferred share market rally is accellerating, with PerpetualDiscounts up 75bp today, while FixedResets were down 14bp. Volume continued high, well spread out amongst the various classes.

Themis Trading published a white paper on High Frequency Trading (hat tip: Financial Webring Forum) that is most interesting:

This paper will explain how these traders – namely liquidity rebate traders, predatory algorithmic traders, automated market makers, and program traders – are exploiting the new market dynamics and negatively affecting real investors. We conclude with suggestions on what can be done to mitigate or reduce these effects.
…
The number of quote changes has exploded. The reason is high frequency traders searching for hidden liquidity. Some estimates are that these traders enter anywhere from several hundred to one million orders for every 100 trades they actually execute.

For the life of me, I was unable to find any real public policy concerns in this paper. Smart traders are making money at the expense of dumb traders, which sounds very right and proper to me. A dumb trader with algorithmic trading software … is a fast dumb trader.

A lot of the kerfuffle, I am convinced, is simply an replay of the floor-traders fight of about 20 years ago. Remember? All those floor traders who’d gotten fat and comfortable with their sinecures suddenly found out that computers had made their jobs obsolete. Nowadays, there are a lot of prop traders at dealerships (not to mention buy-side traders) who are finding out the same thing … and they’re trying to hold back the tide with whatever scare stories a credulous public will swallow.

Unfortunately, the piece was written before the controversy on flash orders (last mentioned August 5), so there is no enlightenment on this issue from that source. The Themis Trading Blog, though, has a lot of good information on HFT in general and has been added to the Blogroll.

CIT has declared that its tender offer was successful:

today announced the expiration and successful completion of its tender offer (the “Offer”) for its $1 billion of Floating Rate Senior Secured Notes due August 17, 2009 (the “Notes”). The Offer expired at 12:00 midnight, New York City time, at the end of August 14, 2009. The completion of this tender offer is another important milestone as the Company continues to make progress on the development and execution of a comprehensive restructuring plan.

As of the expiration date, 59.81% of the total Notes outstanding were validly tendered and not withdrawn, an amount in excess of the minimum condition. In accordance with the terms and conditions of the Offer, CIT will accept tendered Notes for payment on August 17, 2009, the settlement date, at a purchase price of $875 per $1,000 principal amount of Notes. CIT will pay amounts due on Notes that have matured but were neither tendered in, nor subject to the Offer in accordance with the terms of those Notes.

The preferred share market just kept on keeping on today, with PerpetualDiscounts up just over 41bp, leaving the FixedReset return of +2bp looking a little sad. Volume continued high.

Non-performing loans in the States are reaching extraordinary levels:

More than 150 publicly traded U.S. lenders own nonperforming loans that equal 5 percent or more of their holdings, a level that former regulators say can wipe out a bank’s equity and threaten its survival.

The number of banks exceeding the threshold more than doubled in the year through June, according to data compiled by Bloomberg, as real estate and credit-card defaults surged. Almost 300 reported 3 percent or more of their loans were nonperforming, a term for commercial and consumer debt that has stopped collecting interest or will no longer be paid in full.

On August 12 I mentioned some proposed changes to rules in the States that would draw some clearer lines between a broker’s agent & principal functions when underwriting new municipal issues. There’s an example of bone-headed new issue pricing from Chicago:

The Metropolitan Water Reclamation District of Greater Chicago, in a debt offering typical of President Barack Obama’s Build America Bonds, raised $600 million this week, relying on advice from Mesirow Financial Inc., a 72-year-old investment bank based in the city. Within 12 hours, the firm assured itself and investors a profit of at least 2 percent as the bonds appreciated as much as $25.82 for each $1,000 face amount, according to the Municipal Securities Rulemaking Board.
…
The water district saved money for taxpayers with Build America Bonds, said Treasurer Harold Downs. The program, which started in April as part of President Barack Obama’s $787 billion stimulus plan, pays a subsidy for 35 percent of the interest costs on taxable debt sold by states, local governments and universities to finance capital projects creating jobs.

Does this prove that the underwriter was incompetent or that there was hanky-panky? No. Is this a question that really needs to be looked at carefully? Yes.

The preferred share market was on fire today, with PerpetualDiscounts gaining 83bp in their thirteenth consecutive trading day of gains. Yawn. In the course of this run, they have gained 6.63%. Yawn. FixedResets trailed, but were in the black at +39bp today, but were shut out of the volume tables. Yawn. Volume continued high. Yawn.