Category: Market Action

Econbrowser‘s James Hamilton is advocating executive compensation laws:

Lehman Brothers: $27 million for CEO Richard Fuld. The financial freeze that followed the collapse of Lehman is seen by many as the key event that turned the recession of 2007-08 into the frightening freefall currently under way
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What caused that principle to go so badly awry in the present instance? I believe there was an unfortunate interaction between financial innovations and lack of regulatory oversight, which allowed the construction of new financial instruments with essentially any risk-reward profile desired and the ability to leverage one’s way into an arbitrarily large position in such an instrument. The underlying instrument of choice was a security with a high probability of doing slightly better than the market and a small probability of a big loss. For example, a subprime loan extended in 2005 would earn the lender a higher yield in the event that house prices continued to rise, but perform quite badly when the housing market turned down. By taking a leveraged position in such assets, the slightly higher yield became an enormously higher yield, and while the game was on, the short-term performance looked wonderful. If the agent is compensated on the basis of current performance alone, and the principal lacks good information on the exact nature of the risks, the result is a tragically toxic incentive structure.
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My interest in this issue is not so much to exact revenge on those who created our current problems, but instead to ask, how can we change the incentives so that this kind of problem is not repeated again? And that in turn leads me to wonder, why limit the proposals above only to a handful of companies?

Despite Prof. Hamilton’s protestations, I consider this a classic example of American vindictiveness.

In the first place, it was not Fuld’s compensation that caused the credit freeze of 4Q08: it was the sudden withdrawal of $400-billion from money market funds that accomplished that little trick. No individual, no company and not even any industry is able – or willing – to withstand the cumulative effect of uninformed decisions by millions of retail customers.

To ascribe blame for the Credit Crunch on Wall Street policies is as superficial as blaming the Tech Boom and subsequent wreck on IPO specialists and Tech Funds. Retail was coming to them, insisting on get-rich-quick internet investments – and got them. End of story.

Our reaction to the Credit Crunch should be informed by our reaction to, say, a horrific and avoidable traffic accident. We can throw the book at the driver, if it makes us feel better. It won’t stop future accidents. We can improve the regulation of that particular intersection, with improved sightlines and signage; it might cut accidents at that corner, but won’t do a thing for the next block down the street. If we’re really serious about banning accidents, we have to ban cars; we will probably find that the cure is worse than the disease.

There are definitely some aspects of regulation that can be improved – removing the right of directors and shareholders to hire whoever they like at whatever it costs is not one of them – but to try and tame the business cycle with regulation is a fool’s game. As with the Great Moderation, as with the Soviet Union, that’s the sort of thing that works very, very well … until one day, quite suddenly, it doesn’t.

I will also note Dealbreaker‘s estimate of $1-trillion in fees paid in the course of the mortgage boom … so, in defense of the executives:

• if they’d turned down that kind of money, investors would have hired a pig more aggressive in getting to the trough
• what killed the investment banks was not so much their horrific losses, but risk-aversion by their lenders

Am I giving Wall Street a free pass? No. I pointed out in the post SEC & BSC that Wall Street covered its need to tick the “risk management” box by hiring people who didn’t know what they were doing and then ignoring what they said. But the way to get ahead in any large organization – whether it’s an investment bank, a regulator, government, or Honest Bob’s Financial Planning Boutique – is to figure out what your boss (and your clients) want to hear and telling it to them. No amount of well-intentioned regulation will ever change that.

On a related topic, US & International financials got cremated today:

Banks fell after the U.K.’s second bank-bailout plan in three months raised concern the financial crisis is deepening. The government of Prime Minister Gordon Brown said it will spend an extra 100 billion pounds ($142 billion) to support banks and increase its stake in Royal Bank of Scotland Group Plc (RBS:LN).

Royal Bank of Scotland American depositary receipts (RBS:US) plunged 69 percent to $3.33. ADRs of Lloyds Banking Group Plc (LYG:US), the U.K.’s biggest mortgage lender, tumbled 58 percent to $2.61.

JPMorgan Chase & Co. (JPM:US) retreated 21 percent to $18.09. Citigroup Inc. (C:US) lost 20 percent to $2.80. Wells Fargo & Co. (WFC:US), which Friedman Billings Ramsey Group Inc. said will probably cut its dividend during the first half of this year, sank 24 percent to $14.23.
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Bank of America Corp. (BAC:US) dropped the most in the Dow Jones Industrial Average, slumping 29 percent to $5.10. The biggest U.S. lender by assets needs at least $80 billion to restore capital to minimum levels required by regulators, according to Friedman, Billings, Ramsey Group Inc. analyst Paul Miller.
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MGIC Investment Corp. (MTG:US) slid 24 percent, the most since Dec. 1, to $2.13. The largest U.S. mortgage insurer posted a sixth straight loss and predicted an unprofitable 2009 as the deepening U.S. recession will cause more homeowner defaults. The company’s fourth-quarter operating loss of $2.06 a share was worse than the expected deficit of $1.14, according to the average estimate of six analysts surveyed by Bloomberg.
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Regions Financial Corp. (RF:US) lost 24 percent to $4.60, the steepest decline since Sept. 29. The Alabama bank that expanded in Florida a year before the mortgage market collapsed posted a fourth-quarter loss of 35 cents a share, excluding a goodwill charge. Nineteen analysts surveyed by Bloomberg estimated Regions would post a 9-cent loss for the quarter.

Other regional banks also slipped. PNC Financial Services Group Inc. (PNC:US) sank 41 percent to $22. Sovereign Bancorp Inc. (SOV:US) fell 18 percent to $2.
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State Street Corp. (STT:US) had the biggest drop in the Standard & Poor’s 500 Index, sliding 59 percent to $14.89. The world’s largest money manager for institutions said 2009 operating profit will be little changed from last year after fourth quarter earnings fell 71 percent.

Other asset-management firms also declined. Bank of New York Mellon Corp. (BK:US) fell 17 percent to $19. Northern Trust Corp. (NTRS:US) slid 14 percent to $43.93. Legg Mason Inc. (LM:US) fell 18 percent to $17.34. American Capital Ltd. (ACAS:US) dropped 20 percent to $3.66. Calamos Asset Management Inc. (CLMS:US) slid 16 percent to $5.29.

Not a bad day, altogether. SplitShares got whacked, not surprisingly given their dependence on financial common stock. But if the decline in PerpetualDiscounts was credit-related, then why were Fixed-Resets up? Volume continues to be quite good. BNS.PR.T closes tomorrow … and then there will be no more new issues announced but not closed!

Not much news, in light of the holiday in the US and preparations for tomorrow’s Obama-rama.

Willem Buiter writes a piece with a rather startling message: Time to Take the Banks Into Full Public Ownership.

He points out the Bagehot prescription of readily available expensive liquidity can have an unfortunate side-effect:

But if the state’s financial assistance is priced punitively or has other painful conditionality attached to it, existing shareholders and management will do everything to avoid making use of these government facilities. If a bank has no option but to take the government’s money, it will try to repay it as soon as possible – to get the government out of its hair. Such a bank will therefore be reluctant to take any risk, including the risk of lending to the non-financial private sector. Such a bank will hoard liquidity (sometimes in the form of deposits/reserves with the central bank) to regain its independence from the government. Still independent banks will hoard liquidity to stay out of the clutches of the government.

I believe that this mechanism is at work in a powerful way both in the UK, the US and in continental Europe. Hans Werner Sinn in a recent Financial Times OpED piece pointed out that the German rescue package for banks was fatally flawed for precisely this reason: the acceptance by banks of an injection of public sector capital brings with it a cap on managerial salaries. Rather than accepting a cap on their salaries, managers would prefer to totter along with an under-capitalised bank and restrict the scope and scale of their lending operations.

However, I am unconvinced that the alternatives he suggests are really any better:

By throwing cheap money with little conditionality at the banks, the Fed and the US Treasury may get bank lending going again. By subsidizing new capital injections, they reward bad porfolio choices by the existing shareholders. By letting the executive leadership and the board stay on, they further increase moral hazard, by rewarding failed managers and boards that have failed in their fiduciary duties. All this strengthens the incentives for future excessive risk taking.

There is a better alternative. The alternative is to inject additional capital into the banks by taking all the banks into full public ownership. With the state as sole owner, the existing top executives and the existing board members can be fired without any golden handshakes. That takes care of one important form of moral hazard. Although publicly owned, the banks would be mandated to operate on ordinary commercial principles.

The implicit presumption is that government will be able to do it better. I’m not so convinced; political control over the lending process will – inevitably – mean a relaxation of lending standards to handicapped black lesbians and other disadvantaged groups, on the basis of their disadvantage and political advantage, not ability to pay. We are seeing movement towards of this conditionality in the States already, a by-product of TARP’s cheap money:

House Financial Services Committee chairman Barney Frank, D-Mass., on Friday released proposed legislation to reform the TARP and increase program accountability. Under Frank’s proposed makeover of the TARP, the second half of the $700 billion funds will be “conditioned on the use of a minimum of $50 billion for foreclosure mitigation.” His language would require Paulson to develop a comprehensive plan to prevent and mitigate residential mortgage foreclosures by March 15, 2009. The required elements of the plan include a guarantee program for qualifying loan modifications under a systematic plan and bringing down the costs of Hope for Homeowner loans “either through coverage of fees, purchasing H4H mortgages to ensure affordable rates, or both.” The plan would also need to establish a program for loans to pay down second lien mortgages that are impeding a loan modification, grant servicer incentives and assistance to stimulate modifications, and include the purchase of whole loans for the purpose of modifying or refinancing them.

I suggest that a better alternative to full nationalization that addresses Mr. Buiter’s concerns is to give the funding government a fair bit of call protection on its capital injection, while allowing the subject banks to operate on a business-like basis. The current terms do not allow this:

Our current understanding is that that the preference shares to be acquired by the government will rank pari passu with existing Tier 1 instruments in payment and in liquidation. The new preference shares will carry a 12% coupon and will be callable after five years. Banks selling preference shares to the government may not pay dividends on common equity while any of those preference shares remain outstanding. This clearly gives the banks an incentive to repay the government preference shares as soon as possible.

The five year call-protection makes sense; the restriction on common dividends does not. And, what’s more, these should be public issues, with a prospectus, stock-exchange listing and government guarantee of successful issuance.

Floaters did poorly today, perhaps in a last minute panic about tomorrow’s BoC rate announcement amidst speculation that there will be a 50bp cut to 1.00%. I will be interested not so much as to what happens to the Bank Rate as what happens to prime – I can’t see a cut of more than 25bp in prime whatever happens, but … I’ve been wrong before!

The day was enlivened somewhat by reports of excited groupies at the Financial Forum and by the closing quote of BNS.PR.S at 26.00-99.99. Whatever happened to the good old days of bid-without? There is still no indication of what SunLife wants to do with its holding; but surely at some point Sections 711 & 712 of the TSX Company Manual will become applicable:

Sec. 711.

TSX will normally consider the delisting of securities of a listed issuer if, in the opinion of TSX, it appears that the public distribution, price, or trading activity of the securities has been so reduced as to make further dealings in the securities on TSX unwarranted.

Sec. 712.

Specifically, participating securities may be delisted if:

(a) the market value of the listed issuer’s issued securities that are listed on TSX is less than $3,000,000 over any period of 30 consecutive trading days; or
(b) the market value of the listed issuer’s freely-tradable, publicly held securities is less than $2,000,000 over any period of 30 consecutive trading days; or
(c) the number of freely-tradable, publicly held securities is less than 500,000; or
(d) the number of public security holders, each holding a board lot or more, is less than 150.
Non-participating securities will be subject to (b) above as well as Section 711

Still and all, you know, I’m sorely tempted to buy 100 shares at 99.99, just so I can insist on delivery!

PerpetualDiscounts were off a bit today, closing to yield 6.85% dividends, equivalent to 9.59% interest at the standard 1.4x conversion factor. Long corporates are still at about 7.5%, so the pre-tax interest-equivalent spread remains at around the 210bp level achieved on January 9.

Another piece of history gone! Across the Curve notes that Treasury has called the 13.25 of May 2014:

I recall that bond as the last bond to trade at 14 percent. It was issued as a 30 year bond in May 1984. In those days the treasury issued callable long bonds but the call protection was 25 years. Anyway, on the settlement day May 15 1984 the owners threw up all over their shoes and the futures market was down limit. The new bond traded to 14 percent in the cash market. The rest is history as its successor sees nothing but buyers today in the 2.80s.

The New York Fed has endorsed the recent TMPG initiative to charge for fails:

The Federal Reserve Bank of New York endorses the Fails Charge Trading Practice published today by the Treasury Market Practices Group (TMPG) and strongly encourages its adoption by all market participants. The Fails Charge Trading Practice provides a feasible method for market participants to implement the TMPG’s previously announced recommendations for addressing widespread settlement fails in the U.S. Treasury market. The New York Fed is convinced that universal adoption of the trading practice is a crucial step in alleviating the chronic fails problem that currently threatens to constrain Treasury market liquidity and function. The New York Fed will adopt this new trading practice in its own market operations.

Accrued Interest provides some interesting colour on Agencies & MBS, observing:

MBS suffer from a severe negative convexity problem. MBS investors have essentially sold short an interest rate option to the underlying mortgage borrowers. Those borrowers are now almost universally in the money. Many borrowers will have difficulty actually refinancing (more on that below) but regardless, the price for MBS securities will have difficulty rising above $104 or so with an embedded in-the-money option with a $100 strike.

To see what I mean, notice the price spread across the coupon stack (using Fannie Mae 30-year MBS for February settlement):

4.5% Coupon: $101.938
5%: $102.750
5.5%: $103.203
6%: $103.656
6.5%: $104.500
This is the current dollar price for a mortgage security with the indicated coupon.

Tomorrow is the last day of trading of TXPR prior to its rebalancing, which is effective at the opening on Monday 19th. Those with an interest in some of the lower volume issues affected (e.g., ACO.PR.A, NSI.PR.C, NSI.PR.D) may wish to put in stink-bids and stink-offers,as it is possible (possible!) that CPD and other indexers may be willing (or forced!) to trade at a spread to market.

Another day of pretty good volume. PerpetualDiscounts were off again … but having survived 4Q08, I’m decidedly unimpressed by any overall move of less than a point.

Donato Masciandaro writes an opinion piece on VoxEU: Basel 3: Supervising the credit giants with progressive capital ratios:

The too big to fail rule therefore represents an authentic paradox – in the presence of risk of systemic crisis, the rule must be temporarily adopted to prevent the crisis from actually worsening, but if it is not credibly revoked, it pushes the system towards an unstable and inefficient oligopoly.

But can the too big to fail rule be revoked after the financial crisis ends? It may be difficult since the law has never been written, but it is always imminent in oversight procedure. But if government insurance against the insolvency of large banks is difficult to abolish, the government could try making them pay. Defining the correct plan for such a distinctive kind of insurance would not be simple, but the current situation could certainly be improved upon. Now, large banks could reasonably believe that they are covered by a subsequent implicit insurance in case of an insolvency risk. Banks do not pay a corresponding initial premium, however, as the prudent regulation plan does not mention bank size, at least from this point of view.
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New ideas are needed: capital coefficients that, equal to other risks, consider the “irresponsibility risks” that could increase bank sizes out of proportions, for example. Thus, non-proportional capital coefficients which are progressive in relation to the activity volume are needed, possibly divided into size groups. In order to “put a price” on government insurance in favour of credit giants, non-conventional regulatory solutions need to be explored, striving to remain in line with the foundation of a market with prudent regulation. It is not simple, but it would be better than pretending that the problem did not exist.

I support the idea; particularly if it is paired with the idea of weighting risk-weighted-assets differently according to either the “trader” (investment bank, dealer) or “investor” (regular bank) regime chosen by the entity.

Action today was dominated by settlement of three new issues (bank fixed-resets), each of which made it into the volume tables, unsurprisingly. PerpetualDiscounts were off.

BMO is buying AIG’s Canadian life insurance business. Nice to see the balance sheet of a Canadian bank being put to work.

Professor Axel Leijonhufvud has written a two part series on Vox (commencing yesterday) in which he concludes in part:

Two elements of a reconstructed system of regulatory control may be suggested.

First, re-impose effective reserve requirements on deposit-taking banks and extend them to all types of institutions that carry demand liabilities (e.g. money market funds).

Assiduous Readers will remember that I have called for bank-sponsored money market funds to be consolidated in their sponsors’ balance sheets for risk measurement purposes.

The ABCP soap-opera appears to be finally grinding to a resolution as the restructuring has received final approval. Investor Advocates will be pleased to learn that regulators now have judicial imprimatur to restrict investments even further:

Judge Campbell urged regulators to be more watchful about complicated products such as ABCP in the future.

He questioned whether investors and investment advisers “truly understood” what they were selling, and he went on to “urge regulators to sort out what investments should be available to whom.”

Soon only mutual funds will be legal for retail because, you know, you’re just not smart enough for anything else. The government says so, and they’re here to help you.

PerpetualDiscounts returned to their winning ways today.

You know what the trouble with TARP is? I’ll tell you what the trouble with TARP is. The trouble with TARP is there’s not enough box-ticking and there’s not enough feel-goodism and there’s not enough publicity for regulators. Fortunately, the FDIC is taking proactive steps to proactively rectify these shortcomings in a proactive manner:

• The FDIC expects that state nonmember institutions (or their parent companies) will deploy funding received from these federal programs to prudently support credit needs in their market and strengthen bank capital.
• In order to assess how participation in these federal programs has helped the institution support lending and/or support efforts to work with existing mortgage borrowers to avoid unnecessary foreclosures, FDIC-supervised institutions should implement a process to document how these funds were used. State nonmember institutions should describe their utilization of this federal funding during bank examinations and are encouraged to summarize such information in published annual reports and financial statements. Including such information in public reports will provide important information for shareholder and public evaluation of participation in these programs.

All good things must come to an end, usually pretty soon, and the PerpetualDiscount winning streak was halted today. Just a whisker, but a loss never-the-less. Split-shares were hit hard, presumably due to stock market declines.

The ABX index derivatives (which reference either the lowest or the penultimate AAA tranche of structured subprime mortgage products) are getting hammered today due to fears of pending legislation:

it appears that a bill to allow bankruptcy judges to alter loan balances has picked up a head of steam as Citibank broke ranks with other lenders and no longer opposes the measure.

The jobs number was appalling:

The U.S. lost more jobs in 2008 than in any year since 1945 as employers fired another 524,000 people in December, indicating a free-fall in the economy just days before President-elect Barack Obama takes office.
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The Labor Department reported that the nation lost 2.589 million jobs in 2008, just shy of the 2.75 million decline at the end of World War II. The unemployment rate climbed more than economists forecast, to 7.2 percent in December, the highest level in almost 16 years.

The Great Perpetual Rally of 2009 continued today, with PerpetualDiscounts posting their eleventh straight trading day of gains from the low of Dec. 22 to show a total gain of 21.87% over the period. The median pre-tax bid-YTW has declined from 8.48% to 6.86% … what can I say? The interest-equivalent is now 9.60%, while long corporates continue to hold steady at 7.50% – so we’re back down to a 210bp pre-tax interest-equivalent spread, which is just a little over the last patch of relative stability experienced in the first half of 2008.

The Congressional Budget Office released its Ten Year Outlook for the US Economy, and my-oh-my, but it’s gloomy:

Under an assumption that current laws and policies regarding federal spending and taxation remain the same,
CBO forecasts the following:

• A marked contraction in the U.S. economy in calendar year 2009, with real (inflation-adjusted) gross domestic product (GDP) falling by 2.2 percent.
• A slow recovery in 2010, with real GDP growing by only 1.5 percent.
• An unemployment rate that will exceed 9 percent early in 2010.
• A continued decline in inflation, both because energy
  prices have been falling and because inflation excluding energy and food prices—the core rate—tends to ease during and immediately after a recession; for 2009, CBO anticipates that inflation, as measured by the consumer price index for all urban consumers (CPI-U), will be only 0.1 percent.

• A drop in the national average price of a home, as measured by the Federal Housing Finance Agency’s purchase-only index, of an additional 14 percent between the third quarter of 2008 and the second quarter of 2010; the imbalance between the supply of and demand for housing persists, as reflected in unusually high vacancy rates and a low volume of housing starts.
• A decrease of more than 1 percent in real consumption in 2009, followed by moderate growth in 2010;
• the rise in unemployment, the loss of wealth, and tight consumer credit will continue to restrain consumption—although lower commodity prices will ease those effects somewhat.
• A financial system that remains strained, although some credit markets have started to improve; it is too early to determine whether the government’s actions to date have been sufficient to put the system on a path to recovery.

There is more commentary by Paul Krugman of the NYT and Menzie Chinn of Econbrowser.

And there are some straws in the wind regarding the future of US bank regulation:

The biggest U.S. banks may face the threat of lower profits or pressure to break up under greater regulation following the financial crisis.

Federal Reserve officials have made tackling the issue of firms that are too big to fail a priority. Options may include banning or restricting activities that could threaten the stability of the financial system, analysts said.

I continue to suggest that there needs to be a clear delineation of the difference between banking and investment banking. We want a rock-solid banking core, a somewhat more exciting layer of investment banking around that, surrounded by a wild-n-wooly world of hedge funds and shadow banks.

To that end, I suggest that capital rules be modified to emphasize the functionality of these layers. Banks buy-and-hold assets. Therefore, trading should attract a higher capital charge for them. Investment banks buy-and-sell assets. Therefore, aging assets should attract a higher capital charge for them. And, perhaps, hedging inefficiencies should be recognized such that a long and short hedge will attract a small, but non-zero, capital charge on the gross position.

There are indications that the CP market in the US is recovering:

Corporate borrowing in the commercial paper market expanded to the highest level since before Lehman Brothers Holdings Inc. filed for bankruptcy in September as companies took advantage of the lowest rates on record.

U.S. commercial paper outstanding rose $83.1 billion, or 4.9 percent, during the week ended Jan. 7 to a seasonally adjusted $1.76 trillion, the Federal Reserve said today in Washington. That’s the highest since the week ended Sept. 10, five days before Lehman’s filing.

Julia Dickson, OSFI Superintendent, gave a speech on regulatory pro-cyclicity, but there is not much substance to it.

Watson Wyatt has released some cheerful analysis:

Market declines caused by the global financial crisis have left the solvency of Canadian defined benefit (DB) pension plans at historical lows and defined contribution (DC) plan members with shrinking retirement savings, according to an analysis by Watson Wyatt Worldwide, a leading global consulting firm.

The pension solvency funded ratio (the ratio of market value of plan assets to plan solvency liabilities) of the typical pension plan declined 27 percentage points in 2008, dropping from 96 percent at the beginning of the year to 69 percent at year-end. Watson Wyatt’s Pension Barometer, which reflects the combined impact of investment performance and interest rates on the solvency funded ratio of a typical Canadian pension plan, indicates that the funded status of the typical pension plan decreased 11 percentage points in the fourth quarter alone.

PerpetualDiscounts managed to stagger to another gain today, with some evidence that the market is becoming a little (just a little!) less sloppy. To my surprise, Fixed-Resets also did very well.

I’m almost finished fiddling with the format of the performance table, and am about to commence fiddling with the volume table. Once I’m happy with the machine-generated tables, I’ll be adding the occasional comment, as I did way back in 2008. Assiduous Readers will have no idea how happy I am that the drudgery of table preparation is now computerized …

There is speculation that huge issuance may saturate the market for government bonds in the UK. Reception of a €6-billion issue of 10-year Bunds was sufficiently poor that the auction is being labelled a failure:

Germany’s sale of 10-year bunds lured the least demand in six months as investors shied away from a flood of government securities.

Investors bid for 5.2 billion euros of the bonds offered today, a level of demand that prompted the Bundesbank to retain 32 percent of the securities, according to the central bank’s Web site.

The press release tells the tale. A momentary blip? Or a sign of a turn in the tide from the flight-to-safety? Across the Curve notes “flight from risk-averse assets” and a tightening of credit spreads. Place yer bets, gents!

The Fed announced today that the Money Market Investor Funding Facility is being expanded:

the set of institutions eligible to participate in the MMIFF was expanded from U.S. money market mutual funds to also include a number of other money market investors. The newly eligible participants include U.S.-based securities-lending cash-collateral reinvestment funds, portfolios, and accounts (securities lenders); and U.S.-based investment funds that operate in a manner similar to money market mutual funds, such as certain local government investment pools, common trust funds, and collective investment funds.
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the Board authorized the adjustment of several of the economic parameters of the MMIFF, including the minimum yield on assets eligible to be sold to the MMIFF, to enable the program to remain a viable source of backup liquidity for money market investors even at very low levels of money market interest rates
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The MMIFF is designed to serve as a source of liquidity to money market mutual funds and other eligible money market investment vehicles, thereby increasing their ability to meet redemption requests and their willingness to invest in money market instruments, particularly term money market instruments. Under the MMIFF, the Federal Reserve Bank of New York provides a credit facility to a series of special purpose vehicles (SPVs) established by the private sector. The SPVs will purchase certain U.S. dollar-denominated, highly rated, short-term certificates of deposit, bank notes, and commercial paper from eligible money market investors

Speaking of the US, Across the Curve has some interesting colour today:

I had an interesting conversation with a relative value trader in the Treasury market. He loves the 2 year note at 80 basis points. With a zero handle, they would seem like an instrument which should have step child status.

However, he notes that with the ride down the yield curve and the positive carry from financing them at virtually zero, it is as if you own them at 1.75 percent one year from now.

That is the breakeven on a one year coupon. He makes the valid point that for that 1.75 percent to lose money one would need to posit a funds rate close to one percent. Given the tenor of comments from the central Bank, that does not seem likely.

Wild. Riding the yield curve from a 80bp starting point at a time when Treasury auction issuance is at record levels and there is fear of auction failures. This situation is not sustainable.

There’s an interesting development in US distressed mortgages:

Private National Mortgage Acceptance Company LLC, an investor in troubled mortgages run by a former president of Countrywide Financial Corp., bought $558 million of home loans that the Federal Deposit Insurance Corp. acquired last year after First National Bank of Nevada collapsed.

Known as PennyMac and led by Stanford Kurland, the firm is paying an average of 30 cents to 50 cents on the dollar for the loans and the FDIC is sharing some of the risk, spokesman Andrew Chang said.
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“This asset sale did not provide any loss-sharing,” said FDIC spokesman David Barr in an interview about the PennyMac deal. “It is a participation sale, however, which means the FDIC benefits from cash-flow generated from these loans.”

The FDIC will receive 80 percent of the loan’s cash flow until a certain, undisclosed level of payments are received, then 60 percent thereafter, he said.

David Barr’s comments are disingenuous. “Participation” is equivalent to “Loss Sharing” – full stop.

PerpetualDiscounts managed to eke out another gain today – and, much to my surprise, so did fixed-resets! I would have thought that continued issuance would have pounded down the sector, but it is showing significant resilience. And I still have to fiddle with the damn programming of the damn tables.