Category: Market Action

Lasse Heje Pedersen writes a good review piece on VoxEU, Liquidity risk and the current crisis:

the meaning of liquidity risk is clear.

• Market liquidity risk is the risk that the market liquidity worsens when you need to trade.
• Funding liquidity risk is the risk that a trader cannot fund his position and is forced to unwind.

For instance, a levered hedge fund may lose its access to borrowing from its bank and must sell its securities as a result. Or, from the bank’s perspective, depositors may withdraw their funds, the bank may lose its ability to borrow from other banks, or raise funds via debt issues.
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If we have learned one thing from the current crisis, it is that trading through organised exchanges with centralised clearing is better than trading over-the-counter derivatives because trading derivatives increases co-dependence, complexity, counterparty risk, and reduces transparency. Said simply, when you buy a stock, your ownership does not depend on who you bought it from. If you buy a “synthetic stock” through a derivative, on the other hand, your ownership does depends on who you bought it from – and that dependence may prevail even after you sell the stock (if you sell through another bank). Hence, when people start losing confidence in the bank with which they trade, they may start to unwind their derivatives positions and this hurts the bank’s funding, and a liquidity spiral unfolds.
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Banning short selling is a bad idea
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Tobin taxes are a bad idea

TD Bank pre-announced some losses that will show up in the fourth quarter:

Credit trading losses of approximately $350 million (after-tax) for the quarter in Wholesale Banking, leading to a net loss of $228 million on an adjusted basis for that segment
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The first significant item relates to the credit trading business in TDBFG’s Wholesale Banking segment. As previously disclosed, due to global liquidity issues, the widening in the pricing relationship between asset and credit protection markets (basis) has negatively impacted credit trading-related revenues for the first three quarters of 2008. The dramatic absence of liquidity in global credit markets in September and October has produced an unprecedented widening of the basis, causing larger losses in Wholesale Banking in the fourth quarter.

Hmmm … basis widening? It sounds like the Credit Default Swap Basis they’re talking about. So – I think – what happened is this:

• TD has a large corporate bond inventory (that they trade)
• The hedge it by buying protection (via Credit Default Swaps) … not necessarily on each individual name, it might be, f’rinstance IG 11)
• TD might even have deliberately put on a big negative basis trade
• Funding cash bonds has become a chancy thing. Liquidity is NIL (or close enough). The CDS basis becomes even more negative.
• On a mark-to-market basis, TD Bank loses money

Like I said, maybe. There’s not a lot of detail in the press release.

Teck Cominco eliminated its dividend. The market wasn’t very happy.

Preferred share investors shaken by the carnage can console themselves that they have a front-row seat on history while avoiding the brunt of the unwind. I will lift two quotes from the excellent Across the Curve today … Treasuries & Swaps:

The Long Bond is trading at a yield of 3.43 percent and the dollar price has exploded 9 points today. I have done this for nearly 30 years. I have never witnessed this before. Even more incredible is the 30 year swap spread and swap rate. The 30 year swap rate is 2.84. It has dropped about 80 basis points on the day and is about 60 basis points rich to the 30 year Treasury.I just spoke with an options trader about this historic move. He said that there structured product trades buried in trading books all over the world which are melting. There is a massive short in the 30 year sector (in Treasury paper and in the swap market) which resulted from sales of cheap volatility. Some of these positions have been on the books of various entities for years and it is only recently that the chickens have come home to roost. Each time the spread turns more negative, that movement forces some one to receive in swaps to hedge there position. There are short the long end trades in every permutation and combination along the curve. The receiving creates a self fulfilling prophecy which compels someone else to receive. He had no opinion on when this would end.

… and CMBS:

Cash AAAs widened 325 basis points. The email author wanted to put the recent carnage into stark relief for the non aficionados in the room. He noted that GSMS 07-GG 10- A4 is a benchmark deal. Two weeks ago it traded at 83. Today it traded at 48.

CMBX AAAs wider by 130 basis points.

Look at the CMBS basis move! Cash moved 325bp … the CDS index moved by 130. The basis moved nearly 200bp! While I am not a specialist in the field, I would suggest that a move of 2 (two) basis points in the basis would be a pretty good day … in normal times.

The longer term moves? Bloomberg reports:

Yields on the safest category of AAA rated commercial- mortgage bonds rose 3.34 percentage points, the biggest gain ever, to a record 15.29 percentage points more than interest- rate swaps, according to Bank of America Corp. data.
…
The spread on the AAA commercial-mortgage securities, which entered this year at 0.82 percentage point, has climbed from 5.88 percentage points on Nov. 4.

The move in basis is indicative that even those who are willing to take some risk and lever up a position in CMBS … can’t get, or can’t trust, funding. So they have to take a synthetic position by selling protection. Lots of money to be made there, buying cash bonds and protecting them … if you can trust your financing … and your counterparties.

So, after a horrible day that was the fourth horrible day in a row (defining “horrible” as a loss of more than 1%), PerpetualDiscounts yield 7.95% as pre-tax dividends, equivalent to 11.13% pre-tax interest. Long Corporates are still at 7.50% so the Pre-Tax Interest-Equivalent Spread is … (drum-roll, please) … 363bp. Incredible.

Holy smokes. On a day like this, what would I do without Dealbreaker?

There were fifty-seven other index-included $25-pv-equivalent issues trading over 10,000 shares today.

Accrued Interest leads off with some thoughts on the collapsing CMBS market. CMBS opened 40bp wider this morning – panic is the only appropriate word.

Meanwhile, US CPI is normalizing:

Consumer prices plunged 1 percent last month, more than forecast and the most since records began in 1947, after being unchanged the prior month, the Labor Department said in Washington. Excluding food and energy, so-called core prices unexpectedly fell for the first time since 1982.
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Prices increased 3.7 percent in the 12 months to October, the smallest year-over-year gain since October 2007. They were forecast to climb 4 percent from a year earlier, according to the survey median.

The core rate increased 2.2 percent from October 2007, after a 2.5 percent year-over-year increase the prior month.

Citigroup is taking on a whack of SIV assets:

Citigroup Inc., the fourth-biggest U.S. bank by market value, agreed to acquire $17.4 billion of assets held by structured investment vehicles advised by the company.

Citigroup said today in a statement that the value fell from $21.5 billion as of Sept. 30, reflecting market declines of $1.1 billion and $3 billion in debt that matured or was sold.

This continues the re-intermediation process that has culminated in this cycle with the Fed grossing up its balance sheet and is also hitting the leveraged loans market:

The price of the average actively traded leveraged loan fell 2.6 cents to 71.2 cents on the dollar since Nov. 13, according to Standard & Poor’s LCD. Prices have slumped 4.4 cents since Nov. 4, reversing a rally of more than 8 cents on the dollar since the all-time low last month.

This is not a good sign for consumation of the BCE deal – even if the banks like the deal (even when properly risk-adjusted!) they might not have room for it.

There’s a report (h/t: Financial Webring Forum) from the Globe & Mail that the BCE buying consortium is issuing capital calls:

That means the two funds are asking institutional investors to pony up cash that was previously committed to each group, in order to pay for BCE.

These calls are routine in buyouts, and speak to the fact that the private equity funds are doing what’s needed to close the long-delayed transaction by Dec. 11. The move follows on BCE’s push last week to buy back some of its outstanding bonds.
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Capital calls are to be expected at this stage in the BCE buyout. The issue is whether the limited partners -typically pension funds – will step up with cash. Under certain circumstances, backers can refuse to fund a deal that the private equity fund has agreed to.The penalty for pulling out is typically 8 per cent of the value of the contribution that was requested.

Well, maybe I’m a cynic, but I don’t see this as meaning anything one way or another. Of course everybody’s pretending the deal will go through and making sure they go through all the motions, carefully vetted by an expensive team of lawyers. The last thing you want is to be on the hook for the break-up fee! Any speculation as to whether the deal will actually close or not remains speculative.

Assiduous Reader MP – who, I think, makes something of a hobby of SEDAR’s New Prospectus Page – alerts me to some massive, massive shelf prospectuses, including $4.5-billion in debt and preferreds from National Bank. There’s also some very hopeful filings for proposed Brompton Group Split Share corporations … whethere anything comes of them is another matter!

Triple A CMBS widened another 100bp today. US Corporates have reached an all-time wide, with continued term inversion for credit product.

What can I say? It was a lousy day. It was a sloppy day. Long Corporates in Canada have come back in to 7.50%; PerpetualDiscounts now yield 7.56% pre-tax dividend, equivalent to 10.58% pre-tax interest … which means spreads have rocketted out to 308bp. All in the blink of an eye.

There were forty-four other index-included $25-pv-equivalent issues trading over 10,000 shares today.

Remember the BMO Natural Gas fiasco that cost them so much money in the third quarter of 2007? The Fed has announced:

the issuance of a Consent Order of Prohibition against David Lee, former managing director of the Commodities Trading Group and institution-affiliated party of the Chicago, Illinois, branch of the Bank of Montreal (“BMO”).

Mr. Lee, without admitting to any allegations, consented to the issuance of the Order based on his alleged participation in unsafe and unsound banking practices, breaches of fiduciary duty and violations of law, in connection with his natural gas options trading activity at BMO. The Order asserts that Mr. Lee allegedly compromised the independent price verification process BMO relied on to ascertain the true value of his trading book, and also executed and then misvalued exchange of options for options trades in order to conceal the true value of his book, which led to after-tax losses to the bank of at least C$327,000,000.

In addition, the United States Attorney for the Southern District of New York and the District Attorney for New York County announced today that Mr. Lee has agreed to plead guilty to criminal charges relating to this matter. The Commodity Futures Trading Commission and Securities and Exchange Commission also separately announced the filing of civil lawsuits in related matters.

Accrued Interest reviews the function of leverage in the bond market of a deleveraging world and concludes:spreads on credit are permanently higher – not due to credit concerns, but because of financing concerns by leveraged players.

Credit markets got whacked today:

a weakening economy exacerbated concern that the government may not be doing enough to stem the financial crisis.

Top-rated securities backed by subprime or commercial mortgages fell to record lows and the cost of protecting against defaults on leveraged loans and investment-grade company bonds climbed, according to banks and benchmark credit-default swap indexes. Yields on Fannie Mae and Freddie Mac debt over benchmarks also approached records, according to data compiled by Bloomberg.
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Weakening across debt markets accelerated after commercial- mortgage securities began plunging, following reports that two borrowers with $334 million of loans bundled into bonds were about to default. Yields on top-rated bonds backed by commercial mortgages soared 225 basis points to a record 1,125 basis points more than benchmark interest rates as of 1:26 p.m. in New York, according to a Goldman Sachs Group Inc. note to clients. A basis point is 0.01 percentage point.

The ABX-HE-PENAAA 07-2 index tied to subprime bonds rated AAA when created in the first half of 2007 fell about 5.5 percent to a mid-price of 34.25, according to a note to clients today from JPMorgan Chase & Co.

The index is down almost 29 percent this month and indicates the bonds might fetch about 34 cents for each dollar of unpaid balances.

The PENAAA index has been discussed previously.

Scotia has announced:

that its results for the fourth quarter ended October 31, 2008 will include charges of approximately $595 million after tax ($890 million before tax) relating to certain trading activities and valuation adjustments.

The pre-tax charges are comprised of:

• $170-million on the Lehman bankruptcy – not an investment loss, but a failed settlement and trade unwinding. I’m really happy about this one – bankers have been dragging their feet on T+1 settlement for too long and it’s nice to see them get hurt due to their own laziness.
• $560-million on valuation adjustments
  • $150-million on trading inventory
  • $410-million on mark-to-market on CDOs
    • $245-million on CDOs purchased from their US ABCP operation.
    • Other CDOs, $165-million
• $160-million on “derivatives used for
  asset/liability management purposes that do not qualify for hedge accounting.”

To continue today’s tale of woe, the US Commercial Mortgage-Backed Securities market collapsed:

That is the word that one market participant used to describe the action in the CMBS market today. I am sorry to be writing this so late but I just found it as I checked emails and thought it worth posting.

CMBX AAAs widened by 130 basis points. AJ tranches widened 250 basis points to 350 basis points. ( I am lacking expertise in this area but believe an AJ is sort of a junior AAA piece.) And tranches below AAA widened 150 basis points to 350 basis points.

Cash CMBS underperformed the index and some AAA bonds with 30 percent protection widened 200 basis points. These are AAA bonds (allegedly) trading swaps plus 1050 basis points. That is alot of yield and alot of fear.

These incredible spreads might explain today’s weakness in BAM and related issues. US corporates gapped wider:

The corporate bond market as measured by the IG 11 has begun to crumble. The index is currently quoted 226/228 which is about 19 basis points wider on the day.Why the sharp spike out in that spread today? I think it is partly a result of the significant widening in other spreads.

Canadian Preferred shares … were not immune.

There were thirty-one other index-included $25-pv-equivalent issues trading over 10,000 shares today.

There’s a naked short tempest in the loans market:

At least two fund managers complained verbally to officials of the Loan Syndications and Trading Association, saying they believe Goldman helped drive down prices by using the technique, according to people with knowledge of the objections. New York- based Goldman is acting against its clients by trying to profit at their expense, the investors said.

Well, boo-hoo-hoo. The so-called fund managers are upset because they bought things that went down, and are distressed to hear that their counterparty was Goldman.

They aren’t fund managers. They aren’t investors. They’re mewling little weenies is what they are; they should apologize to their clients, hand in their licenses, get out of the business and go home and play with their dollies.

There is a novel form of reintermediation going on in the States:

American International Group Inc. and GMAC LLC are among money-losing companies whose banking units are paying higher rates than larger rivals to lure depositors, pressuring bank profits needed to offset rising loan losses.

AIG, the insurer bailed out by the U.S. government, and GMAC, the biggest lender to General Motors Corp. car dealers, are offering yields of more than 4 percent for one-year certificates of deposit. Bank of America, the largest U.S. bank by deposits, is paying 2.75 percent, according to its Web site.
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The fight for the $7.4 trillion in U.S. deposits is intensifying as companies gain retail-bank status and unprofitable firms seek a lifeline during a worldwide credit crunch. American Express Co., Goldman Sachs Group Inc. and Morgan Stanley, which have received Federal Reserve approval to become bank-holding companies, may drive the market even higher by paying more to depositors, said David Hendler, a credit analyst at CreditSights Inc. in New York.

So they can’t sell Commercial Paper, therefore they open a bank and take deposits with a FDIC guarantee!

Shell-shocked Assiduous Reader pugwash asked in an unrelated thread:

What happened today – No news and prefs got nailed – is this forced selling by hedge funds etc?

You got me! Long corporates are actually up on the month. I’d be very surprised if it was hedge funds – preferred shares aren’t really their style (I’m still trying to get mine off the ground!). As far as the States is concerned:

Participants in the corporate bond market describe a deadly, dull depressing day. The level of activity from clients was quite subdued.The IG 11 is currently 208/210. It had opened 8 wider this morning on a wide 210214 quote.

Preferreds? Lots of activity, broadly based … I’d say that, for today, preferreds just aren’t fashionable.

There were forty other index-included $25-pv-equivalent issues trading over 10,000 shares today.

Julia Dickson, OFSI Superintendent, has released a speech made to Langdon Hall Life Insurance Forum:

It is best to see the current cycle through before making major changes to Minimum Continuing Capital and Surplus Requirements (MCCSR);
…
Pillar 3 is all about disclosure and transparency. Shedding additional light on these issues will encourage better risk management. Sunlight is a great disinfectant and I think it encourages good risk management.
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The changes OSFI made to the seg fund guarantee capital requirements reflected the same thinking – the need for something that stands up to evaluation and is reasonable.

The trouble is, of course, is that

• A massive change has been made to the MCCSR rules
• OSFI itself is a secretive organization that seldom, if ever, justifies or explains its decisions
• The reasoning behind the seg fund guarantee requirements has not even been exposed for evaluation, much less stood up to it.

There has been an inverted credit curve on some financial issues for quite some time, but FT Alphaville has pointed out this is now more common than not:

FT Alphaville claims this is due to front-end-loaded default fears, but Across the Curve says there’s another factor in play:

Time Warner offering of 5 year and 10 year bonds. The 10 year priced at T+525 and recently someone quoted the issue 510/490.

That two tranche offering yesterday pricedwith an inverted credit curve. As I mentioned the 10 year was T+525 but the 5 year issue required a wider spread to Treasury paper and that paper priced at T+590. This phenomenon is not confined to Time Warner but manifests itself in quite a few other names.

Traditionally, that would indicate that investors see a greater a chance for default sooner rather than later and require a wider spread to protect portfolios from that risk.

Conversations with market participants, though, lead to a different conclusion. The credit spread inversion is a function of demand for duration. There is much more demand for 10 year assets from insurance companies and pension funds and that demand is evident in the number of credits which experience the inversion.

Like everything else in the investment world, I’ll suggest that there’s a bit of truth to every half-way reasonable explanation. Here in the preferred share world, I’ve been puzzled for some time as to why BAM Perps yield less than BAM retractibles (discussed on August 22) … the duration hypothesis from Assiduous Reader prefwatcher didn’t convince me at the time and doesn’t convince me now … but who knows?

There were twenty-eight other index-included $25-pv-equivalent issues trading over 10,000 shares today.

Assiduous Reader MP alerts me to the fact that both POW and PWF have filed shelf prospectuses for new series of prefs. We shall see!

Accrued Interest notes that the long Treasury auction today was terrible:

Across the Curve estimates that the sloppy auction cost US taxpayers $175-million.

In sympathy, Canadas got whacked for about 7bp across the curve today.

TD Bank talked a good game about BCE debt (if there should happen to be any):

Toronto-Dominion Bank, one of the lenders financing the C$51.7 billion ($42.6 billion) takeover of BCE Inc., may have to keep the loans on its balance sheet because selling new debt will be difficult amid the credit crisis, the bank’s top executive said.

Toronto equities were heading for a new low but then recovered. Preferreds did much the same, but didn’t recover completely.

There were thirty-seven other index-included $25-pv-equivalent issues trading over 10,000 shares today.

The Fed and other US regulators have released a motherhood statement on banking practices:

• DO lend to your regular customers
• DON’T pay excessive dividends
• DON’T be unnecessarily mean to delinquent mortgagees
• DON’T pay dumb bonuses to management

A nod’s as good as a wink to a blind man, eh?

On September 25 I predicted that TARP would fail for the same reason MLEC failed: disagreement over valuation of assets. So I pleased to see that Paulson has abandoned the asset-buying idea:

U.S. Secretary Henry Paulson plans to use the second half of the $700 billion financial rescue program to help relieve pressures on consumer credit, scrapping an effort to buy devalued mortgage assets.
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Paulson’s remarks are an acknowledgement that the centerpiece of the $700 billion bailout request to lawmakers was ill-conceived. Neel Kashkari, the Treasury official who heads the rescue program, told legislators last month that officials shifted to buying stakes in banks because it was a faster way revive capital markets and the economy.

“I will never apologize for changing a strategy or an approach if the facts change,” Paulson said.

The nice part about being part of a lame-duck administration – or working out your notice at McDonalds, or whatever – is the joyous feeling of being able to tell the truth and behave intelligently! Accrued Interest mourns the plan’s failure.

Spend-every-Penny has announced a $50-billion mortgage swap with Canadian Banks:

The Honourable Jim Flaherty, Minister of Finance, today announced the Government will purchase up to an additional $50 billion of insured mortgage pools by the end of the fiscal year as part of its ongoing efforts to maintain the availability of longer-term credit in Canada.

This action will increase to $75 billion the maximum value of securities purchased through Canada Mortgage and Housing Corporation (CMHC) under this program.

Also announced was:

• The rate on the Canadian Lenders’ Assurance Facility will be decreased by 25bp and insurance costs of 25bp waived
• OSFI has debased bank capital quality (at least we now know where the instruction came from – I thought it was National Bank, who have basically maxed out their issuance capacity under the old rules)
• The Bank of Canada has the spigots wide open

Jon Danielsson reviews the Icelandic situation on VoxEU:

A third of the population is considering emigration.

Does anybody remember Richard Rohmer’s book, Exodus UK?

The first main cause of the crisis was the use of inflation targeting. Throughout the period of inflation targeting, inflation was generally above its target rate. In response, the central bank keep rates high, exceeding 15% at times.

In a small economy like Iceland, high interest rates encourage domestic firms and households to borrow in foreign currency; it also attracts carry traders speculating against ‘uncovered interest parity’. The result was a large foreign-currency inflow. This lead to a sharp exchange rate appreciation that gave Icelanders an illusion of wealth and doubly rewarding the carry traders. The currency inflows also encouraged economic growth and inflation; outcomes that induced the Central Bank to raise interest rates further.

The end result was a bubble caused by the interaction of high domestic interest rates, currency appreciation, and capital inflows. While the stylized facts about currency inflows suggest that they should lead to lower domestic prices, in Iceland the impact was opposite.

There were thirty-one other index-included $25-pv-equivalent issues trading over 10,000 shares today.

The Fed appears to be winning the bureaucratic turf-fight over the nascent CDS Clearinghouse industry:

The Federal Reserve is working on a plan that would give it authority to regulate the clearing of trades for the $33 trillion credit-default swap market, according to people with knowledge of the proposal.

The Fed, the U.S. Securities and Exchange Commission, the Treasury Department and the Commodity Futures Trading Commission are discussing a memorandum of understanding that lays out oversight of clearinghouses that would become the central counterparty to credit-default swap trades, said the people who asked not to be named because the discussions are private.

VoxEU has announced a new collection of essays titled “What G20 leaders must do to stabilise our economy and fix the financial system”. The article “Returning to narrow banking” by Paul De Grauwe looks most interesting, but I have not yet been able to read it:

Bubbles and crashes have been part of financial markets for centuries. Allowing banks – which inevitably borrow short and lend long – to get deeply involved in financial markets is a recipe for disaster. The solution is to restrict banks to traditional, narrow banking with traditional oversight and guarantees while requiring firms operating in financial markets to more closely match the average maturities of their assets and liabilities.

The Globe and Mail reported further evidence that Canada’s political leadership has the collective intelligence of a peanut:

The premiers also want Ottawa to delay the age at which seniors must begin taking money out of their Registered Retirement Income Funds. Several premiers expressed concern that, in the current economic climate, forcing Canadians at 71 to begin liquidating their RRIFs would cause significant losses on portions of their earnings that depend on stock holdings.

Um … bozos? Nobody says they have to sell their holdings. They just have to withdraw the holdings from the RRIF, stick them in a regular account and declare the withdrawal as income. Collapsing their RRIFs with the least amount of declared income is a Good Thing.

SunLife’s common got whacked:

Manulife Financial, Canada’s biggest insurance company, slid 3.4 percent to C$25.75. Sun Life Financial Inc., the third- largest, fell 6.7 percent to C$27.24.

Goldman Sachs Group Inc. reduced its rating on the life- insurance industry to “cautious” from “neutral,” saying investment losses may force insurers to raise more capital and threaten credit ratings.

… and their prefs were caught in the downdraft. SunLife’s 3Q08 Financials show they took a $636-million hit on credit-related and $326-million on equity-related issues. SLF does not yet know the effect of OSFI’s MCCSR Rule-Change on capital. They have $69.0-billion in segregated fund assets, compared to $16.6-billion in equity including preferred shares.

A description of the equity risk associated with policyholder obligations is included in Note 9 of the 2007 annual consolidated financial statements. The estimated impact from these obligations on the Company from an immediate 10% increase across all equity markets would be an increase in net income of $159 [-million]; conversely, the impact of an immediate 10% drop across all equity markets would be an estimated decrease in net income of $222 [-million]

There were twenty-seven other index-included $25-pv-equivalent issues trading over 10,000 shares today.

Today’s big news, such as it was, was the new and improved bail-out of AIG. The Fed announced:

• Treasury will buy $40-billion more prefs
• The rate on the Fed Loan (formerly $85-billion, now $60-billion) will be reduced to LIBOR+300 from LIBOR+850 on funds drawn, and the fee for undrawn funds will be reduced to 75bp from 850bp. Term of the facility extended from two years to five
• Two new external companies will be created:
  • RMBS buyer, funded up to $22.5-billion by the Fed, AIG to take $1-billion first loss
  • CDO buyer/CDS unwinder, funded $30-billion by Fed, $5-billion by AIG, AIG takes first loss.

The last is kind of interesting. It would appear that AIG is unable to unwind its CDSs on CDOs at anywhere near intrinsic value. They want to get out of the CDSs, but want to retain the exposure, so this little company is going to buy the CDOs themselves while AIG buys back the CDSs; retaining exposure while neatening the books. At least, that’s how I interpret the paragraph!

The Treasury release shows how this whole process is degenerating into populist political theatre. There’s not a word about the economic terms of the $40-billion senior preferreds Treasury is buying; only executive compensation, lobbying expenses and corporate governance side-agreements are discussed.

On the unwinding front, expensive progress is being made:

The first rescue plan wasn’t sustainable, Liddy said during a conference call today. AIG’s third-quarter loss equaled $9.05 a share and compared with profit of $3.09 billion, or $1.19, a year earlier, AIG said in a statement. Losses in the past year erased profit from 14 previous quarters dating back to 2004.
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The insurer guaranteed about $372 billion of fixed-income investments as of Sept. 30, compared with $441 billion three months earlier. AIG booked more than $7 billion in writedowns during the quarter on the value of the swaps.

Circuit City, parent of the 750-store The Source in Canada has petitioned for Chapter 11 bankruptcy:

“It’s very incongruent for retailers to file bankruptcy before Christmas,” Burt Flickinger, managing director of consultant Strategic Resource Group in New York, said in a Bloomberg Television interview. “You’re gong to see a record number of retailer bankruptcies and closings.”
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The chain, with 721 stores in the U.S. and 770 in Canada, has said competition hurt sales, especially at older locations in lower-income neighborhoods. Amazon.com Inc. and other Web-based retailers of computers, televisions and music also have lured customers away.

Fannie Mae recorded appalling results:

Fannie Mae posted a record quarterly loss as new Chief Executive Officer Herbert Allison slashed the value of the mortgage-finance provider’s assets by at least $21.4 billion and said it may need to tap federal funds next year.
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Fannie slashed its net worth, or the difference between assets and liabilities, to $9.4 billion on Sept. 30 from $44.1 billion at Dec. 31. The company said today it may fall to negative net worth by the end of next quarter, requiring it to seek government funding. Fannie said today that it hadn’t tapped any federal aid through Nov. 7.

But at least HSBC did OK:

HSBC Holdings Plc, Europe’s biggest bank, said third-quarter profit rose even as it set aside a more- than-estimated $4.3 billion to cover bad loans in the U.S. and forecast “further deterioration.”

The U.S. unit “declined markedly” because of consumer and corporate loan defaults, the London-based company said in a statement today. Pretax profit in the quarter was helped by lending in Asia, $3.4 billion in accounting gains on its debt and the sale of assets in France.
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The bank takes in more customer deposits than it lends out, enabling it to avoid the funding shortages that forced Royal Bank of Scotland Group Plc, HBOS Plc and Lloyds TSB Group Plc to sell as much as 37 billion pounds of stock to the U.K. government to increase capital.

And there is a certain amount of … justified? unjustified? I don’t know … bureaucratic muscle-flexing in Sweden:

D. Carnegie & Co. AB, Sweden’s largest publicly traded investment bank, was seized by the country’s national debt office and will be sold off in parts after it took “exceptional risks” with loans.

The debt office assumed control of Carnegie Investment Bank AB and Max Matthiessen Holding AB, the two units that make up Stockholm-based Carnegie, which had been used as collateral for a 5 billion-krona ($640 million) loan made by the government last month. Carnegie will keep operating under new ownership.

Nortel got smacked:

Nortel Networks Corp., North America’s largest maker of phone equipment, posted its biggest net loss in seven years and announced plans to cut 1,300 jobs as customers scale back budgets.

The third-quarter loss was $3.4 billion, or $6.85 a share, Toronto-based Nortel said today. That included a $3.2 billion expense to write down the value of deferred tax assets and its Ethernet and enterprise businesses. Nortel also is firing at least four top executives, including its technology chief.

The Fed’s balance sheet continues to grow, with the latest H.4.1 release showing an increase of about $100-billion in Commercial Paper assets, funded by deposits – mainly from banks. However, LIBOR is now well below the Fed’s yield on paper:

The London interbank offered rate, or Libor, that banks say they charge one another for loans fell 10 basis points to 2.29 percent today, the lowest level since November 2004, the British Bankers’ Association said. The overnight rate held at a record low of 0.33 percent and the TED spread, a gauge of bank cash availability, dropped under 200 basis points for the first time since the day before Lehman Brothers Holdings Inc. collapsed.

The CPFF rate is now 1.54%, but there is a 100bp surcharge on top of that..

Today’s jobs number was icky:

The jobless rate rose to 6.5 percent in October from 6.1 percent the previous month, the Labor Department reported today in Washington. Employers cut 240,000 workers after a loss of 284,000 in September, the biggest two-month slide since 2001.

Econbrowser‘s James Hamilton provides a graph (which doesn’t look so good when re-sized for PrefBlog, so read the original post!):

The next battleground for do-over whining is GMAC SmartNotes:

Chuck Woodall, 66, who lives with his wife in Columbus, Ohio, amassed $200,000 of SmartNotes starting eight years ago, and they now equal about 25 percent of his investments. At the time, the securities were rated investment-grade and they paid more interest than government bonds or certificates of deposit. They also were backed by Detroit-based GM, the biggest U.S. automaker.

Woodall, a former owner of apparel stores and a pet-supply business, holds SmartNotes due in 2018 that he says have lost about 80 percent of their value. He said his Merrill broker told him that in more than 20 years, no client had lost money on bonds.

Sadly, the Bloomberg reporter didn’t ask ‘What the hell are you doing putting 25% of your entire portfolio in a single name?’

GM is in a bad way:

General Motors Corp., seeking federal aid to avoid collapse, said it may not have enough cash to keep operating this year and will fall “significantly short” of the amount needed by the end of June unless the auto market improves or it raises more capital.
…
GM’s $3 billion of 8.375 percent bonds due in 2033 tumbled about 4 cents to 24.4 cents on the dollar as of 11:46 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt yields 34 percent, or about 30 percentage points more than similar- maturity Treasuries, Trace data show.
…
One-year credit-default swaps were quoted at a mid-price of 51 percentage points upfront, compared with 50 percentage points yesterday, CMA data show. That means it would cost $5.1 million initially in addition to $500,000 over one year to protect $10 million of GM bonds. The contracts reached as high as 52 percentage points upfront on Oct. 16.

I am certain that we are going to see a reprise of the Oshawa shuffle … Why should we subsidize them? Because they’re good jobs. Why are they good jobs? Because they’re subsidized.

A solid day for PerpetualDiscounts, up 20bp on the day to yield 6.85% pre-tax dividend, equivalent to 9.59% pre-tax interest at the standard 1.4x factor. Long corporates now yield about 7.55%, so the spread is 204bp.

There were twenty-nine other index-included $25-pv-equivalent issues trading over 10,000 shares today.