Category: Market Action

The Department of Finance announced today a programme of writing Credit Default Swaps on bank paper – the Canadian Lenders Assurance Facility:

which will provide insurance on the wholesale term borrowing of federally regulated deposit-taking institutions. This initiative will help to secure access to longer-term funds so that Canadian financial institutions can continue lending to consumers, homebuyers and businesses in Canada.

This temporary program will be offered to lenders on commercial terms so there is no expected fiscal cost.
…
Additional details of the Canadian Lenders Assurance Facility will be released shortly, after consultations with financial institutions.

We can hope that they’re a little better at it than, say, AIG!

There is at least one player shouting that Treasury’s Whack-a-Mole efforts to restore normality to the credit markets are more like Whack-a-Mountain:

Banks getting $125 billion from U.S. taxpayers to unlock the credit crunch are saying they’d rather hoard the money than use it for loans, the head of the largest independent mortgage company said.

Treasury Secretary Henry Paulson is injecting capital into institutions including Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc. on the expectation they would step up lending and investing to prevent the economic slowdown from getting worse. That isn’t happening, said Lee Farkas, chairman of Ocala, Florida-based Taylor, Bean & Whitaker Mortgage Corp.

Many large banks have told Farkas the U.S. rescue isn’t boosting their interest in offering or expanding credit lines to lenders such as his, even for borrowing secured by “low-risk, highly liquid loans,” he said.

“By their own admission, they’re taking the money and they don’t want to put it to work,” he said in an interview during the Mortgage Bankers Association’s conference in San Francisco. “Every single one you talk to, from the biggest to medium biggest, is saying the same thing, they want to de-lever.”

****************

Sorry, folks! I can’t keep my eyes open any more, and tomorrow could be an interesting day!PerpetualDiscounts were off 22bp on the day and now yield 6.77%, equivalent to 9.48% interest at the standard 1.4x factor. Long corporates are at about 7.2%, so the spread is about 230bp – still hanging in there!

I did update the October 21 performance; and updated the post regarding the new Fixed-Reset Royal Bank issue with not entirely surprising news of what comparison of coupons has done for the prices of extant issues. My guess is that tomorrow will be worse … but I’ll have a better idea at about 4pm…

Update, 2008-10-24: The subindices have been updated:

Stocks got clobbered again:

U.S. stocks sank and the Standard & Poor’s 500 Index dropped to the lowest level since April 2003 on concern a worsening global economic slump will damp profits.

…
The S&P 500 lost 58.27 points, or 6.1 percent, to 896.78. The Dow Jones Industrial Average plunged 514.45, or 5.7 percent, to 8,519.21 as all 30 of its companies dropped. The Nasdaq Composite Index lost 80.93, or 4.8 percent, 1,615.75. About 24 stocks fell for each that rose on the New York Stock Exchange.
…
The S&P 500 has moved more than 1 percent on 13 of the 16 trading days this month, making it the most volatile by that measure since September 1932, according to S&P analyst Howard Silverblatt.

… Canada was not immune:

Canadian stocks fell, pushing the main index toward its worst monthly drop in 21 years, as energy shares including Canadian Natural Resources Ltd. slumped along with oil prices on signs that fuel consumption is dropping.
…
The Standard & Poor’s/TSX Composite Index fell 5.7 percent to 9,236.88 in Toronto. Canada’s broadest stock benchmark, which derives more than three-quarters of its value from commodity and financial shares, has lost 21 percent in October, the most since after the “Black Monday” crash in the same month in 1987.
…
The S&P/TSX has dropped 39 percent from its June 18 record as debt markets froze after more than $660 billion in credit losses at global institutions.

Barney Frank wants Financial Services bonuses frozen:

House Financial Services Committee Chairman Barney Frank said there should be a freeze on Wall Street bonuses until companies find a way to keep the year-end payouts from encouraging excessive risk-taking.

“There should be a moratorium on bonuses,” Frank, a Massachusetts Democrat, told reporters yesterday in Washington. “They have a negative incentive effect because they are the ones that say if you take a risk and it pays off you get a big bonus,” and if it causes losses “you don’t lose anything.”

He’s right as far as this particular time ’round goes, but most of the time, if it causes losses you’re looking for work. It’s another variation of ‘Lose a million, you’ve got a problem. Lose a billion, THEY’VE got a problem.” Which, ultimately, comes down to risk management which, from all appearances, has for the past few years been largely a regulatory box-ticking exercise, as opposed to a job that somebody actually wanted done. The pro-Street Dealbreaker leads the charge:

I mean, yeah, it was really only higher ups who perpetrated the monumental fuck ups we’re currently paying for, including but not limited to the barbershop quartet of, say, Dick Fuld, Stan O’Neal, Chuck Prince, and Jimmy Cayne (with back up dancers Angelo Mozilo, Alan Greenspan et al.), but surely something will come of cutting the annual take-home of low-level plebes who were minding their own business placing Seamless Web orders while their boss’s boss’s boss’s boss’s boss was investing in that can’t miss asset class, subprime.

I was once offered a job running a small piece of a large company – they wanted to pay me bonus based on how well the other 99.9% of the company did, rather than how well my little feifdom did. There were other problems, and the conversation didn’t last long.

There will be no market reporting AGAIN, due to the same technical difficulties that caused yesterday‘s report to be cut short. However, I have now determined, isolated and neutralized the problem; it only remains to determing that I am doing so in the best manner.

I’ll explain in another post, because it’s kind of funny, but basically there’s a little loop used in the process of curve approximation that calculates a yield; in the case of YLD.PR.B, quoted at 1.60 with a stated annual dividend of $1.05 (currently suspended) until maturity 2012-2-1 at $15 [dubious], the little loop ran ’round 5,709,833 times [in the run where the problem was unequivocally isolated] before the WebService timed out and blew up the whole programme.

So, all is well, basically, but I’M TIRED.

More later.

Update, 2008-10-24: The subindices have been updated:

The situation in the States just keeps getting more bizarre … there are major problems in the commercial paper market:

The Federal Reserve will provide up to $540 billion in loans to help relieve pressure on money- market mutual funds beset by redemptions.

“Short-term debt markets have been under considerable strain in recent weeks” as it got tougher for funds to meet withdrawal requests, the Fed said in a statement in Washington. About $500 billion has flowed out of prime money-market funds since August, a Fed official said.

Assiduous Readers will remember my proposal to have banks consolidate their branded MMFs for capital purposes … I thought that was pretty radical, but I’m beginning to wonder if it’s enough. If MMFs are sensitive to runs AND these runs have a major economic effect … perhaps its time to start regulating them as banks.

Whack-a-Mole financial problems continue … this time with Australian mortgage funds:

The East Coast Mortgage Trust, Northern Investment Trust Fund and the Richmond Mortgage Fund — holding a combined $660 million — all froze redemptions yesterday as spooked investors attempted to liquidate holdings.

The latest freezes followed an announcement yesterday by the giant Challenger Howard Mortgage Fund that it had frozen $2.8 billion of funds, claiming the federal Government’s pledge to guarantee bank deposits had exacerbated a run on redemptions.

There has been a lot of chatter lately alleging Fannie & Freddie caused the sub-prime argument. Menzie Chinn of Econbrowser rebuts the charge and provides an interesting graph:

The graph is taken from the IMF Global Financial Stability Report, October 2008 … which I may get around to reading soon!

Accrued Interest continues his push for exchange traded CDSs in a post titled CDS could be fair and simple, but implicitly supports a decoupling of the CDS and cash markets:

Third, in the event of default, the seller of the contract pays the buyer 60 cents on the dollar. No actual bonds change hands.

This type of CDS is known as a “recovery lock” and have been discussed on PrefBlog. The instrument has caused huge problems in connection with the Fannie/Freddie technical default. I cannot support any plan that allows – not just allows, idealizes! – the decoupling of cash and derivative markets.

Meanwhile, there’s a turf-war going on about who gets to regulate CDSs (hat tip: Naked Capitalism): the Fed, the CFTC or the SEC? More jobs for more regulators to tick off more boxes on more forms! Yay!

On the other hand (hat tip: Dealbreaker), Sen. Tom Harkin (D-Iowa) just wants to ban them:

Sen. Tom Harkin (D., Iowa), chairman of the Senate Agriculture Committee, which regulates derivatives and so has a claim to authority over credit default swaps, has repeatedly questioned whether the $60 trillion industry should be outlawed.
…
“They’ve been touted as reducing risk, but as we have seen, it has actually increased the risk, the systemic risk, of the whole society,” Harkin said during an Oct. 14 hearing exploring the need for greater regulation of the derivatives.

On a brighter note, there is speculation that settlement of CDSs on Lehman has had no effect.

Technical difficulties prevent me from publishing the three regular tables today. I will update this post tomorrow.

Update, 2008-10-23: Tomorrow, indeed! And only one of the tables! Boy, the things you have to put up with in a free blog, eh?

Bloomberg has some interesting colour on the US TIPS market:

Treasury Inflation-Protected Securities fell 8 percent since June as investors shunned all but the most easily traded debt amid the seizure in credit markets. TIPS were the only part of the U.S. government bond market to lose money in that time as Treasuries of all maturities gained 2.12 percent, according to Merrill Lynch & Co. indexes.

BlackRock Inc., Brown Brothers Harriman & Co., DWS Investment GmbH and New Century Advisors are buying the securities because inflation will likely increase at a faster pace over the next decade than the 1 percent annual rate TIPS yields suggest. Consumer prices, unchanged in September, may increase 4.5 percent this year and 2.65 percent in 2009, according to the median estimate of 69 forecasters surveyed by Bloomberg.

The Cleveland Fed’s liquidity adjusted inflation expectations estimator shows a ten year expectation of 1.48% as of 10/16, vs. the unadjusted figure of 0.95%.

A very good day for markets in general, credit markets particularly and especially prefs! PerpetualDiscounts now yield 6.77% dividend, equivalent to 9.48% interest at the standard factor of 1.4x, while long corporates are now at 7.25% for a pre-tax interest-equivalent spread of 223bp.

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

The post regarding Tuesday’s appearance on BNN has been updated.

Naked Capitalism republishes extracts from a Financial Times article about the unintended consequences of Treasury’s Whack-a-Mole efforts:

US mortgage rates have soared this week in an unexpected reaction to the latest Treasury financial rescue plan, which has prompted investors to buy bank debt and sell bonds backed by home loans.

Interest rates on 30-year fixed-rate mortgages, as measured by Bankrate.com, rose to 6.38 per cent on Thursday from 5.87 per cent last week – before the Treasury said on Tuesday that it would take equity stakes in banks and guarantee new bank debt.

Investors responded to the new guarantee by buying existing bank debt, reckoning it could be refinanced with the new government-supported bonds.

An unrelated (as far as explicit mention is concerned, anyway) story on Bloomberg makes the BCE buy-out look either less likely to happen or more likely to cause massive and instant write-downs:

High-yield, or leveraged, loans have plummeted to a record low of 66.1 cents on the dollar from 88.5 cents on Sept. 2 and from above face value in June 2007, according to Standard & Poor’s LCD.

There are more details in a story about just how horrible the LBO-debt market is at the moment:

Prices of loans rated below investment grade declined to a record low 66.1 cents on the dollar, virtually guaranteeing investors get their money back, based on historical recovery rates, according to data compiled by Standard & Poor’s.
…
The selling is being compounded by hedge funds and mutual funds dumping holdings to meet redemptions, which may push prices even lower, according to analysts at UBS AG.

Barclays Plc, the U.K.’s second-biggest bank, is auctioning $642 million of loans seized this week from Dallas-based Highland Capital Management LP, according to people with knowledge of the sale who declined to be identified because the sale hasn’t been announced. Hedge funds Tudor Investment Corp., run by Paul Tudor Jones, and SAC Capital Advisors LLC, managed by Steven Cohen, sold assets this month to raise cash as stock prices dropped, according to people with knowledge of the sales.

BCE common has traded in a 10% range today, closing at $34.89, +8.02%.

On another note, I have no idea whether Andrew Lahde was lucky or smart. But either way, I like him!

“I was in this game for money,” Lahde, 37, wrote in a two-page letter today in which he said he had come to hate the hedge-fund business. “The low-hanging fruit, i.e. idiots whose parents paid for prep school, Yale and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government.

“All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other sides of my trades. God Bless America.”

The market performed well today, on reasonable volume. Still relatively illiquid and volatile – the performers table is limited to absolute moves of more than 2% today – but improving.

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

Canadas efforts to join the Banksgiving Moneyday rescues have now commenced implementation. The results of the first mortgage reverse-auction have been announced:

Auction Date: October 16, 2008
Settlement Date: October 23, 2008
Maturity Date: October 15, 2013
Amount: $5 billion
High Yield: 4.679%
Low Yield: 4.041%
Average Yield: 4.241%

There are rumours that old What-Debt? is going to have to run a deficit:

While his Oct. 14 victory left him with more Conservative Party seats in Parliament, the deepening global financial crisis may force him to backpedal on both pledges.

Harper yesterday said his first move may be a taxpayer- funded package to keep financial institutions competitive amid bailouts in the U.S. and Europe. With the budget surplus shrinking and Harper lacking a parliamentary majority, he’ll also probably end up spending more than he wants because he’ll need help passing legislation from opposition parties that want to expand social programs.

Geez … having cut taxes and run the structural budget balance to zero in order to goose an already over-stimulated economy, we now find that bad times may require a deficit. What a surprise. What an absolutely incredible surprise.

On the bright side US inflation is moderating, although the headline number is still scary looking:

Prices increased 4.9 percent in the 12 months to September after a year-over-year gain of 5.4 percent in August. The core rate increased 2.5 percent from September 2007, the same as the year-over-year increase in the prior month.

Via Dealbreaker comes news that Iceland’s Glitnir Bank has defaulted on a $750-million FRN.

And the Fed’s discount window is wide open:

The Federal Reserve’s direct loans to commercial banks rose to a record $101.9 billion yesterday versus $98.1 billion a week earlier as still-high money market rates encouraged more borrowing from the lender of last resort.

Borrowing by securities firms through the Fed’s Primary Dealer Credit Facility totaled $133.9 billion, up from $123 billion, the central bank said today in its weekly report.

“The ability to borrow 90-day funds at 1.75 percent is a good deal for a lot of banks,” said Michael Feroli, economist at JPMorgan Chase & Co. “The stigma of borrowing from the Fed is declining.”

Borrowing 90-day funds at 1.75 is a very good deal for a lot of banks. I have no objections to the facility itself, but the discount rate is set way too low, in defiance of Bagehot.

Closed off the ‘performers’ table at +/- 2% today. Volatility continues high, liquidity continues dry.

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

There is some speculation that:

Flaherty is considering increasing deposit insurance beyond the current C$100,000 per person and guaranteeing short-term bank debt, the Globe and Mail reported today, citing people it didn’t name. The Bank of Canada may let mutual funds and pension funds take part in its short-term debt purchases aimed at shoring up liquidity in credit markets, the Globe also said.

The Globe story said:

The Bank of Canada also broadened the list of participants in such actions, which are normally reserved for a select group of financial institutions such as the big banks, to include “other money market participants” that sources said will likely include pension funds and mutual funds.

Well, they might be ready to make that change, to include pension and mutual funds, and they may have the intent of allowing these funds to bid indirectly, but that’s not what the Bank of Canada press release says:

Second, to enhance the distribution of liquidity, effective the 21 October auction, term PRAs will be transacted with direct participants in the Large Value Transfer System (LVTS) as well as with Primary Dealers until further notice.

LVTS participants are:

Alberta Treasury Branches
Bank of America, National Association
Bank of Montreal
The Bank of Nova Scotia
BNP Paribas (Canada)
La Caisse centrale Desjardins du Quebec
Canadian Imperial Bank of Commerce
Credit Union Central of Canada
HSBC Bank Canada
Laurentian Bank of Canada
National Bank of Canada
Royal Bank of Canada
State Street Bank and Trust Company
The Toronto-Dominion Bank

These participants may well allow their clients to bid through them on a back-to-back basis, and the Bank may well be encouraging such transactions, but pension funds and MMFs are not actually included in the list. The list has been broadened from primary dealers only to include LVTS participants.

The SEC is seeking the power to have all CDS positions reported to them:

One way to guard against misinformation and fraud is to create a mandatory system of recordkeeping and reporting of all CDS trades to the SEC.
…
OTC market participants generally structure their activities in CDSs to comply with the CFMA’s “swap exclusion” from the Securities Act and the Exchange Act. These CDSs are “security-based swap agreements” under the CFMA, which means that the SEC currently has authority to enforce antifraud prohibitions under the federal securities laws, including prohibitions against insider trading. If CDSs were standardized as a result of centralized clearing or exchange trading or other changes in the market, and no longer individually negotiated, the “swap exclusion” from the securities laws under the CFMA would be unavailable.

Bloomberg reports that perpetual preferred assets can be regarded as debt, allowing historical cost accounting rather than mark-to-market, although I cannot find the letter on the SEC website.

The U.S. Securities and Exchange Commission agreed to back an effort by banks that may delay writedowns on some securities tied to losses that have cost companies more than $640 billion.

Banks in certain cases may account for perpetual preferred securities as debt, allowing them to postpone writing down their value, SEC Chief Accountant Conrad Hewitt wrote in a letter yesterday to Financial Accounting Standards Board Chairman Robert Herz.
…
The SEC’s interpretation may help resolve a debate over accounting for the securities, which are issued without maturity dates. Auditors have determined the securities should be treated as equity and banks sought to count the assets as debt. Banks can treat them as debt “if there has been no evidence of deterioration in the credit of the issuer,” such as a decline in cash flows from the investment or a downgrade in the security’s rating below investment grade, Hewitt wrote

Fine tuning on the weekend bank rescues continues, with the UK softening its doctrinaire rhetoric:

Prime Minister Gordon Brown said the U.K. government is talking to banks about the ban on paying dividends imposed on those institutions taking taxpayer money, signaling ministers may soften the rules.
…
Brown said Oct. 13 that banks tapping a 37 billion-pound ($64.5 billion) bailout program won’t be allowed to pay dividends until the government redeems its investment. The banks say the rule is making it more difficult to raise cash from private investors, two people familiar with the matter said.

The comments suggest the government may drop rules Brown has said were necessary to protect taxpayer money and penalize the banks for reckless lending. That would anger rival lawmakers and unions what want to see more curbs on the industry.

Well, the sensible thing to do is “whatever works” and forget about theory and idealogy. But, says I, it seems to me that if the banks aren’t able to sell their stock without a dividend, then they can just reduce the price further and dilute their existing shareholders more. But the story does not go into details about the real-life options available to the firms.

S&P had some interesting things to say today regarding the bank rescue:

Standard & Poor’s Ratings Services believes that the bank bailout plan announced by the U.S. government on Oct. 14, 2008, will likely mark the turning point in the crisis of confidence currently afflicting credit markets, according to a report published today (“U.S. Banks: Back To Fundamentals,” available on RatingsDirect).
…
“We believe the recent moves by the various governments will likely have a meaningful market stabilizing influence. Although, from a rating perspective, we view the potential effects of the plan as favorable to the credit quality of U.S. financial institutions, we do not anticipate an immediate impact on participating bank ratings. We are in the process of reassessing both industry risk and individual bank and bank holding company debt ratings in light of recent events,” said Standard & Poor’s credit analyst Tanya Azarchs.

… but on the other hand:

Standard & Poor’s said it may downgrade $280.1 billion of Alt-A mortgage securities, the most that the ratings company has identified in a single announcement for bonds backed by the loans.

The debt may be cut in part because S&P has boosted estimates for losses on each foreclosure on Alt-A loans with at least five years of fixed rates to 40 percent, from 35 percent, the New York-based company said today in a statement.
…
Loans at least 90 days late among those underlying the securities that S&P downgraded today totaled 13.1 percent of the balances as of September, up 27.6 percent from June, S&P said. Loss severities will be higher because property prices will probably fall further amid “continued foreclosures, distressed sales, an increase in carrying costs for properties in inventory, expenses associated with foreclosures, and further declines in home sales,” the firm said.

The table of notable performers has been limited to those issues with an absolute change in bid price of over 3%. I hope to get back to 1% some day!

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

Whoosh! The Weekend Bank Rescues had an effect all right! I think Assiduous Reader Annette has it right: Banksgiving Moneyday.

Accrued Interest provides some interesting colour on financial spreads while Across the Curve counsels caution on Corporates.

Readers of a helpful bent are encourage to air their view on BAM credit quality, where some concern is being expressed regarding the recent hammering of BAM’s issues. Like it? Don’t like it? Feel free to call me stupid, as long as you explain why.

The Performers table is limited to those with an absolute change of 5% or greater, bid/bid. Sorry, folks …

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

Unbelievable.

I’ll have more to say over the weekend, but for now I think “Unbelievable” about covers it. Any decent bid was picked off and not replaced. Bid/Ask spreads routinely more than $1. Perfectly good prefs getting hammered in a blind rush to the exits.

A few investors will have made incredible bargains today, as some of the intra day lows were … really low.

The price-performers table is today limited to changes in excess of 10%. That’s how … unbelievable … it was.

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

More bad news for the BCE buy-out:

The value of high-risk, high-yield loans used to fund leveraged buyouts tumbled amid speculation that more than 1 billion euros ($1.4 billion) of debt is being offered for sale, including assets seized from Iceland’s banks.

Who knows? Somebody’s going to take a huge and immediate mark-to-market loss if the deal goes through. BCE common is trading well below the buy-out price … all I can say is that whatever happens will be interesting!

There are reports that Paulson will adopt the PrefBlog plan of direct capital injections (which, one hopes, will be preferred shares, perhaps convertable, with a punitive dividend):

Treasury Secretary Henry Paulson is weighing plans for the U.S. government to invest in banks as the next step in trying to resolve the deepening credit crisis.

“These capital injections are something that Secretary Paulson is actively considering,” White House Press Secretary Dana Perino said in a briefing in Washington. She also said President George W. Bush will meet with Group of Seven finance ministers at the White House on Oct. 11.

Paulson told reporters in Washington yesterday that legislation Congress passed last week to rescue financial institutions gave him broad authority that he intends to use, beyond just buying mortgage-related assets on banks’ balance sheets. He indicated that an option available may be boosting companies’ capital with cash infusions.

Treasury fails were briefly mentioned on September 29. Bloomberg had an interesting update:

The Treasury began selling $40 billion in additional debt yesterday to relieve the pressure in the $7 trillion-a-day market for borrowing and lending securities. The Fed also cut the minimum fee it charges dealers to borrow securities from its open market account as part of its daily securities lending program. Demand for the relative safety of government securities has surged this month as the seizure in credit markets around the world deepened.

Dealers often let trades in the repurchase, or repo, agreement market go uncompleted when it is difficult to obtain the securities or the cost to get the securities becomes too expensive. Since dealers typically use repurchase agreements to finance their holdings, movements in the rates affect the cost of holding the securities in inventory.

A lockup in the Treasury repo market is indicative of extreme fear. People are not willing to let government paper out of their hands, even when secured by cash collateral.

PerpetualDiscounts enjoyed their thirteenth consecutive trading day of negative total return. The last up-day was September 22; since then, the index has lost 7.74%. Pretty boring, eh? Hell, common equities can lose that before lunch.

Another confused day, but CM issues picked up a little. You want wild? As I sign off, Tokyo’s down 10% … tomorrow could well be fun!

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