Category: Market Action

The Fed is pushing hard for a CDS Clearinghouse:

The Federal Reserve has given U.S. futures exchanges until Oct. 31 to present written plans on how they’ll make the $55 trillion credit swaps market less risky, according to four people familiar with the discussions.
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Federal Reserve officials are not aiming to pick a winner to operate a clearinghouse, the people said. Rather, the central bank is hoping to set up a framework for the eventual winner.
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The four groups vying to operate clearing operations include partnerships of Chicago-based CME Group and Citadel Investment Group LLC, and Intercontinental Exchange, dealer-owned Clearing Corp. and credit-swap index owner Markit Group Ltd. Eurex AG and NYSE Euronext also have submitted proposals.

The last major review of the clearinghouse on PrefBlog was my reaction to Accrued Interest‘s plan. On September 22 I deprecated his idea of trading only CDSs with a recovery lock.

On VoxEU, John Kiff, Paul Mills and Carolyne Spackman project a resurgence of covered bonds. While the essay suffers from the mind-set that the credit crunch happened because credit rating agencies are dumb and more rules will make them smart, the provide some interesting charts:

In a welcome piece of news, Bloomberg reports:

Sales of longer-term commercial paper soared 10-fold after the Federal Reserve began buying the corporate IOUs, a sign that the central bank’s efforts to unlock the market may be working.

Companies yesterday sold more than 1,500 issues totaling a record $67.1 billion of the debt due in more than 80 days, compared with a daily average of 340 issues valued at $6.7 billion last week, according to data published by the Fed. Most of the difference was probably absorbed by the Fed, said Adolfo Laurenti, a senior economist at Mesirow Financial Inc.

The source data from the Fed shows that the increase in issuance was almost entirely at the long-end, probably 90-day paper.

Accrued Interest looks at agency paper and likes it, despite the fact that position limits for Taiwanese insurers are being reduced:

The danger is that Asia doesn’t seem to agree. Selling of both Agency debt and MBS securities have been concentrated in Asia the last several days. We know that that Taiwanese insurance regulators are limiting allowable exposure to U.S. agency mortgage-backed securities, claiming the credit rating cannot be believed. If China or Japan were to come to the same conclusion, there would be real problems real fast.

The good news is that despite heavy selling from Asia, agency spreads (and MBS spreads for that matter) have moved wider slowly. Agency spreads are about 60bps wider this month, whereas corporate spreads have moved 117bps wider.

The Taiwanese rule change is:

Where previously there was no limit to investments in MBS issued by US federal housing loan agencies, namely Fannie Mae, Freddie Mac and Ginnie Mae, insurers will now be given a maximum ceiling of 50% of their offshore investment limit to such products by the three institutions. Maximum exposure to MBS and collateralised issues by any of the individual agencies will be set at 25%.

Now, this is the danger. On the weekend, I discussed the Fed’s balance sheet in terms of the Fed intermediating between the banks and credit risk, in the same manner as banks intermediate between Granny Oakum and credit risk. This is a natural thing and this is a good thing, but the Fed’s ability to do so is constrained by the ability to sell Treasury debt. Eight years of fiscal profligacy have eroded the available excess capacity … I don’t think we’re in trouble yet, but this is the type of thing that signifies trouble.

Just because equities were up so much today doesn’t mean we can relax! There are rumours that Barclays has foreclosed a hedge fund:

Barclays Plc, the U.K.’s second- largest bank, is seeking bids for $1.5 billion of bonds and $3.5 billion of credit-default swap contracts held by a hedge fund, according to people with knowledge of the auction.

The bank is selling bonds from European, Asian and U.S. issuers, according to the people, who asked not to be identified because the sales aren’t being made public. Barclays is also selling $970 million of assets, primarily high-yield, high-risk loans, the people said. Bids on both portfolios are due today.

Somewhat to my chagrin, I see that FixedReset issues are trading as if they were actually 5-year paper, rather than as perpetual paper with a five year call. The recently announced new issues offer a 5.60% coupon, with a continued reset to 5.60 if 5-year Canadas remain unchanged; rather than falling a lot, to offer equivalent perpetual yields, extant Fixed-Resets have fallen a little, to offer equivalent five-year yields with the assumption of a call at par.

In fact, yields to first call of the extant fixed resets are in excess of 5.60%, implying that the new issues will trade at an immediate (small) discount, rather than at the premium they would command otherwise. It’s a funny old world.

Another day of heavy volume, with a number of dealers crossing significant blocks.

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

The extraordinary Money Market disintermediation (discussed on the weekend) continues, with Morgan Stanley badly hit:

Morgan Stanley clients withdrew almost one- third of their cash from money-market accounts last month, forcing the firm to buy $23 billion of securities held by the funds to keep them afloat.

Redemptions were $46 billion in September, mostly from funds that invest in corporate debt, Morgan Stanley said in an Oct. 9 regulatory filing. The New York-based company made sure the money-market funds had enough cash to repay investors by acquiring some of their assets with financing from “various available stabilization facilities.”

Not surprisingly, US Commercial Paper rates are spiking:

Yields on commercial paper rose as the Federal Reserve began buying the debt directly from companies, showing the central bank’s efforts to unfreeze short- term credit markets have yet to take hold.

Rates on the highest-ranked 30-day commercial paper, which many corporations use to finance their day-to-day operations, jumped 25 basis points to 2.88 percent, according to yields offered by companies and compiled by Bloomberg.
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The Fed today set the rate it’s willing to accept for 90-day unsecured commercial paper at 1.88 percent plus a 1 percentage point credit surcharge. The 90-day secured asset-backed rate was set at 3.88 percent, according to Fed data compiled by Bloomberg.

The Fed’s graph tells the tale:

There is a note from Bloomberg that overnight US Equity futures and the cash market opening are decoupling:

U.S. stock-index futures are becoming less reliable as predictors of market moves.

With equity investors around the world contending with the worst drop since the Great Depression, futures on the Standard & Poor’s 500 Index misstated gains or losses by an average 1.4 percentage point in October, twice the gap in the third quarter, data compiled by Bloomberg show. One of the biggest misses was Oct. 24, when futures fell as much as 60 points, while the index itself dropped 37 points in the first half hour of trading, before closing down 31.

… which may be related to derivatives losses at Deutsche Bank:

Deutsche Bank AG, Germany’s biggest bank, lost more than $400 million on equity derivatives trades as stock markets headed for their biggest rout since the 1930s, two people with direct knowledge of the matter said.

The loss, equal to almost half of the Frankfurt-based company’s second-quarter revenue from equity sales and trading, is a black eye for Richard Carson, global head of equity derivatives, and may signal more job losses at the bank.

Econbrowser‘s James Hamilton has posted supporting a Fed cut to 1.00%, on grounds that:

• The three month bill rate is 1.00%
• inflation is unlikely with oil below $70; unemployment is a greater concern, and
• risks to the dollar are minimal considering the global nature of the crisis

Viral Acharya and Raghu Sundaram have posted an analysis of the UK & US bank loan guarantees on VoxEU:

In the UK, an institution seeking a guarantee on an issue will be charged an annual fee of 50 basis points plus that institution’s median 5-year credit-default swap (CDS) spread observed in the 12 months before 7 October 2008.
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In the US, each participating institution will pay a flat 75 basis points per annum on the entire amount of its new senior unsecured liabilities (subject to the 125% cap mentioned above). If the institution has informed the FDIC of its intent to also issue non-guaranteed long-term debt, then the 75 basis points fee applies to the guaranteed portion of its new debt issues. But in the latter case, the institution must also pay a one-time fee of 37.5 basis points of that portion of its senior unsecured liabilities as of 30 September 2008, that will mature on or before 30 June 2009.
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Even a casual glance at these numbers suggests that the British Treasury’s fees are a great deal higher than the proposed American flat fee structure (0.75% versus anything between 109 basis points for HSBC to over 178 basis points for Nationwide).
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If the entire available guarantee amount of GBP 250 billion is taken up, the resulting subsidy to be borne by UK taxpayers is of the order of about GBP 0.675 billion per year, or about GBP 2 billion over the three years of the scheme.
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Assuming a total guarantee figure of $1.5 trillion (an estimate that is likely on the lower side), this means an annual [US] government subsidy to the participating banks of $18 billion, or well over $50 billion over the three years of the scheme.

By way of comparison, the Canadian Lenders’ Assurance Fund:

Insurance provided through the facility will be priced on a commercial basis. The base annualized fee will be 135 basis points [note 2]. There will be a surcharge of 25 basis points for eligible institutions rated at or above A- or equivalent. There will be a further surcharge of 25 basis points for other eligible financial institutions. There will also be a further surcharge for insurance on non-Canadian dollar denominated debt.
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Note 2: This is the average over the twelve months ending August 2008 of the spread between the yield on Canadian dollar five-year senior unsecured bonds issued by the five largest Canadian banks and the comparable Government of Canada bond

Spend-every-penny Flaherty announced today that Desjardins will be eligible for the facility.

I reported in early September that the five-year TIPS note was in danger … any more auctions like today’s will eliminate the uncertainty!

The average yield was 3.27 percent which means that the new bond yields more than the nominal 5 year note. The so called breakeven spread is the spread at which inflation would need to average for the holder of the TIPS to breakeven with the nominal bond and it generally predicts a positive rate of inflation.

In this case, the TIPS is yielding above the nominal bond by about 70 basis points in which case the market is saying that it thinks that inflation will average negative 0.7 percent per year for the next 4 ½ years.

Another post on VoxEU, by Romain Ranciere, Aaron Tornell and Frank Westermann, takes the somewhat heretical view that the credit crunch is not a big deal:

How big is the current US bailout? The $700 billion bailout bill is equivalent to 5% of GDP. Adding to it the cost of other rescues – Bear Stearns, Freddie Mac and Fannie Mae, AIG – the total bailout costs could go up to $1,400 billion, which is around 10% of GDP. In contrast,

• Mexico incurred bailout costs of 18% of GDP following the 1994 Tequila crisis.
• In the aftermath of the 1997-98 Asian crisis, the bailout price tag was 18% of GDP in Thailand and a whopping 27% in South Korea.
• Somewhat lower costs, although of the same order of magnitude, were incurred by Scandinavian countries in the banking crises of the late 1980s. 11% in Finland (1991), 8% in Norway (1987), and 4% in Sweden (1990).

• Lastly, the 1980s savings and loans debacle in the US had a cumulative fiscal cost for the taxpayer of 2.6% of GDP.

The bailout costs that the taxpayers are facing today can be seen as an ex post payback for years of easy access to finance in the US economy. The implicit bailout guarantees against systemic crises have supported a high growth path for the economy – albeit a risky one. In effect, the guarantees act as an investment subsidy that leads investors to (1) lend more and (2) at cheaper interest rates. This results in greater investment and growth in financially constrained sectors – such as housing, small businesses, internet infrastructure, and so on. Investors are willing to do so because they know that if a systemic crisis were to take place, the government will make sure they get repaid (at least partially).

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Perhaps the financial sector lent excessively, leading to overinvestment in the housing sector today and the IT sector in the late 1990s. But the bottom line remains that risk-taking has positive consequences in the long run even if it implies that crises will happen from time to time. Over history, the countries that have experienced (rare) crises are the ones that have grown the fastest.1 In those countries, investors and businesses take on more risks and as a result have greater investment and growth. Compare Thailand’s high-but-jumpy growth path with India’s slow-but-steady growth path before it implemented liberalisation a few years ago. Over the last 25 years, Thailand grew 32% more than India in terms of per-capita income despite a major financial crisis. Similarly, easier access to finance and risk-taking explains, in part, why the US economy has strongly outperformed those of France and Germany in the last decades.

Hear, hear! It is a natural human preference that things we cannot control be predictable … but to suffocate the financial system with scads of new rules and restrictions would be the equivalent of the school board banning running in the playground because occasionally a kid falls and skins his knee.

The loonie got killed today:

The Canadian dollar depreciated by as much as 1.5 percent to C$1.2972 per U.S. dollar, from C$1.2775 on Oct. 24, the lowest since Sept. 21, 2004. It traded at C$1.2914 at 2:24 p.m. in Toronto. One Canadian dollar buys 77.44 U.S. cents.

… as did Canadian equities …

The Standard & Poor’s/TSX Composite Index slid 8.1 percent to 8,537.34 in Toronto, the most since a 11 percent plunge on “Black Monday” of Oct. 19, 1987. The S&P/TSX, which derives three-quarters of its value from resource and finance shares, has fallen 27 percent in October, poised for its biggest monthly decline since January 1919.

Prefs did not escape unscathed, with PerpetualDiscounts closing at a yield of 7.00%, a level last seen in April 1995. This is equivalent to interest of 9.80% at the standard 1.4x equivalency factor, while long corporates now yield about 7.25% for a pre-tax interest-equivalent spread of 255bp.

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

Holy smokes. Thirty-year Treasuries hit an all-time low yield in the morning, 3.93%, following overnight carnage in overseas equities. Corporates were hugely wide. Sterling got slaughtered and Denmark bucked the trend hiking the policy rate by 50bp to defend the krone. Trading curbs were imposed on US equity futures after a 6% limit-drop overnight.

All this before the markets opened!

And then it fizzled. It did in Canada, anyway:

The Standard & Poor’s/TSX Composite Index dropped 0.4 percent to 9,294.09 in Toronto after earlier falling 7.5 percent, the most in eight years, to the lowest since September 2004. The S&P/TSX, which derives three-quarters of its value from finance, energy and materials shares, slid 2.8 percent this week and is poised for a 21 percent drop in October, the steepest since the crash of 1987.

… but US Equities tanked:

The Standard & Poor’s 500 Index lost 3.5 percent, a smaller decline than European and Asian equities, even after futures on the U.S. measure fell so far that trading was curbed.

… while Treasuries steepened on a volatile but light day:

The 2 year note is trading at 1.50 percent and is better by 10 basis points for the day. The yield on the 5 year note has tumbled 8 basis points to 2.55 percent. The yield on the 10 year note has declined 1 basis point to 3.66percent (it had traded as low as 3.53 percent this morning). The yield in the Long Bond is unchanged at 4.05 percent. As I noted in a previous posting the yield on the bond reached a modern era low earlier today at 3.88 percent.

The 2year/10 year spread has widened 9 basis points to 216 basis points.

Traders and sales persons report light flows in the Treasury market. Several participants reported that clients who did trade were only doing what they were compelled to do. Most activity seemed directed toward reducing risk and balance sheet.

There’s a report that marketting of the BCE takeover debt will commence next week, but I’m not convinced it means a row of beans. You can bet that on this deal, the lawyers are in charge and if there is the slightest possibility that the deal will fail, all parties want to be able to tell the judge they tried. Who knows? Somebody or other will be taking an immediate massive write-down if the deal proceeds.

Whoosh! And that’s the end of that week!

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

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.
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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.”

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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.

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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.
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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.
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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.
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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.
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“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.
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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.