Category: Market Action

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

As many will have noted, a lot of things haven’t been posted yet that should be posted. For various reasons – includng, but not limited to, what the market is doing, this is Misery Week.

Things like commentary on MAPF and best/worst lists for September have gone by the board but will appear … eventually.

PerpetualDiscounts now yield 6.70% on average, equivalent to 9.38% at the standard 1.4x equivalency factor. Long corporates have popped up to about 6.9%, so the spread is not as unreasonable as one might suppose, at 248bp.

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

Via Dealbreaker comes news that CME and Citadel will be starting a CDS exchange. The follows reports yesterday that the Fed was pushing the principals of a proposed clearinghouse to get moving; the report noted:

CNBC reported earlier that the Fed was meeting with officials from Chicago-based futures exchange operator CME Group and the Intercontinental Exchange Inc., the second-largest U.S. futures market, to create a marketplace for credit-default swaps.

Kelly Loeffler, a spokeswoman for Intercontinental Exchange, and CME spokeswoman Mary Haffenberg declined to comment on the meeting. Both companies have announced plans to offer clearing services for the market and ICE earlier this year bought credit swap broker Creditex Group Inc., which is one of the owners of Clearing Corp.

CME last year started offering futures contracts that were similar to credit-default swaps in an effort to tap into the over-the-counter market, which had swelled more than 100-fold the past seven years.

For background, see the post Exchange Traded CDSs and Accrued Interest.

I’ve updated the post SEC and BSC with some juicy de-redactions.

There is a cheery note from Bloomberg:

The Standard & Poor’s 500 Index lost 18 percent since the start of 2000 after sinking 11 percent this month, total return data compiled by Bloomberg show. The decline would be the first for a decade in 70 years and exceeds the 8.9 percent plunge in the 1930s, following the stock market crash of 1929, data compiled by New York University’s Stern School of Business show.

Econbrowser‘s Menzie Chinn paraphrases an IMF report on historical experience with finance-led recessions and provides a cheery chart:

The risk weight of Fannie/Freddie debt is being cut to 10%:

The Federal Deposit Insurance Corp. today tentatively approved a rule, proposed by all four federal bank regulators, that eases capital requirements for federally insured depository institutions that hold large amounts of Fannie and Freddie corporate debt, subordinated debt, mortgage guarantees and derivatives. The so-called risk weighting for banks on Fannie and Freddie’s credit claims was cut to 10 percent from 20 percent.

Sub-debt, too? Let’s hope they’ve got some really good signatures on the government guarantee!

At the same time, the banks are putting the screws to any borrower who breaches covenants. It’s every man for himself!

Brookfield issues were killed today. Annihilated. There has been a significant increase in options activity but the most recent actual news I can find is that Brookfield Residential Property Services has bought GMAC Home Services LLC. GMAC Home Services Mortgage and GMAC Real Estate were also included in the deal. But that was September 23. Are there any options mavens out there (you know who you are!) who want to take a stab at estimating default probabilities and times for the BAM retractibles, perps and BNA split-shares?

As at October 6, BMO-CM calls Brookfield a market-performer; it was down significantly today, but given that it outperformed slightly yesterday that’s not all too much surprising. If anybody can explain this, let me know!

What can I say? At 6.63%, PerpetualDiscount yields are now equal to their July 16 peak. This time around, though, long corporates are at about 6.70, so the interest-equivalent yield of 9.28% is a spread of “only” 258bp. Hell, we were there in June.

What gets me, though, and what has people who know me crossing the street so I won’t complain to them about it again, is just how sloppy the market is. It’s outrageous! If it keeps up, you won’t need any fancy software to outperform the market … just the ability to calculate current yields for similar issues with the same ex-Date.

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

Total, Utter Carnage:

Canadian stocks fell, sending the main index to the lowest in three years, as commodity producers slid on concern their profits will be hurt by a global recession.
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The S&P/TSX fell 5.3 percent to 10,230.43 in Toronto and earlier slid 11 percent for its biggest intraday drop since the “Black Monday” crash of Oct. 19, 1987. Canada’s main index is trading at the lowest level since October 2005, having fallen 32 percent from its June 18 record. All 10 industry groups in the S&P/TSX retreated today as 13 stocks out of 244 rose in Toronto.

Preferred Shares were not immune, with the TXPR down 1.71% compared to the TSX’s 5.30%. PerpetualDiscounts had their worst single day since I started doing these indices 2006-6-30 … the second worst day was a loss of a mere 2.183%. They closed with a weighted-mean average pre-tax bid-YTW of 6.56%, equivalent to 9.18% interest at the standard 1.4x factor. Long corporates closed with a yield of about 6.7%, so the spread is now about 248bp. The recent peak in PerpetualDiscount yield was 6.63% on July 16.

Volume wasn’t particularly heavy today, but there were quite a few SplitShare preferreds trading well above average volumes. Bid-Ask spreads were enormous, and the market is very, very sloppy.

We will see what tomorrow brings!

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

Accrued Interest brings us up to date on US Municipals. He mentioned delevering of closed end funds frantically trying to redeem their Auction Rate Securities … First Trust Advisors redeemed one tranche on Sept. 24, then another tranche Oct. 2 … of the same paper! The symbol (of the “Capital Units”, shall we say) of the fund is FPI and it has not been having a nice time:

FPI invests in tax-advantaged preferreds, but the delevering principal is the same as with municipal funds.

Ten year municipals are trading 50bp over treasuries – before tax effects – which is unusual to say the least. States and cities aren’t doing so well in this market:

Tax-exempt borrowers this week sold less than 15 percent of a typical week’s sales, data compiled by Bloomberg show, and their costs to borrow long term soared to the highest in eight years. Congress passed a $700 billion financial-market rescue plan today designed to unlock credit markets, urged on by California Governor Arnold Schwarzenegger’s warning that his and other states may need emergency loans without it.
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States and cities have postponed more than $12 billion in note and bond deals since Lehman Brothers Holdings Inc. declared bankruptcy on Sept. 15, according to data compiled by Bloomberg. California may run out of cash at the end of the month if the state can’t sell billions in short-term debt, Treasurer Bill Lockyer, a Democrat, said Oct. 1.

Assiduous Readers will remember Mr. Lockyer – he’s made many unintentionally hilarious statements about investor behaviour … but should be more careful with what he wishes for.

The Citigroup/Wachovia/Wells Fargo fight promises to be entertaining – who has the most influential regulators?

“The FDIC stands behind its previously announced agreement with Citigroup,” FDIC Chairman Sheila Bair said in a statement today. “The FDIC will be reviewing all proposals and working with the primary regulators of all three institutions to pursue a resolution that serves the public interest.”

Emergency changes allow ideas to be tested in unexpected ways. I remember reading about a professor in the States who had gone so far as to attempt to estimate the effect on climate of jet plane contrails. All very thorough and meticulous, I’m sure, but how could his calculations ever be tested? He got his chance when air traffic over North America was shut down in the wake of 9/11.

And so it is with this moronic short-selling ban. The WSJ publicized some Credit Suisse research and there are a few bits and pieces here and there similarly examining actual data. Basically, the ban has increased volatility and increased transaction costs. This ban will provide grist for academic mills for a long time to come … I may start making a book on when the regulators will come forward and admit ‘We don’t understand the first thing about markets, we panicked and we were wrong’. Should be about maybe next week, eh?

As it happens, they rescinded the ban … its last day will be Wednesday 8th. Surprisingly, the press release makes no mention of staff resignations.

I’ve added material to the post Synthetic Extended Deposit Insurance – the Critique.

CIBC has entered into a risk-sharing agreement with Cerberus:

Canadian Imperial Bank of Commerce, which has taken more writedowns than any Canadian lender during the financial crisis, said Cerberus Capital Management LP will invest $1.05 billion in its U.S. real estate portfolio, helping the bank reduce risk.
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The real estate portfolio has a notional value of about $6.3 billion and consists of mortgage-backed securities and collateralized debt obligations. The assets have been written down “by a material amount,” Lalonde said, with a fair value of $1.08 billion at July 31.
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“CIBC has given away a portion of what appears to be the economic value of the underlying assets to protect the accounting (i.e. mark-to-market) downside,” National Bank Financial analyst Robert Sedran said in a note to investors.

PerpetualDiscounts off a bit today, marking their ninth consecutive down day. The weighted-mean-average pre-tax bid-YTW is now 6.38%, equivalent to 8.93% at the standard 1.4x equivalency factor. Long Corporates are now at about 6.75, making the pre-tax interest-equivalent spread about 218bp.

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

Again, very brief commentary. Sorry, folks!

Fed will get hit by mark-to-market accounting rules. Haha! This will fuel political debates for CENTURIES!

The Fed will announce its quarterly estimate of the fair value of Maiden Lane LLC’s $30 billion of holdings that JPMorgan Chase & Co. considered too risky when it acquired Bear Stearns in March, Bank of America analysts Jeffrey Rosenberg and Hans Mikkelsen wrote in a client note. The central bank valued the assets at $29 billion as of June 30, according to the report.

“With the worsening in mortgage markets since last quarter, we estimate a range of $2 billion to $6 billion of unrealized losses,” the New York-based analysts wrote.

Discount window working overtime

Market for short term paper on strike; and some anecdotal colour thereof.

Corporate bond market completely illiquid:

The so-called bid-ask spread on Dallas-based AT&T Inc.’s $600 million of 6.8 percent bonds due in 2036 averaged 121 basis points last week, up from 7 basis points in early 2007, according to data compiled by Bloomberg.

Preferred got smacked today in the backwash from a horrible, horrible, horrible day in equities. A bit more commentary, with an emphasis on the sloppiness of the market at Sloppy, Indeed!

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

Just imagine that there are penetrating and astute observations being made here today, OK?

European bank bail-out friction

Possible higher risk-weight for ABS in Europe

Squabbles and alleged skullduggery at Reserve Primary Fund

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

The Irish Government has announced its own bailout:

The Government has decided to put in place with immediate effect a guarantee arrangement to safeguard all deposits (retail, commercial, institutional and interbank), covered bonds, senior debt and dated subordinated debt (lower tier II), with the following banks: Allied Irish Bank, Bank of Ireland, Anglo Irish Bank, Irish Life and Permanent, Irish Nationwide Building Society and the Educational Building Society and such specific subsidiaries as may be approved by Government following consultation with the Central Bank and the Financial Regulator. It has done so following advice from the Governor of the Central Bank and the Financial Regulator about the impact of the recent international market turmoil on the Irish Banking system. The guarantee is being provided at a charge to the institutions concerned and will be subject to specific terms and conditions so that the taxpayers’ interest can be protected. The guarantee will cover all existing aforementioned facilities with these institutions and any new such facilities issued from midnight on 29 September 2008, and will expire at midnight on 28 September 2010.

Guaranteeing sub-debt is breathtaking!

Dexia got a massive European bail-out … equity based:

Belgium and France threw Dexia SA a 6.4 billion-euro ($9.2 billion) lifeline and ousted the chairman and chief executive officer as the widening financial crisis forced governments to prop up institutions across Europe.
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The capital infusion for Brussels- and Paris-based Dexia comes two days after Belgium, the Netherlands and Luxembourg agreed to inject 11.2 billion euros into Fortis, the largest Belgian financial-services company. Britain seized Bradford & Bingley Plc, the U.K.’s biggest lender to landlords, while Germany bailed out Hypo Real Estate Holding AG.

And as if poor old Fortis didn’t have enough problems, it looks like they have problems with an asset sale.

Writing in VoxEU, Daniel Gros & Stefano Micossi want to go even further and establish a permanent bail-out authority:

Europe’s largest banks are highly leveraged and thus vulnerable, as Fortis showed. But some of these banks are both too large to fail and too big to be rescued by a single government. The EU should: (1) urgently pass legislation to cover banks with significant cross-border presence and empower the ECB to provide direct support, and (2) create an EU-level rescue fund managed by an existing institution like the European Investment Bank.

And in a familiar scenario, UniCredit’s stock price has plunged because they might need to sell some:

UniCredit SpA, Italy’s biggest bank and the owner of Germany’s HVB Group, tumbled more than 10 percent for the second day in Milan trading amid concern the company may need to raise money to strengthen its finances.

UniCredit fell a record 38 cents, or 13 percent, to 2.60 euros, giving the bank a market value of about 34 billion euros ($48 billion). The stock, at its lowest since Dec. 4, 1997, has fallen 55 percent this year, compared with the 41 percent slide in the 69-member Bloomberg Europe Banks and Financial Services Index.

The fun isn’t confined to the banking sector: Jefferson County’s up against it:

Jefferson County, Alabama, faces a deadline today to reach a new agreement with creditors to avoid defaulting on bonds sold by its municipal sewer system that have pushed the state’s most populous county toward bankruptcy.

The county has won agreements since April with JPMorgan Chase & Co., bond insurers and other creditors to postpone full interest and principal payments on the $3.2 billion of debt it amassed building its sewers. The current agreement, which Governor Bob Riley brokered last month, expires today.

It’s a great time to be desperately in need of money, ain’t it? But don’t worry: Obama’s got a plan:

Barack Obama, the Democratic presidential nominee, today proposed increasing the Federal Deposit Insurance Corp. limit to $250,000 from the current level of $100,000.
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In proposing an increase, Obama noted that the current $100,000 limit was set 28 years ago and hasn’t been adjusted for inflation.

Utter craziness. $100,000 in the bank is comfortably in excess of what anybody should have for their day to day needs; small businesses and investors will just have to do their due diligence on their bank of choice if they need to hold more in a single bank. At that level of deposit, it is more than reasonable that bank customers be expected to understand the concept of diversification.

However, the decision appears to be unanimous: both presidential candidates and the FDIC itself want a deposit insurance limit of $250,000.

There has been some criticism of a diversification service which allows large deposits to be distributed amongst many banks and be entirely insured:

“When I first saw Promontory, I was amazed that the regulators would let it fly,” says Sherrill Shaffer, a former chief economist at the New York Federal Reserve Bank. “It undermines a lot of the safeguards around the FDIC deposit fund. I’m astounded that the FDIC has not picked up on that and tried to shut down that loophole.”

The loophole Promontory exploits is the FDIC rule that allows an individual to open up federally insured accounts of up to $100,000 at an unlimited number of banks.
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Edward Kane, senior fellow of the FDIC’s Center for Financial Research, says CDARS intercepts FDIC premiums.

“It’s portrayed as a public-spirited way to help customers as opposed to a way to game the system,” he says. “They’ve decided there’s a loophole that they’re in charge of.”

… which I confess I don’t understand. The only legitimate criticism I have been able to come up with is that it exploits the minimum and therefore deprives the financial system as a whole of the due diligence that would arise from a large depositor being worried about the soundness of the bank he uses. But this concern is not consistent with the criticism in the article, or with the level of disdain for the process expressed.

However, I have had some discussion with specialists in the field; the concern is that the FDIC is insuring all deposits anyway – the Wachovia deal – and should get paid for it. Infinite deposit insurance! Now there’s a moral hazard issue if ever there was one. Problems at IndyMac & WaMu and the subsequent wipe-out of common shareholders were brought to a head by a run on deposits … it seems to me that infinite deposit insurance will allow banks to ignore the hazards of losing confidence.

Rumours certain to get the Internuts into a lather are going around: Fair Value Accounting might be getting an overhaul … it’s the endless struggle … expected cash flows vs. market price …

… and the rumours proved true! There is an SEC press release offering “clarifications”:

When an active market for a security does not exist, the use of management estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is acceptable.
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Further, in some cases using unobservable inputs (level 3) might be more appropriate than using observable inputs (level 2); for example, when significant adjustments are required to available observable inputs it may be appropriate to utilize an estimate based primarily on unobservable inputs.
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Broker quotes may be an input when measuring fair value, but are not necessarily determinative if an active market does not exist for the security.
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when markets are less active, brokers may rely more on models with inputs based on the information available only to the broker.
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The results of disorderly transactions are not determinative when measuring fair value.
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Transactions in inactive markets may be inputs when measuring fair value, but would likely not be determinative.
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In general, the greater the decline in value, the greater the period of time until anticipated recovery, and the longer the period of time that a decline has existed, the greater the level of evidence necessary to reach a conclusion that an other-than-temporary decline has not occurred.

The last sentence is a classic of the genre.

And that’s all she wrote for September, 2008!

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