Category: Market Action

Two articles today brought into sharp relief the issue of individuals’ compensation within the financial services industry. Naked Capitalism republishes an article from the Financial Times which brings up the old chestnut about an investment strategy that returns 10% in nine of ten years and -100% one time in ten:

We can identify two huge problems to be solved. First, many investment strategies have the characteristics of a “Taleb distribution”, after Nicholas Taleb, author of Fooled by Randomness. At its simplest, a Taleb distribution has a high probability of a modest gain and a low probability of huge losses in any period.

Second, the systems of reward fail to align the interests of managers with those of investors. As a result, the former have an incentive to exploit such distributions for their own benefit.

Further, it is claimed that:

Professors Foster and Young argue that it is extremely hard to resolve these difficulties. It is particularly difficult to know whether a manager is skilful rather than lucky.

Well, says I, no more difficult than with anything else. You have to actually look at an investment; looking at returns – whether actual or backtested – is only half the story. If we look, for instance, at the just-reported blow-up of Endeavor Capital, we see:

Endeavour Capital LLP, the London- based hedge-fund firm founded by former Salomon Smith Barney Inc. traders, has fallen about 28 percent this month because of “extreme volatility and vast moves” in Japanese bonds, according to two investors.

The $2.88 billion Endeavour Fund sold “substantially all” of its Japanese government debt this week, Chief Executive Officer Paul Matthews said today in an interview. He declined to comment on the March decline.

Endeavour seeks to profit from discrepancies in the prices of various fixed-income securities and currencies, a strategy known as relative-value trading. The fund lost money as the spread, or difference, between yields on Japanese 7- and 20-year bonds widened to 1.44 percentage points on March 17, the most in almost nine years. Investors bought shorter-term debt as the benchmark Nikkei 225 stock index fell 13 percent in March.

Let’s think about this. They lost money because the spread between 7s and 20s widened … so presumably they were long 20s and short 7s. Since they are calling themselves “relative value” investors, we will assume (assume!) that the position was duration neutral and in that case their position was most likely long cash, short 7s, long 20s in such a way that parallel shifts in the yield curve would not – to a first approximation anyway, for smaller small parallel moves – harm them. Note that the assumptions leading to this conclusion are entirely reasonable, but are still assumptions. Anybody who knows better – feel free to tell me. Anyway .. long cash / short 7s / long 20s is a coherent strategy, at the very least.

But “relative value”? Well – I don’t know what the proponents themselves called it when pitching clients for money. And, at a stretch, “relative value” can cover a lot of ground … if you feel that the value on stocks is cheap relative to cash, you can justify levering 20:1 on a stock portfolio and call it a “relative value” play.

I certainly wouldn’t call it a “relative value” play. The position I’ve described – long cash, short 7s, long 20s – is a “flattener”. It will make all kinds of money if the overall yield curve flattens, and lose all kinds of money if the overall yield curve steepens … and it appears that the Japanese government curve has just done that latter. It’s not a “relative value” play at all – it’s a macro-market call, subject to all the chaos and market risk of any other macro market call.

If they want to go long 5s, short 7s, long 10s … then maybe they can talk to me a little bit more about their “relative value” plays. Maybe. But that’s the outside limit, and too much leverage takes it out of consideration.

In a similar vein, Guido Tabellini of Bocconi University asks in VoxEU Why did bank supervision fail?:

On the other hand, there were systematic incentive distortions. First, the “originate and distribute” model entails obvious moral hazard problems. Second, credit rating agencies face a conflict of interest. Third, management compensation schemes reward myopic risk taking behaviour; it is rational for me to under-insure against the occurrence of rare disruptive events, if my bonus only depends on short-term performance indicators.

These are bare assertions – Prof. Tabellini may well have good reason to believe they are true, but they are incidental to the main point of his article, which I will not discuss.

What I find interesting is the renewed focus on short-term compensation; it’s reminiscent of the handwringing of the 1980’s – remember? When the ceaseless pressure on American corporations to post quarterly returns was blamed for all that was wrong with the world and predictions that the long-term oriented Japanese would end up owning the world? This was before the Japanese property bubble collapsed and sent them into a 15-year recession, of course.

I’ve said it before, but I never get tired of seeing my own words on screen: there are problems, sure, but most of these will be self-correcting. It’s going to be awfully difficult to sell originate-and-distribute product any more without better disclosure and accountability … the pendulum has, if anything, swung over too far on that one, at least for now. And bank supervision – via the Basel accords – needs to provide a brighter line between the (protected and regulated) banking system and the (unprotected and unregulated) shadow-banking system.

Compensation structures for individuals can always be improved – but there is always a lot competition for talent:

As more than 14,000 Bear Stearns Cos. employees watch the value of their stock sink and brace for firings, some of the company’s 550 brokers who handle individual investors’ accounts are receiving job offers from competitors promising windfalls of $2 million or more.

Merrill Lynch & Co., Morgan Stanley, UBS AG and Citigroup Inc.’s Smith Barney unit are offering Bear Stearns brokers packages that include signing bonuses of two times the revenue they bring in annually, said Mindy Diamond, president of Diamond Consultants LLC, a Chester, New Jersey-based executive search company. Someone generating $1 million in commissions and fees could receive $1.5 million up front and the rest over three years, she said.

Note that in highlighting this example, I am using the word “talent” to denote “ability to bring money in the door”.

Back to economics, Econbrowser‘s James Hamilton opines on yesterdays massive Fed easing:

suppose you believe that oil over $100 a barrel is a destabilizing influence– and I do— and that the Fed’s recent decisions on the fed funds rate are the primary reason that oil is over $100– and I do— and that further reductions in the Tbill rate have limited capacity to stimulate demand– and I do. Suppose you also saw a risk that the inflation, financial uncertainty, and slide of the dollar could precipitate a run from the dollar, introducing an international currency crisis dimension to our current headaches.
…
I think the Fed missed an opportunity here. A 25 or a 50 basis point cut would have sent commodity prices crashing. Even the mildly hawkish surprise of “only” a 75 basis point cut may have some effects in that direction. If the Fed did convince the commodity speculators that their path leads only to ruin– and I believe the Fed could easily have done just that– that would leave Bernanke with a lot more maneuvering room to cope with what comes next.

I agree with him, as I agreed with his recently expressed view on limits to monetary policy. It seems to me that as far as the overall economy is concerned, the Fed should be waiting to see what its cuts – now 300bp cumulative since August – do to the economy. At the moment, the problem is land-mines of illiquidity blowing up unexpectedly, and the TSLF, together with the occasional spectacular display of force are the best defense against that.

In other words, I’m worried about the collateral damage from such an unfocused tool as the Fed Funds rate. I will note that Accrued Interest is of the view that the (assumed) objective of deleveraging is being (somewhat) achieved by the spanking given to Bear Stearns:

Deleveraging continues. All the big brokers know that the surest way to avoid a Bear Stearns problem is to make sure they aren’t over exposed to hedge funds. Supposedly there have been several commodities-oriented funds which are selling today. Gold getting crushed. Haven’t heard anything about equity-oriented funds but that might be part of what’s going on today as well.

Speaking of Bear Stearns, the SEC has released some FAQs, one of which supports Bear Stearns’ story of sudden and unforseeable liquidity collapse:

Why was Bear Stearns’ loss of credit so critical to its ongoing viability?

In accordance with customary industry practice, Bear Stearns relied day-to-day on its ability to obtain short-term financing through borrowing on a secured basis. Although Bear Stearns continued to have high quality collateral to provide as security for borrowings, as concerns grew late in the week, market counterparties became less willing to enter into collateralized funding arrangements with Bear Stearns.

Late Monday, March 10, rumors spread about liquidity problems at Bear Stearns, which eroded investor confidence in the firm. Bear Stearns’ counterparties became concerned, and a crisis of confidence occurred late in the week. In particular, counterparties to Bear Stearns were unwilling to make secured funding available to Bear Stearns on customary terms.

This unwillingness to fund on a secured basis placed stress on the liquidity of the firm. On Tuesday, March 11, the holding company liquidity pool declined from $18.1 billion to $11.5 billion. On Wednesday, March 12, Bear Stearns’ liquidity pool actually increased by $900 million to a total of $12.4 billion. On Thursday, March 13, however, Bear Stearns’ liquidity pool fell sharply, and continued to fall on Friday.

Joe Lewis is opposing the JPM / BSC deal:

Lewis, a former currencies trader born in an apartment above a pub in London’s East End, will take “whatever action” he deems necessary to protect his $1.26 billion investment in New York-based Bear Stearns, he said in a filing today with the U.S. Securities and Exchange Commission. He said he may “encourage” the firm and “third parties to consider other strategic transactions.
…
“If he gets others to vote with him he may be able to get some token increase in the price,” said John Coffee, a securities law professor at Columbia University in New York, referring to Lewis. “He’s not going to get a significantly higher bid because no one else can get the Fed’s support and the Fed’s financing.”

Lewis paid an average of $103.89 apiece for his 12.14 million Bear Stearns shares, according to today’s filing. He started accumulating most of his shares last July and has lost about $1.19 billion on the investment, or almost half his wealth, which Forbes magazine estimated at $2.5 billion in its 2007 survey.
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The SEC filing today showed that Lewis purchased 1.04 million Bear Stearns shares during February and March, raising his total stake 8.35 percent of common shares outstanding. His price per share ranged from $55.13 to $86.31. He said he may dispose of his holdings entirely or bet that the stock will drop further.

Naked Capitalism highlights some rumours about European banks, which brings to mind Accrued Interest‘s prescient emphasis on the effect of rumours in a bear (Bear?) market reported here March 12. 

And in the regular trickle of news about LBOs in general and how the market is affecting the chances for Teachers / BCE, there is a snippet about current conditions on Bloomberg:

U.S. banks have whittled their holdings of leveraged buyout loans to $129 billion from $163 billion at the beginning of the year by offering the debt at discounts, according to Bank of America Corp. analysts led by Jeffrey Rosenberg.
…
Goldman reduced its backlog of loans by $20 billion in the past quarter from $43 billion, chief financial officer David Viniar said on an investor call yesterday. The New York-based firm, which booked a loss of $1 billion on the loans, also added $4 billion of new commitments during the period.

Lehman, the fourth-biggest U.S. securities firm, booked losses of $500 million on leveraged loans last quarter, CFO Erin Callan said on a conference call with investors yesterday.

Morgan Stanley, the second-biggest U.S. securities firm, reduced its leveraged finance pipeline to $16 billion from $20 billion during the first quarter, CFO Colm Kelleher said in an interview today after the company reported first-quarter profit fell 42 percent.

Make of it what you will!

In other jolly news, DBRS has announced that it:

has today withdrawn the ratings of the below-listed Affected Trusts under the Montréal Accord. This action has been taken at the request of the Affected Trusts.

Well, I guess the court appointed monitor didn’t want to pay rating bills for trusts that were under CCCA protection anyway! Speaking of ratings, by the way, I am participating in an exchange with Naked Capitalism in the comments to an almost unrelated post.

The pref market eased downward today on modest volume, enlivened by some sharp declines among financial-based splitShare corporations.

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

Price & Value! They’re not always the same thing – which is wonderful for those of us who achieve outperformance by exploiting the difference – but sometimes they get so far out of whack that real pain is experienced. We’re going to be hearing a lot about the two over the next few years, as the regulators wrestle with what they can do to avoid future procyclical margin calls on banks.

AIG, for instance, took an $11.1-billion hit in its fourth quarter, compared to its internal “worst case” stress test of $0.9-billion because its CDS positions (short) were marked-to-disfunctional-market. Bear Stearns investors are looking at book value $84, accepted bid $2. And, of course, it has become fashionable to make fun of mark to make believe accounting, enjoyment being inversely proportional to understanding.

Brace yourselves! There’s going to be a lot of discussion over the next year! Nouriel Roubini claims that the Bear Stearns price is, in and of itself, clear proof of insolvency:

As JPMorgan paid only about $200 million for Bear Stearns – and only after the Fed promised a $30 billlion loan – this was a clear case where this non bank financial institution was insolvent.

I think Prof. Roubini goes too far in his statements:

The Fed has no idea of which other primary dealers may be insolvent as it does not supervise and regulate those primary dealers that are not banks. But it is treating this crisis – the most severe financial crisis in the US since the Great Depression – as if it was purely a liquidity crisis.

While it is indeed true that the Fed does not regulate the brokers, the SEC does, and had examiners on the scene at Bear as the crisis evolved:

Cox said on March 11 the SEC was monitoring firms’ capital levels on a “constant” basis and sometimes daily in response to the subprime-loan meltdown that triggered the crisis.

Now, I will agree that it is better, in general, for the Lender of Last Resort to also wear the Regulators’ hat … this has been discussed before on PrefBlog, but now I find that the damn “search” function isn’t working and I can’t find it … but if the functions are separate (as they are in Canada and the UK, to name but two) it’s not the end of the world. Any bureaucracy is much more dependent upon esteem, morale and independence from politicians than it is on formal structure. If Bernanke calls Cox and asks (in J. P. Morgan’s famous 1907 phrase) “Are they solvent?” I’m sure he gets the best answer available.

Back to Roubini:

Here you have highly leveraged non bank financial institutions that made reckless investments and lending, had extremely poor risk management and altogether disregarded liquidity risks; some may be insolvent but now the Fed is providing them with a blank check for unlimited amounts.

All I can say is … it’s easy to second-guess. BSC management has come a cropper and it’s easy to say ‘I told you so’ … especially when, as in Prof. Roubini’s case, he DID say ‘I told you so’! And share-holders are looking at a wipe-out scenario as a result. The Fed moves involve a risk of moral hazard, but somehow I feel a little doubtful that BSC executives are currently exchanging high-fives at being bailed out so generously; if moral hazard exists in this matter, it is with respect to the bond-holders who, it would seem, have a good expectation of seeing their credit quality improve with a takeover.

The most familiar example of moral hazard is in banking; I have previously discussed the state of deposit insurance in Europe … it’s really lousy because they are absolutely terrified of moral hazard. It may be necessary to regulate brokerages more strictly and come up with some refinement of the rules to ensure that liquidity is always abounding … but I’m not sure if, ultimately, such an effort will be worth-while. How often does a market turn from go-go-go! to zero inside of six months, as has happened with sub-prime? How often does an eighty-five year old securities firm with $11-billion book value and profitable operations find itself with dusty telephones?

I’ll listen to suggestions, but I suggest that this is probably one to be permanently filed in the “Why Regulators Need Discretion” category. A much greater source of moral hazard is deliberate moral hazard, as is now being encouraged by Congress:

At the beginning of this decade, derivative risk management geeks, interest rate swaps traders and central bank econometricians filled up entire server farms with what-ifs on the balance-sheet hedging activities of the GSEs. The essential problem was that the GSEs were balancing ever-larger portfolios of fixed-rate mortgages on tiny equity bases. Fortunately, as we all knew, the credit risks of those portfolios were limited because homeowners rarely default on their mortgages. But that still left very large interest rate risks.

The core problem for the housing GSEs is, and has been, the prepayment option embedded in US fixed-rate mortgages. That has meant that the term of the GSE assets extends or contracts depending on whether homeowners can refinance at an advantageous rate. However, most of the long-term debt on the liability side of the GSE balance sheets has a fixed term. So the GSEs must more or less continually offset this imbalance between the average maturity of their assets and liabilities through the derivatives market, specifically the interest rate swap market. Otherwise the mark-to-market losses would overwhelm their small equity bases.

I have said before: the terms on a perfectly normal, standard US mortgage are ridiculous:

Americans should also be taking a hard look at the ultimate consumer friendliness of their financial expectations. They take as a matter of course mortgages that are:

• 30 years in term
• refinancable at little or no charge (usually; this may apply only to GSE mortgages; I don’t know all the rules)
• non-recourse to borrower (there may be exceptions in some states)
• guaranteed by institutions that simply could not operate as a private enterprise without considerably more financing
• Added 2008-3-8: How could I forget? Tax Deductible 

First, the GSEs need to be regulated as the banks they are; second, implementation of this discipline must be allowed to make the terms of US mortgages less procyclical. 

Back to Bear Stearns for a moment, with a hat-tip to Financial Webring Forum. There are some very interesting theories regarding why BSC stock is going up:

what could account for the rise in shares? One of the most intriguing theories, as expressed by observers like ThePanelist.com’s David Neubert, Portfolio’s Felix Salmon and Fortune’s Roddy Boyd, is that bondholders are buying up Bear Stearns shares. Bankruptcy would almost surely have been Bear Stearns’ fate if it had not secured an 11th-hour deal, which would have defenestrated shareholders and thrust bondholders into a potentially bruising battle with other, more senior creditors.

But the JPMorgan deal offers bondholders a potential payout: Upon completion, Bear Stearns bonds currently trading at steep discounts would be made whole by the banking giant. Buying shares in Bear Stearns would help ensure that the deal goes through, and so it’s possible that bondholders are buying up the still-cheap shares in hopes of guiding the JPMorgan takeover to completion.

Buying shares in Bear Stearns could also be a hedge, Mr. Neubert and Mr. Salmon add. If the deal falls through, the bonds will fall in value, but the stock could rise.

Mr. Roddy also points out that hedge funds who sell credit default swaps, financial instruments that protect buyers against the default of a given company, have an incentive to see the deal go through as well. As Bear Stearns’ financial health improves by forging closer ties to the bigger, steadier JPMorgan, the cost of insuring the company through these swaps goes down.

I’ve mentioned the decoupling of de facto & de jure economic interest before, in the context of Credit Default Swaps. Now maybe the swaps boys are at it again! Fascinating. Incidentally, another story making the rounds is that JPM wanted to bid more, but the Fed insisted that management not only be wiped out, but publicly humiliated to boot. Makes sense, but I will not venture an opinion on its accuracy!

Update:In the absence of an endgame, it makes more sense for the bond shorts (that is, those who have bought CDS Protection) to buy shares, since there’s a bigger payoff if they get their way, forcing bankruptcy and then forcing a fire-sale. There is the danger, however, that the company would walk into bankruptcy court with a ready-made plan signed by the Fed giving full recovery to bondholders. The game-players would then lose on both sides of their hedge. Those long bonds have the Promised Land at their feet as soon as the merger succeeds.

Econbrowser‘s James Hamilton approves of the Fed action:

Bear is not going to be last, but it is the model I think for what we’d want to see– owners of the companies absorb as much of the loss as possible, while the Fed does its best to minimize collateral damage.

And I’d say he’s right.

A good strong day in the preferred market, with volume picking up substantially.

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

The big news today is the JPMorgan takeover of Bear Stearns, which has been the subject of so much commentary I’ll keep mine to a minimum. The interesting part is that the Fed is taking a first-loss position on the mortgage paper:

The steps were announced at the same time the Fed agreed to lend $30 billion to J.P. Morgan Chase & Co. to complete its acquisition of Bear Stearns & Co. The loans will be secured solely by difficult-to-value assets inherited from Bear Stearns. If the assets decline in value, the Fed — and thus, the U.S. taxpayer — will bear the cost.

The fact that this financing is non-recourse to JPM is confirmed by their investor presentation:

Special Fed lending facility in place; non-recourse facility to manage up to $30B +/- of illiquid assets, largely mortgage-related

The investor presentation is also remarkable for the coy nature of its disclosure of deal terms:

No material adverse change clause. JPM has customary protections

Huh? That’s it? One possibility that the deal is a stalking horse: JPM is backstopping an auction with a reserve price of $2 per share. In exchange, they’re getting a nice break fee and BSC is getting a “go shop” clause. But … Assiduous Readers who have heeded my advice that the first thing to examine in any commentary is what isn’t being said will note that no probability is assigned to this possibility!

The non-recourse provision is extraordinary and reinforces the arguments of the TSLF’s nay-sayers – such as interfluidity:

If you think, as I do, that the Fed would not force repayment as long as doing so would create hardship for important borrowers, then perhaps these “term loans” are best viewed not as debt, but as very cheap preferred equity.
…
The Federal Reserve is injecting equity into failing banks while calling it debt. Citibank is paying 11% to Abu Dhabi for ADIA’s small preferred equity stake, while the US Fed gets under 3% now for the “collateralized 28-day loans” it makes to Citi. Pace Accrued Interest (whom I much admire), I still think this all amounts to a gigantic bail-out. And that it is a brilliantly bad idea from which financial capitalism may have a hard time recovering. Like a well-meaning surgeon slicing up arteries to salvage the appendix, the Federal Reserve is only trying to help.

In an admirable discussion of the further implications of the TSLF, Econbrowser‘s James Hamilton pointed out:

One measure economists sometimes use for the liquidity of an asset is the bid-ask spread. By that definition, one might be justified in referring to the present problems as a problem of liquidity– the gap between the price at which owners would like to sell these assets and the price that counterparties are willing to pay is so big that the assets don’t move. That illiquidity itself has proven to be a paralyzing force on the financial system. By creating a value for these assets– the ability to pledge them as collateral for purposes of temporarily acquiring good funds– the Fed is creating a market where none existed, thereby tackling the problem of liquidity head on.

OK, but if we agree to use that framework to describe the current difficulties as a liquidity (as opposed to a solvency) problem, which is closer to the “true” valuation, the bid or the ask price?
…
Even in the worst possible outcome, the ultimate increase in outstanding Treasury debt would be substantially less than $400 billion, because the collateral is far from worthless. And I would trust the Fed to be taking a smaller risk on behalf of the Treasury than I would expect to be associated, for example, with congressionally mandated expansion of FHA insurance, or the unclear implicit Treasury liability that results from increasing the assets and guarantees from Fannie or Freddie. Nevertheless, the doubters seem to me to be correct that the risks currently being absorbed by the Federal Reserve are substantially greater than zero.

You don’t get something for nothing.

Accrued Interest provides an entertaining analysis of the knock-on effects of the BSC/JPM deal:

Nothing, nothing, would surprise me today. Down 500? Up 200? Who knows? What we have is a tug of war. Traders betting on things getting worse. The Fed and Treasury are trying to draw a line in the sand, telling the market they won’t let either banks nor primary dealers fail as long as they still have decent assets to pledge as collateral.
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I will say that I wouldn’t be a buyer of protection against any of the big banks or brokerages here. The Fed just delivered a big middle finger to people who bet against Bear Stearns. If you want to bet against brokerages, the stock is a much smarter bet. The Fed doesn’t give a fuck if a stock falls 50%. They have basically unlimited power to prevent a bankruptcy.
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The problems brokerages are facing today have nothing to do with the normal financial ratio-type analysis that the ratings agencies do. In fact, for a guy like me who likes to pour over financial statements when making an investment decision, analyzing credits now is next to impossible.
…
Lehman and Goldman’s earnings reports tomorrow are probably the most important earnings reports for the broad economy of my career.

Naked Capitalism points out that we are currently engaged in a monstrous game of prisoner’s dilemma:

[Eugene Linden observes] The problem facing the credit markets right now is yet another iteration of the “prisoner’s dilemma” from game theory, at least in the sense that participants know that if everybody takes the stance of “every man for himself” the markets will crater, but they also know that if they rush for the exits there’s a chance that they will get out the door relatively unscathed. Studies of the problem suggest that the more anonymous the context, the more likely that players will adopt “every man for himself,” and, of course there’s nothing more anonymous than markets.
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[Naked Capitalism reader Lune argues] We’ve already seen the law of unintended consequences so far:

1) Congress raises conforming limits on Fannie/Freddie to help unfreeze the mortgage market. Result: agency spreads skyrocket, bringing down Bear and a host of hedge funds. Mortgage markets still remain frozen.

2) Fed opens TSLF to unfreeze mortgage market. Result: Carlyle goes bankrupt as people rapidly arbitrage the difference between holding MBS in firms that can and can’t access the new credit facility. Mortgage markets remain frozen.

Now we have 3) Fed opens TSLF to broker-dealers.
…
[Also “Lune”] I’m wondering: if the demise of Carlyle and BSC was hastened because they were firms that couldn’t access Fed money and thus were foreclosed by firms that could, what will happen Monday? I’m thinking hedge funds, unable to access the Fed directly, will be eaten alive by the IBs.

Meanwhile, in a Financial Times piece dissed by Naked Capitalism as self-serving, Greenspan has pointed out the vulnerabilities of quantitative models:

The most credible explanation of why risk management based on state-of-the-art statistical models can perform so poorly is that the underlying data used to estimate a model’s structure are drawn generally from both periods of euphoria and periods of fear, that is, from regimes with importantly different dynamics.

The contraction phase of credit and business cycles, driven by fear, have historically been far shorter and far more abrupt than the expansion phase, which is driven by a slow but cumulative build-up of euphoria. Over the past half-century, the American economy was in contraction only one-seventh of the time. But it is the onset of that one-seventh for which risk management must be most prepared. Negative correlations among asset classes, so evident during an expansion, can collapse as all asset prices fall together, undermining the strategy of improving risk/reward trade-offs through diversification.

If we could adequately model each phase of the cycle separately and divine the signals that tell us when the shift in regimes is about to occur, risk management systems would be improved significantly. One difficult problem is that much of the dubious financial-market behaviour that chronically emerges during the expansion phase is the result not of ignorance of badly underpriced risk, but of the concern that unless firms participate in a current euphoria, they will irretrievably lose market share.

Paradigm-shift is indeed a problem in quantitative modeling – such models, including all the ones I’ve ever worked on, tend to perform poorly during trend changes, and not at their best when a definite trend exists. All you can do is manage diversification – ‘I can compare equities, and I can compare bonds, but I can’t compare bonds to equities’.

The key phrase in these remarks is: If we could … divine the signals that tell us when the shift in regimes is about to occur, risk management systems would be improved significantly. Can’t be done! The world is chaotic and every bad result has its own unique set of circumstances. So diversify! I am in complete agreement with Mr. Greenspan’s conclusion:

In the current crisis, as in past crises, we can learn much, and policy in the future will be informed by these lessons. But we cannot hope to anticipate the specifics of future crises with any degree of confidence. Thus it is important, indeed crucial, that any reforms in, and adjustments to, the structure of markets and regulation not inhibit our most reliable and effective safeguards against cumulative economic failure: market flexibility and open competition.

A horrible, horrible day for the preferred share market, particularly the PerpetualDiscounts, on light volume. The guy who sold a whack of RY.PR.F at 20.45 last week is starting to look a lot smarter!

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

Bear Stearns! Bear Stearns! Bear Stearns!

What can I say? Their options are limited:

• Find a parter – e.g., sell out to JPMorgan at a price of about maybe $27 – this is about $60 less than book.
• Hold a fire sale of assets. Then watch the business die.
• Go broke.

Whatever they choose, common shareholders are dead. The only question is whether the franchise will survive. I suspect that it will … there’s a gun to the directors’ heads, because trying to tough it out will just destroy their business before the month is out. There’s a lot of franchise value in Bear Stearns … so they have to go cap in hand to every major investment bank in the world, and desperately hope that at least two of them show an interest. As clearing bank, JPMorgan is most familiar with the assets – if they want it.

Another day of light action in the preferred market, with PerpetualDiscounts down again. CIBC was busy!

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

There was a very gratifying article about the lopsided (disfunctional?) CDS Market today in the Financial Times reprinted by Naked Capitalism:

“The credit default swap market has become lopsided,” says Peter Fisher, co-head of fixed income at BlackRock Financial Management in New York. “It’s not deep and liquid the way we normally think of that — it’s more like an insurance market in which few want to write insurance and many want to buy.”
…
In a normal world or in a world where the derivative is closely tied to the underlying cash security, if the price of the derivative became utterly divorced, market operators would step in to trade away the difference, Mr Fisher adds.

But volumes in the credit derivatives market exploded precisely because most of the bonds hardly trade at all. At Goldman Sachs, for example, for every three dollars of trading in bonds, the firm trades $97 in credit default swaps.

As I mused on February 21:

Despite my interest in the asset class, I’m not convinced that the CDS market is ready for prime time. If their main attraction is the ability to lever up a portfolio significantly, then a huge degree of uncertainty is introduced into pricing, in addition to the uncertainty introduced by debt decoupling. I continue to wrestle with the idea, but these twin, undiversifiable uncertainties probably introduce a required risk premium that makes inclusion of these instruments, long or short, in a fixed income portfolio uneconomic.

Treasury Secretary Paulson has announced an initiative to make everybody feel good:

The group also will propose directing credit-rating firms and regulators to differentiate between ratings on complex structured products and conventional bonds. In addition, it wants rating firms to disclose conflicts of interest and details of their reviews and to heighten scrutiny of outfits that originate loans that are enveloped by various securities.
…
Mr. Paulson also is planning to encourage the development of a domestic market for “covered bonds,” bonds issued by banks that are secured by mortgages. Popular in Europe, these could be an alternative to securitization. When mortgages are securitized, they generally leave bank balance sheets and banks don’t hold capital against them; covered bonds remain on bank books, and banks must set aside capital to back them.

Covered bonds will be familiar to PrefBlog’s Assiduous Readers. The separate credit rating scale for structured securities is cosmetic nonsense and simply represents more political interference with credit ratings. “Don’t downgrade XYZ, it’s a big employer in my district!”.

In yet another disturbing development, it is felt that indices might attract shorts, therefore don’t have indices:

Markit Group Ltd. shelved plans to create an index that would have allowed investors to bet on the $200 billion market for securities backed by auto loans.

Markit Director Ben Logan confirmed the index was put on hold because of a lack of support from dealers.

The decision follows criticism from analysts at Merrill Lynch & Co. and Wachovia Corp., who said the index would drive down prices of the underlying bonds. Markit had been in talks with firms including Lehman Brothers Holdings Inc., Morgan Stanley, and Bear Stearns Cos. to create and index allowing investors to speculate on auto-loan securities from issuers such as Detroit-based GMAC LLC and Ford Motor Credit Co.

In happier news, S&P opines that the worst of the write-downs is over:

Standard & Poor’s said the end is in sight for subprime-mortgage writedowns by the world’s financial institutions.

Writedowns from subprime securities will probably rise to $285 billion, New York-based S&P said today in a report. The ratings company previously estimated losses of $265 billion in January. S&P raised its estimate because of increased loss assumptions for collateralized debt obligations.

“The positive news is that, in our opinion, the global financial sector appears to have already disclosed the majority of valuation writedowns” on subprime debt, S&P credit analyst Scott Bugie said in an accompanying statement. Losses on other debt such as leveraged loans are still likely to increase, the report said.

The actual report is available from S&P – thanks to Accrued Interest, who found the link and commented on the implications:

Anyway, so people love to talk about what inning we’re in when it comes to the subprime crisis. But let’s be more positive about it, shall we? We’re in the first inning of the healing process. The subprime contagion has decimated broker/dealer capital. That phase is probably wrapping up.

Bank of Canada Governor Mark Carney gave a speech today that was also soothing in its message:

some of the world’s largest financial institutions have recorded substantial losses, the cost of borrowing has increased, and the availability of credit has decreased. More than seven months on, the end is not yet in sight, although it is safe to say that we have reached the end of the beginning of this turmoil. This is not because the dislocations in markets have eased; in fact, strains in financial markets have intensified recently, but rather because we are entering a new phase where policy-makers and market participants have a better understanding of both the shortcomings in the current financial system and what needs to be done – by both groups – to address them.

Mr. Carney gave some very strong indications of his desires for financial market reforms going forward; the speech is important enough that I will attempt to review it thoroughly tomorrow.

The preferred market was weak again on more light volume, with the general malaise resulting in some violent pricing moves when some players absolutely had to get some selling done (RY.PR.F was particularly noteworthy). The PerpetualDiscount index has had only one up-day in the twelve trading days following February 26 and is currently down 2.78% from its 2/26 level.

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

Econbrowser‘s James Hamilton has an interesting philosophical piece on the limits to the Fed’s ability to influence the economy, Asking too much of monetary policy:

I am certainly a believer in the potential real effects, sometimes for good, sometimes for ill, of monetary policy. But I just as certainly do not believe, nor should any reasonable person believe, that no matter what the economic problem might be, you can always solve it just by printing more money.
…
I would nevertheless caution that we need to be open to the possibility that no matter how low the Fed brings its target rate, it may not arrest the unfolding financial disaster. Unless the intention is to go all the way with enough inflation to avert the defaults, that means we need an exit strategy– some point at which we all admit that further monetary stimulus is doing nothing more than generating inflation, and at which point we acknowledge that the goal for monetary policy is no longer the heroic objective of making bad loans become good, but instead the more modest but also more attainable objective of making sure that fluctuations in the purchasing power of a dollar are not themselves a separate destabilizing influence.

Indeed, with the Treasury curve virtually decoupled from the corporate curve, it doesn’t look like there’s anything more the Fed can do. Cutting rates again probably will not have any major effect on corporate yields, or on banks’ willingness to lend; I think that the only justification for such a move would be to help increase profit margins at the banks in order to assist their recapitalization, as was done in 1993 – the year of the steepest yield curve on record, which led to 1994 – the year of the worst government bond market on record.

At the moment, I don’t think there’s a lot of evidence that such drastic treatment is necessary. Below are some graphs available from the FDIC showing the recovery of the American banking system from 1990-94 … sorry they’re not too clear, click on them for a better version, or just go directly to the full report.

Some of this was due to Resolution Trust, to be sure, but a good chunk was due to a very steep yield curve that made it very profitable to borrow short and lend long.

It is interesting to note, from the FDIC report, that data for 4Q93 (the point at which the Fed said, “OK, play-time’s over, we’re going to start hiking now”) indicated that the 13,220 institutions reporting had $375-billion in capital backstopping $4,707-billion in total liabilities and capital, an equity leverage ratio of 12.61. The current FDIC report, 4Q07, shows 8,533 institutions with capital of $1,352-billion backstopping $13,039-billion, equity leverage of 9.6:1.

One may well quibble over the 4Q07 equity figure … perhaps there are massive unrecorded losses about to appear. And one may quibble even more about the relative quality of assets between then and now – subprime and perhaps credit card and auto debt coming up for kicking in The Great Leverage Unwinding of 2007-08. But all in all, as I’ve pointed out in posts on loss estimates and loss distribution, I’m having a hell of a time finding credible, sober analysis concluding that Armageddon is Now.

Anyway, what I’m trying to say is that I agree with Prof. Hamilton (subject to quibbles about loss estimates), when he states:

The problem then is many hundreds of billions of dollars in loans that are not going to be repaid, the prospect of whose default could completely freeze the market for credit.

That, it seems to me, is a problem you can’t solve by lowering the fed funds rate.

By me, the Fed is doing the right thing with the TSLF introduced yesterday. The problem is liquidity, and there are many players with indigestible lumps of sub-prime paper on their books. These are, I’ll bet a nickel, on their books at marked-to-disfunctional-market prices well below ultimate recovery, but so what? They can’t sell them to hot money – hot money’s got its own problems:

At least a dozen hedge funds have closed, sold assets or sought fresh capital in the past month as banks and securities firms tightened lending standards. The industry is reeling from its worst crisis because bankers — staggered by almost $190 billion of asset writedowns and credit losses caused by the collapse of the subprime-mortgage market — are raising borrowing rates and demanding extra collateral for loans.

They can’t sell them to real money – real money read in the paper just last week that it’s all worthless junk. So the paper has to sit on the books for a while and be financed in the interim.

Perhaps not entirely coincidentally, there’s an article on VoxEU titled Why Monetary Policy Cannot Stabilize Asset Prices. VoxEU is up to its old tricks … the page is blank. To read the article, you have to click “View|Source” on your browser, pick a section to copy/paste, save this extract as a .html file on your hard drive and then open this with a browser. The graph has to be viewed separately.

Mechanical difficulties aside, it seems that this will soon be a CEPR discussion paper; the authors state:

Figure 1 analyses the effects of a 100 basis points increase in interest rates. Note that after about 8 quarters, interest rates have declined but remain about 35 basis points above their initial level. After 12 quarters, they have fallen further to a level some 10 basis points above the starting point. Overall, the increase in interest rates will dissipate in about three years.

Turning to real property prices, we note that these start to fall in response to the tightening of monetary policy. After 16 quarters, they reach a bottom of about 2.6% below the initial level and then start to return gradually to their starting level. Overall, property prices react quite slowly to monetary policy actions.

Next we consider the responses of real GDP.³ The figure shows that it also reaches a trough after 16 quarters, when it is some 0.8% below its initial level.⁴ Thus, the responses of real GDP are almost exactly 1/3 of those of real property prices.⁵ This is an important finding. To see why, suppose that monetary policy makers come to believe that a real property price bubble of 15% has developed, and decide to tighten monetary policy in order to bring down asset prices. In doing so, the average central bank in the 17 countries we study should also expect to depress the level of real GDP by 5%, a truly massive amount.
…
Whatever merits such a stabilisation policy has in theory, our research suggests that in practice, monetary policy is too blunt an instrument to be used to target asset prices – the effects on real property prices are too small, given the responses of real GDP, and they are too slow, given the responses of real equity prices. In particular, there is a risk that setting monetary policy in response to asset price movements will lead to large output losses that exceed by a wide margin those that would arise from a possible bubble burst.

In other news, Accrued Interest points out that It’s just a dead animal:

Now I’m not here to say whether Bear Stearns has liquidity problems or not. The recovery in both the stock and bond market for Bear paper would indicate that they probably don’t. But this kind of panicky trading is exactly why its hard to own financial bonds right now. I mean, anyone who had traded through bear markets knows that the rumor mill becomes very active. Right now everyone is nervous. The longs are nervous because they’ve been losing money and/or under performing their index for months now. I’m sure there are many portfolio managers and/or traders worried about losing their jobs over poor performance.

The shorts are nervous too. Right now corporate credit spreads are at all-time wides. That means that getting short a credit is expensive to begin with.
…
So amidst all this nervousness, it seems that Wall Street starts giving more credence to rumors.

Sit tight, do your homework, turn off the TV and stare at financial statements until you’re crosseyed, that’s the path to success. The bond market is excitable and always will be … ignore it, keep your company-specific bets small, your leverage non-existant and have another look at them financial statements.

In other news, it looks like Barney Frank, Chairman of the House Financial Services Committee wants to start his own credit rating agency:

U.S. Representative Barney Frank gave ratings companies a month to fix “ridiculous” standards that they apply to local government debt, as his House committee opened a hearing today on how the firms evaluate municipal bonds.

“I am going to say to the rating agencies and to the insurers: they have about a month to fix this,” Frank, the Massachusetts Democrat who chairs the House Financial Services Committee, told reporters in Washington yesterday. “We’re going to tell them they have to straighten it out.”

California Treasurer Bill Lockyer and other state officials are calling for Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings to change a system they say costs taxpayers by exaggerating the risk that municipal issuers will default on their debts. Every state except Louisiana would be AAA if measured by the scale used for corporate borrowers, according to research by Moody’s.

“This notion of having a separate standard for the municipals because they would do too well on the other standard is ridiculous,” Frank said.

Cool! Credit ratings courtesy of the politicians! Doesn’t that make you feel safe? Sign me up!

Back on Earth, Berkshire Hathaway is worried that municipal bond insurance will return to ultra-cheap levels in a price-war:

The risk of guaranteeing municipal debt is increasing because the economy is slowing and some insurers may cut prices to regain lost business, said Ajit Jain, head of Berkshire Hathaway Inc.’s new bond insurer.

Fiscal stress in Vallejo, California, and Jefferson County, Alabama, may be the “tip of the iceberg” for municipal defaults, said Jain, who runs Warren Buffett’s Berkshire Hathaway Assurance Corp. He said downgrades of some insurers hurt the industry’s integrity and those firms may spark “pricing wars” if they regain their financial footing and seek to recoup lost business.
…
Ambac and MBIA, the two largest bond insurers, may trigger a price war if they stabilize their AAA ratings and start backing municipal bonds again, Jain said.

“That will be unavoidable,” he said in his testimony. “Unless you continue to believe that this is zero-loss business, that conduct assures a bleak future for this business.”

Another light day for volume. Split-shares got hammered, particularly the BNA issues that have something of a penchant for volatility. PerpetualDiscounts were also weak.

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

Today’s big news was the expansion of the Term Securities Lending Facility:

The Federal Reserve announced today an expansion of its securities lending program.  Under this new Term Securities Lending Facility (TSLF), the Federal Reserve will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS.  The TSLF is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally.  As is the case with the current securities lending program, securities will be made available through an auction process.  Auctions will be held on a weekly basis, beginning on March 27, 2008.  The Federal Reserve will consult with primary dealers on technical design features of the TSLF.

The kerfuffle over Bear Stearns yesterday shows that the market is prepared to believe anything, as long as it’s bad. Yes, times are tough. But they actually managed to scrape out a profit last year (Nov. 30 year end) and have $18-billion cash on the balance sheet thanks to a vigorous term issuance programme in which they haven’t been afraid to pay up for five year money. They’re not going to disappear overnight. Though mind you, as Naked Capitalism points out, they’re very highly levered:

With this in mind, why were Bear and Lehman so highly geared? Lehman is levered 40 to 1, Bear is geared 34:1 (by contrast, Carlyie is levered 32:1). Trading firms should know better.

In deteriorating debt markets, the last thing you want to be carrying is a big balance sheet. Perhaps the banks in question assumed that the Fed’s interest rate cuts would produce enough gains in value (due to lower prevailing rates) to make deleveraging less urgent.

But now Bear and Lehman (and no doubt their peers as well) are delevearging out of necessity, as mark-to-market losses force them to write down assets, leading to hits to equity, and then putting them at gearing levels that are untenable. So shrink they must.

And, mind you, if I was thinking about buying their stock, I wouldn’t be counting on a return to pre-2007 earnings anytime soon. Neither would Punk Ziegel.

“The key problem is not the write-offs and losses that the company must take in the just-ended first fiscal quarter. The key issue is building a new business model,” Bove said. “Bear Stearns must adjust and it is probably going to be forced to find a merger partner,” he added.

Find a partner? Maybe they have!

Joseph Lewis, the second-largest shareholder in Bear Stearns Cos., may add to his holdings after the stock fell on speculation the company lacks sufficient access to capital, a person close to him said.

Times are tough, did I say above? Econbrowser‘s James Hamilton won’t quarrel if you say a recession has begun and his partner Menzie Chinn takes a certain amount of Democrat glee in the prospects for a two recession Bush presidency:

So, I’ll echo Jim’s assessment: too soon to be sure, but chances are pretty darn good that we that we’re into the second recession of the G.W. Bush presidency.

It seems to me the next question of interest is whether the recession is likely to be short or long. I keep on seeing predictions of a short V-shaped recession [3], [4], [5]. Most macro forecasts do predict a resurgence in 2008H2 (just as CEA Chair Lazear alluded to in his last press conference). For instance, today’s Deutsche Bank forecast is for (-0.5%) and (-0.3%) in Q1 and Q2, respectively, with growth spiking in Q3 at 2.6% before settling at 0.9% in Q4. Still, with oil and ag commodity prices stubbornly high, the extent of the financial system turmoil uncertain, and the less-than optimally constructed fiscal stimulus limited to only one percent of GDP, I’m don’t think the 2008H2 acceleration will be a sustained one.

Well … I’m not an economist and I have a high degree of skepticism towards any macro-forecast anyway … but if I had to bet a nickel I’d bet on a long grinding recession that squeezes every last bit of leverage out of the system. The credit markets are thoroughly disfunctional, borrowers are extending term to stay alive (Bear Stearns, CIT, …) rather than to expand and these funds are staying on the balance sheet as cash at a negative carry (Bear Stearns, CIT, …). I don’t know what will happen tomorrow, but I can say it looks pretty ugly out there today!

As usual, Accrued Interest has some sensible remarks regarding what will bring an end to the credit market:

What would bring an end to this bear market? Simple. Bear markets end when the market runs out of sellers.

I would prefer to phrase it … ‘Bear markets end when prices stop going down’, but this is a mere quibble.

Naked Capitalism has an interesting piece on the Credit Rating Agencies’ alleged reluctance to cut the ratings on AAA sub-prime paper:

The Bloomberg story confirms our cynicism about the S&P’s and Moody’s. It reports that the rating agencies have held back from downgrading AAA subprime related securities.

Why is this important? In most deals, roughly 80% is of the value of the transaction was in the AAA tranches. These are far and away the most important in terms of economic value. But, not surprisingly, many of the buyers of this paper did so because they had portfolio constraints or capital requirements that made top-rated instruments particularly desirable. Thus in many cases, downgrades of this paper would have a pronounced impact, leading in many cases to sales, depressing prices.
…

The ratings methods balance estimated losses against so-called credit support, a measure of how likely it is that owners of each piece of the bond will incur losses. For AAA rated debt, credit support needs to be five times the expected losses, according to Sylvain Raynes, author of The Analysis of Structured Securities, a college textbook.

All but six of the 80 AAA ABX bonds failed an S&P test for investment-grade status, which requires credit support to be twice the percentage of troubled collateral. The guideline was one of four tests used by S&P, and a failure to meet the standard wouldn’t have automatically resulted in a downgrade. The other companies used similar metrics to grade bonds, Raynes said. Investment grade refers to all bonds rated above BBB- by S&P and Baa3 by Moody’s….

On a $118 million Washington Mutual bond issued in 2007, WMHE 2007-HE2 2A4, 5.6 percent of its loans are in foreclosure and its safety margin, or the debt available to absorb losses, is less than the combined total of its loans at risk. Both S&P and Moody’s rate it AAA.

Fitch rates that bond B, five levels below investment grade and 15 levels less than its rivals….

The full Bloomberg story explains the Fitch discrepency a little better:

“We have built in 20 percent more home price declines from the end of ’07,” said Glenn Costello, managing director for residential mortgage-backed securities at Fitch. “When you build in that much home price decline, I feel good when I pick up the paper and I see that home prices are only down another 3 percent. My ratings are still good.”

Fitch is a good shop. I like Fitch.

In yet another sign of the cavalier sloppiness that was epidemic at the height of the bubble, there are indications that CDO deal documents are not clear:

These bad decisions, in turn, have resulted in the collapse of many investment vehicles: more than 100 collateralised debt obligations (CDOs) and structured investment vehicles (SIVs) have already entered the murky post-event of default (EOD) state. This number will grow in the coming weeks.

Unfortunately, the legal documents that govern these transactions are so poorly written – full of ambiguities, inconsistencies, “circular references” and worse, contradictions – that many investors, trustees and respective legal advisors do not know how to interpret them.

The lawyers will feast!

Speaking of lawyers and their feasting, I was asked recently about BCE’s bonds following their triumph over the bondholders. It was one of Markit’s “CDS Deteriorators” on March 10, with 5-Year CDS yields increasing 73bp to 646bp. According to Markit’s CDS commentary for March 10:

BCE’s spreads widened on expectations that the company’s LBO will go ahead. A Quebec Court threw out a bondholder lawsuit that alleged the takeover of the Canadian telecoms company by an investment consortium was unlawful.

Volume returned to the preferred market today and was actually relatively heavy – the first time that’s happened in a while! I don’t know quite what to make of the price and volume activity in the PWF/GWO issues … there’s no news that I can see – it may just be a single manager re-jigging his portfolio. Or random chance!

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

Bloomberg has a story headlined TIPS’ Yields Show Fed Has Lost Control of Inflation::

“The way TIPS are trading now, investors believe headline inflation will stay lofty and are willing to give up the real yield for that,” said Brian Brennan, a money manager who helps oversee $11 billion in fixed-income assets at T. Rowe Price Group Inc. based in Baltimore. Prices for the securities indicate “a real concern of a recession and high headline inflation,” he said.

This is the type of boneheaded analysis that is rife now that the smiley-boy salesmen have taken over the industry completely. If the driver of these real yields is inflation, then why is the 30-year Treasury bond yielding less than 4.5%?

As Accrued Interest points out, Treasury yields are being driven by fear, with investors piling into government guaranteed debt for the simple reason that they want to protect their capital. TIPS are simply maintaining a spread to nominals – an increasing spread, to be sure; inflation fears are part of the picture as I have previously discussed, but to ascribe the entire move to this is … boneheaded. Sorry folks, I just can’t think of any other word.

PerpetualDiscounts got smacked again today, on extremely light volume – all eyes, yet again, were on the equity markets and wondering if the music would stop with EVERYBODY holding the hot potato. BCE issues did very well – it appears that there are some who took the unsuccessful bondholders’ lawsuit a lot more seriously than I did.

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

Again, virtually zero commentary!

The market went down sharply today, on very light volume.

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

Again, not much today!

BCE has announced:

that it has been notified by the Québec Superior Court that the judgments relating to BCE’s application for a final order approving BCE’s plan of arrangement for the company’s privatization transaction and the other proceedings instituted by or on behalf of certain holders of Bell Canada debentures will be made public at 7:00 p.m. on Friday, March 7, 2008. BCE will immediately post the judgments on its website at http://www.bce.ca/. To access the judgments, click on the “Privatization of BCE” banner on the home page. Judgments will be posted under the header “Resources” at the top of the page.

Place yer bets, gents, place yer bets! I’m betting (with myself; notional value $0.05) that the bondholders get told to dry up and blow away, but that the deal fails anyway on financing. But what do I know?

Accrued Interest updates his commentary on the until-last-month-not-terribly-exciting US Municipal market:

But the initial read was apparently wrong. On Monday, retail buyers (i.e., mom and pop investors) started coming out of the woodwork to buy bonds. The State of California came with a $1.7 billion deal on Monday. Demand was so strong that the underwriter cut the interest rate by 15bps across the board, and still $1 billion of the deal was done retail. Now maybe there has been $1 billion of a deal done retail in the past, but I sure as hell don’t remember ever hearing of such a thing. Smith Barney, Citigroup’s retail brokerage arm, supposedly had the best day for selling municipal bonds in their entire history on Monday. One large dealer I talk to regularly said they had sold every bond in their inventory by 11AM.

Overall, municipal bond rates are probably 15bps lower today than on Friday, while Treasury rates are about 15bps higher.

The market fell today, led by SplitShares as all eyes were on the carnage in the equity markets. Volume was on the light side; the market had very little time to react to the BNS New Issue before closing; it will be most interesting to see what the upshot is tomorrow morning.

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