Category: Market Action

Accrued Interest opines on the future of CDOs.

Naked Capitalism collects some opinions on credit conditions.

Bloomberg reports on LIBOR reporting problems.

Bloomberg reports on how OIS is overtaking LIBOR as a measure.

Lou Crandall comments (a long time ago) on how LIBOR overtook US T-Bills as a measure.

Jeffrey Frankel defends his thesis that low real interest rates cause commodities to rise.

Standard & Poor’s points out that sub-prime borrowers bought cheap houses, which have less volatile prices than expensive ones … the mortgage carry quickly becomes comparable to renting, no matter how far underwater you are.

Standard & Poor’s Ratings Services’ current ratings on the 2006 subprime U.S. residential mortgage-backed securities (RMBS) vintage reflect, in part, an assumed loss severity of 45%. That assumption includes our estimate that, based on our views on the current housing market environment, foreclosure costs and market value declines account for losses of 26.3% and 18.7%, respectively, in the loan balances of these mortgages. We project a 19% aggregate loss for subprime mortgages backing U.S. RMBS sold in 2006 based on assumptions for foreclosure and loss severity. The 19% assumption is the product of projected foreclosures of approximately 42% and the assumed loss severity of 45%.

Standard & Poor’s current house price decline assumption is 33.4%, which is a 72% increase over the maximum price decline of 19.4% observed to date (see table 1). We believe this assumption appropriately protects against forecasted price declines through the housing downturn.

Dates have been set for the redemption of FAL.PR.A & FAL.PR.H; the post has been updated.

Plans – well, rumours of plans, anyway – are moving forward for a CDS Clearinghouse. I have updated my most recent post on the issue.

For those fascinated with all aspects of the David Berry affair, I’ve had a look at the career of Cecilia Williams, Scotia’s compliance officer, and have updated the most recent relevant post.

In case you missed the announcements amidst the Bank Capitalization posts, note that RY.PR.K has been called for redemption and TD has a new Fixed Reset, 5+160 … and the argument about the structure’s merits rages on. It takes two to make a market!

Good volume on the day, with some nice sized blocks going through for some Operating Retractibles. Prices were down … surely, people can’t be selling straights to buy fixed-resets?

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

It seems like most of the interesting news lately has been sufficiently important to merit separate posts, so these daily reviews have been suffering!

Today Mishkin announced his resignation from the Fed Board:

Mishkin, 57, on a leave of absence from [Columbia University], will step down as of Aug. 31, the Fed said in a statement today, also releasing his letter of resignation to President George W. Bush.

The departure may create an unprecedented third vacancy on the seven-member Fed Board of Governors this year as the central bank tries to ease the credit crisis. The vacancies mean that a new U.S. president to be inaugurated in January may have an opportunity to influence monetary and regulatory policy by nominating new members to the board.
…
Senate Banking Committee Chairman Christopher Dodd, a Democrat from Connecticut, has already delayed a confirmation vote for three board nominees for more than a year. After gaining support from the committee, the nominations would go to the full Senate for a vote of final approval.

Hey, who cares about the direction of the world’s most important Central Bank when when there are political games that can be played?

It’s not like the Fed doesn’t have a plateful of problems – JPMorgan is calling for US Inflation of over 5%

Not bad, with long treasuries at 4.6%, eh? Fisher is continuing his anti-inflation drum-beating:

Federal Reserve Bank of Dallas President Richard Fisher said he expects the central bank would raise the benchmark U.S. interest rate should the public begin to expect greater gains in consumer prices.

“If inflationary developments and, more important, inflation expectations continue to worsen, I would expect a change of course in monetary policy to occur sooner rather than later, even in the face of an anemic” economy, Fisher said today in the text of a speech in San Francisco.

Fed bank presidents, including Gary Stern of Minneapolis and Thomas Hoenig of Kansas City, have expressed growing concern this month about rising prices. Fisher, 59, is the only member of the Federal Open Market Committee to dissent three times from decisions to lower the overnight bank-lending rate, favoring either no change or less aggressive reduction.

There’s an interesting and rather heretical piece on VoxEU by Cournand and Heinemann titled Can Central Banks Talk too Much?:

Public information is a double-edged sword: it conveys valuable information, but it leads agents pursuing coordination to condition their actions on public announcements more than optimal. In this respect, Morris and Shin (2002) have shown that noisy public announcements may be detrimental to welfare. They conclude that central banks should commit to withholding relevant information or deliberately reduce its precision. This result has received a great deal of attention in the academic literature, in the financial press (see for example the Economist (2004)), and among central banks.
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Far from being perfect, all these means of communication allow the central bank to provide partially public information and avoid market overreactions to information of poor quality. To some extent, these means play a role in the actual policy of central banks already. Therefore, our results give a rationale for central banks releasing partially public information in addition to official publications. Our main result shows that these means of partial publicity should only be employed for announcements of low precision.

In other words … the bond market is excitable, so let’s just feed it pablum.

I don’t like the idea: it’s too big-brotherish. Much better would be the use of fan charts, as mentioned on January 18 with other methods of conveying the idea that such-and-such information is only a best guess. Excitable bond markets are great! A long term investor with half a brain can make good money out of them! Why should I – or any other PrefBlog reader – seek to prevent cowboys from losing all their clients’ money?

As reported by Bloomberg, S&P today downgraded a swath of Alt-A paper:

The classes affected by the negative rating actions represent an issuance amount of approximately $33.95 billion, or about 13.92% of the par amount of U.S. RMBS transactions backed by Alt-A mortgage loans rated by Standard & Poor’s in the first half of 2007.
…
Due to current market conditions,
we are assuming that it will take approximately 15 months to liquidate loans in foreclosure and approximately eight months to liquidate loans categorized as real estate owned (REO). In addition, we are assuming a loss severity of 34% for U.S. Alt-A RMBS transactions backed by fixed-rate and long-rest hybrid (fixed-rate period of at least five years) loan collateral issued in 2007. We are assuming a loss severity of 35% for transactions issued in 2007 that are backed by mortgage loans that have a negative amortization feature. We are also assuming a loss severity of 35% for transactions backed by adjustable-rate and short-rest hybrid loan collateral (fixed-rate period of less than five years).
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Monthly performance data reveal that delinquencies and foreclosures continue to accumulate for the 2007-vintage U.S. Alt-A RMBS transactions. As of the April 2008 distribution date, serious delinquencies (90-day, foreclosures, and REOs) among all U.S. Alt-A RMBS transactions issued during 2007 were 6.64%, up 64.76% since January 2008. During this same time, cumulative realized losses for 2007-vintage Alt-A deals increased to 0.08% from 0.02%.

The analysis performed during this review has allowed Standard & Poor’s to project losses for each of the three types of Alt-A transactions issued during the first half of 2007. We project aggregate lifetime losses of 8.15%-8.65% of the original balance for the transactions with negative amortizing collateral. We project aggregate lifetime losses of 6.40%-6.90% for the transactions backed by fixed-rate and long-reset hybrid collateral. Finally, we project
aggregate lifetime losses of 7.00%-7.50% for the transactions backed by adjustable-rate and short-rest hybrid collateral.
…
Unless we observe a significant change in the macroeconomic environment, Standard & Poor’s considers today’s actions, except for the CreditWatch placements, to be the last major changes to the ratings on the U.S. Alt-A RMBS classes issued during the first half of 2007.

Moody’s has released a report (available to subscribers only) regarding the CDS market. According to their press release:

“The notion that credit default swaps represent this $62 trillion long credit exposure is not an accurate depiction of the market nor particularly helpful to investors in determining where the true risks lie,” says Moody’s AVP/Analyst Alexander Yavorsky, one of the authors of the report, referring to the oft-cited figure for the notional amount of CDS contracts outstanding.
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Yavorsky says a more useful number when looking at the CDS market is the gross replacement value, of outstanding contracts, which at just over $2 trillion is under 3.5% of the notional amount.
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More concerning to Moody’s than an increase in underlying credit losses is the potential for market disruption through the failure of a major bank or broker-dealer.

If a large CDS counterparty failed, this would very likely have a substantial market-wide re-pricing effect on the cost of CDS protection, and, by extension, the underlying cash bonds. The effect of this would be especially problematic for firms needing to replace the CDS trades they had with the failed counterparty. Until the trades were replaced — an operationally challenging and unprecedented undertaking — the firms that lost protection would be left with unhedged exposures amid what is likely to be a very volatile market environment.
…
Moody’s also notes, however, that the systemic importance of the largest CDS dealers provides powerful incentives to regulators to prevent their disorderly failure, as demonstrated by the recent case of Bear Stearns. The more important the role played by an institution the more likely regulators will consider it to be too systemically important to fail.

The Canada Pension Plan released its 2008 Annual Report, showing a benchmark portfolio of 25% Canadian Equities, 40% Foreign Equities, 25% Fixed Income and 10% Canadian Real Return Bonds; benchmark performance for the year was -2.7% as foreign equities got hammered. They outperformed by 241bp; actual allocations – as reported – were 23.5% Canadian Equities, 39.2% Foreign Equities, 24.3% Fixed Income and 11.7% “Inflation Sensitive Assets”, which includes real-estate and infrastructure, not just RRBs.

So … it’s only one year and you’d have to do a whole lot more work before you took a view on their skill …. but it shows what you can do when you have a captive client and don’t have to worry about explaining the latest headline. For example:

As a result, in September, we committed a total of US$2 billion ($2 billion) in funds managed by Apollo Management and the Blackstone Group to begin to establish a diversified portfolio of senior secured loans that were available at significant discounts to face value, of which approximately US$667 million ($666 million) has been invested to date. The CPP Investment Board had both the liquidity and knowledge needed to prudently purchase this senior performing debt at discounted prices and we are confident that this investment will deliver superior long term risk-adjusted returns.

The second example is our investment in distressed mortgage funds to take advantage of heavily discounted prices following the credit crisis. During the fiscal year, we committed a total of $750 million to two distressed mortgage funds run by very experienced fund managers, Pacific Investment Management Company (PIMCO) and BlackRock, Inc. To date, approximately US$500 million ($513 million) has been invested.

It appears probable, therefore, that at least part of the CPP money was involved in the Hapaolim / PIMCO deal mentioned May 22 – which I suggested was a fantastic buy for PIMCO. You won’t find too many pension plans doing that sort of thing … first, it involved fund management hiring an external specialist (which, for most firms, involves sharing the fee) and second, everybody knows that all sub-prime securities are level-3 toxic trash that will go to zero soon, if not negative. It said so in the paper yesterday!

Volume was normal today, with no particularly violent price trends apparent.

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

Menzie Chinn of Econbrowser posted a good piece over the weekend, How Effective Will Monetary Easing Be? The Bank Lending Channel and the Implications of Increasingly Internationalized Banks, reviewing a paper presented at a recent Bundesbank conference:

The results of this paper are consistent with the view that while loosening of US monetary policy might induce greater lending overseas by branches of US banks, thereby tending to support rest-of-world economic activity, they also imply that negative shocks to the assets of US banks will also tend to reduce lending abroad. Hence, deleveraging by domestic banks has global (or at least rest-of-OECD) implications. That means both negative and positive shocks will be propagated abroad. In this sense, I think decoupling of the major developed economies is even less likely to occur.

It seems to me that this in turn will have some effect on currency rates, because whenever the banks deliberately mismatch their balance sheet in different currencies they are, for all intents and purposes, engaged in a carry trade.

It is my guess – as a non-specialist! – that these transactions would incur an additional capital charge equivalent to that of a long dated currency forward, according to the schedule given on page 73 (paragraph 92) of the OSFI Guidelines for Basel II … with the assumption that such loans would be unhedged. Hedging such transactions would largely reduce their point, as long-date FX trades at spot + government yield difference; therefore hedging would destroy the point.

The OSFI guidelines look reasonable to me … if my interpretation is correct … but I’d sure like to see some specialist discussion of the issue!

Every now and then I mention revolving-door regulation on this blog … like, f’rinstance, yesterday. I should emphasize that ill effects stemming from this can arise without anybody having any venal intent, as opined by Willem Buiter:

It is rather rare, I believe, in well-established parliamentary democracies, for the process through which power corrupts to be a direct and conscious one: “I have power. I control this license that you want; I can give you a tax break; I can make sure government procurement favours your company; I can acquit your useless son on manslaughter while DUI charges. Here is the number of my Swiss bank account. ”

It may happen, but more common and possibly more insidious and dangerous is the gradual transformation (I would say, distortion) of both the value system and the world-view or perception of reality that afflicts those elected or appointed to high office. This occurs through a gradual re-socialisation of those in power, which results in them gradually identifying with different peer groups and with different reference groups for benchmarking normal or acceptable behaviour.

A quiet day today on the preferred market, with no real trends evident.

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

Memorial Day in the US … very little interesting news!

The chatter regarding the SocGen / Kerviel fiasco continues:

“It validates what Jerome has said,” Guillaume Selnet, Kerviel’s defense lawyer, said yesterday in a telephone interview. “The only possible explanation is negligence, individual and systemic negligence.”

The full SocGen report is available via the SocGen Press Releases page. The report itself is illuminating. Essentially, their bookkeeping procedures did not produce exception reporting, or have adequate drill-down capability. Gross incompetence – an accident waiting to happen.

The report, while publicly available, has been encrypted to make extracts hard – I can only imagine they don’t want their various howlers discussed too readily! However, I’ll retype:

Furthermore, the Futures Back Office did not identify the significant frequency of cash complements paid in order to meet deposit requirements as such supervision is not within its mandate. Between January 1 and 18, 2008, in the absence of a sufficient quantity of bonds to cover an IMR requirement undergoing strong growth due to JK’s activities, the Futures Back Office paid a cash complement of over EUR 500 million on five occasions in order to meet deposit requirements, as opposed to one such payment made during 2007 (on March 13, 2007 for a total of EUR 699 million). In the absence of any supervision and of any alert threshold for cash amounts paid as deposits in the procedures in place at that time, Back Office failed to detect the substantial increase in cash payments made under IMR from January 2008 onward. Back Office in fact makes a global cash payment, including by currency and by clearer, other than the deposit paid in cash, margin calls, commissions and interest payments. The controls concern solely any discrepencies between the amounts claimed by the clearer and those calculated by the SG accounting system (GMI/clearer reconciliation). But it is not Back Office’s role to carry out checks on the consistency of the amounts concerned.

Finally, the detailed breakdown of the collateral re-invoicing by GOP, which should have allowed the abnormally high amounts to be identified, was not sent to JK’s direct heirarchal superiors. GOP 2A represented 10% on average of the re-invoicing of the securities deposit financing paid by GEDS to FIMAT Frankfurt since April 2007 (see Table no. 1). This re-invoicing is carried out on a monthly basis by the Securities treasury Middle Office on a pro rata basis in the form of an Excell spreadsheet to the GEDS/TRD manager only (who became GEDS manager on December 18, 2007), i.e. to JK’s L+5, a level which is too high for such data to be analyzed in detail. The DLP and DELTA ONE desk managers (JK’s L+1 and L+2 respectively), who could have identified this significant level of GOP 2A deposit expenditure, directly visible on such re-invoicing statement, were not recipients of this spreadsheet.

In other words, no accountability, no risk management, no brains at all. I’d say the onus is on senior management at this point to show that they should retain their jobs.

Michael J. Orlando, formerly of the Kansas City Fed, has written a piece for VoxEU: Let Form Follow Function: In Defense of Central Bank Independence. Somewhat cursory, but the basic assertion is sound:

Finally, recent events have demonstrated that the Fed may find it necessary to employ new and innovative approaches to target liquidity injections in times of crisis. For example, on December 12 the Fed established a new program to allow discount window borrowers to bid for additional liquidity extended for a fixed period of time. On March 11, the Fed established a program to lend U.S. Treasury securities against a pledge of other, presumably lower quality assets. And on March 16, the Fed initiated another new program to lend directly to primary dealers of government securities. Along with the Fed-arranged marriage between Bear Stearns and JPMorgan Chase, these programs merit continued debate and analysis. However, it is not obvious that the Fed’s ability to respond to this crisis in a timely and effective manner would be enhanced by more immediate legislative or executive oversight.

Willem Buiter disappoints me today with a rather breathtaking “therefore”:

Fundamentally, the key asymmetry is that the authorities are unable or unwilling, whether for good or bad reasons does not matter here, to let large leveraged financial institutions collapse. There is no matching inclination to expropriate or otherwise financially punish or restrain highly profitable financial institutions. This asymmetry has to be corrected. Therefore, any large leveraged financial institution, commercial bank, investment bank, hedge fund, private equity fund, SIV, Conduit or whatever it calls itself, whatever it does and whatever its legal form, will have to be regulated according to the same principles.

Dr. Buiter’s policy aim with this recommendation is, I’m afraid, not particularly clear to me. Additionally, I don’t see a lot of support for his premise that authorities are “unable or unwilling … to let large leveraged financial institutions collapse”. One may quibble over definitions, but I don’t think shareholders of Bear Stears are in 100% agreement with this assertion; neither are the beneficiaries of Carlyle’s leveraged mortgage fund or Amaranth – to name but two.

Protect the core, by all means! But to make all financial institutions as safe as the banks would be contrary to the ultimate public good.

Today’s BCE news (hat tip: Financial Webring Forum) is that the Supreme Court will move quickly on the BCE file:

Canada’s Supreme Court has agreed to speed up the process of deciding whether to hear BCE Inc.’s appeal of a lower court decision that threw the company’s $35-billion planned sale to a group of private-equity funds into doubt.

BCE had requested an expedited process to enable the company to try to stick to a plan to close the deal by June 30.

If leave to appeal is granted, the court said it will hear the case starting on June 17, with each side getting one hour for oral arguments.

Such excitement! There’s not just BCE news, but there’s Barry Critchley has asked a rather important question about the David Berry issue (emphasis added):

The current edition of Toronto Life has a major article on Berry that focuses on his time at Scotia — where he was the firm’s highest-paid employee — his $100-million lawsuit against his former employer and regulatory issues he is facing. Berry, his former associate Mark McQuillen and Scotia all faced allegations brought by Market Regulation Services: the latter two settled while Berry opted for a contested hearing.
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Berry said the settlement materials are relevant and necessary because RS’s Discipline Notices “explicitly states that proceedings in respect of Scotia’s supervision of Berry and McQuillen were not taken by RS.

There is no information, however, that addresses why Scotia was not held responsible for failing to supervise Berry under [UMIR].”

Berry added that “the agreed facts in the settlement agreement entered into between RS and Scotia do not refer to Scotia’s supervisory obligations, and the agreed sanctions represent a simple disgorgement of financial benefits obtained by Scotia through Berry’s trading.”
…
When RS and Scotia settled, RS’s Maureen Jensen said, “We are pleased that Scotia Capital recognized in this settlement that, even though supervision was not an issue, it would not be appropriate to retain profits generated by the wrongdoing of its employees.” Which raises the question: Did Scotia get a special deal from RS?

It should be noted that it’s not too long ago that the Globe was oohing and ahhing over the fat paycheques handed out to dealers’ compliance staff … and RS was very proud of its role as a training ground. Why is revolving-door regulation permitted?

My last major post on the Berry issue was with respect to the OSC decision. There was some more detail given on May 23. Kerviel … Berry … motivations, methods and results were very different. But the basic issue is the same: does management have any responsibility at all to design a risk management system, use it and take responsibility for it? Or is it just there as an after-the-fact ass-covering and blame-casting device?

The market drifted slightly upwards today on light-ish volume.

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

A trader at Merrill in London has been naughty, apparently overpricing his inventory by something less USD 20-million. It’s bad news for him, it’s bad news for his supervisor and it’s not all that great for Merrill … but it wouldn’t be news if everybody wasn’t so nervous! Unless more cockroaches scuttle out from under that fridge, I’m inclined to accept their official position:

“The firm routinely reviews the marks our traders set,” Merrill spokesman Jezz Farr said today in an e-mailed statement. “Our preliminary review determined that one desk used marks that appear to be outside of our accepted policy. We have suspended a trader and we continue to review this matter.”
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“This case shows our oversight system works,” Farr said in the statement, referring to the firm’s detection of the suspended trader’s conduct.

As noted by Calculated Risk, US mortgage delinquencies are rising. I haven’t seen anything yet about whether these increases are sufficiently severe and unexpected to affect credit.

I have made some observations on one of the papers referenced in the Bank of Canada Review : Spring 2008 … you can chase it down through that post.

As noted in a Bloomberg story, the FASB has announced that it:

today issued FASB Statement No. 163, Accounting for Financial Guarantee Insurance Contracts. The new standard clarifies how FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises, applies to financial guarantee insurance contracts issued by insurance enterprises, including the recognition and measurement of premium revenue and claim liabilities.
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Statement 163 requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. It also requires disclosure about (a) the risk-management activities used by an insurance enterprise to evaluate credit deterioration in its insured financial obligations and (b) the insurance enterprise’s surveillance or watch list.

To my mind, the critical paragraphs in the statement are:

25. Expected net cash outflows (cash outflows, net of potential recoveries, expected to be paid to the holder of the insured financial obligation, excluding reinsurance) are probability-weighted cash flows that reflect the likelihood of all possible outcomes. For purposes of this Statement, the expected net cash outflows shall be developed using the insurance enterprise’s own assumptions about the likelihood of all possible outcomes based on all information available to the insurance enterprise (including relevant market information). Those assumptions shall consider all relevant facts and circumstances and, where applicable, be consistent with the information tracked and monitored through the insurance enterprise’s risk-management activities and used to assist in making operational decisions.
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29. An insurance enterprise shall disclose information that enables users of its financial statements to understand the factors affecting the present and future recognition and measurement of financial guarantee insurance contracts.

It is interesting to consider this change in terms of the Fitch / MBIA battle reported briefly on PrefBlog on March 24, with much better discussion available from Floyd Norris’ NYT blogs If you don’t like your grade, fire the teacher and Jay Brown Keeps Fighting.

FASB Statement 163 seems like a step in the right direction, but whether there will be enough information made available that investors can rationally check the credit ratings is something I have not – yet – seen discussed.

Vallejo has filed for bankruptcy as indicated on May 7. According to Markit 10-Year MCDX closed at 49bp today, essentially unchanged from its opening levels.

And in quite possibly the most astonishing news to hit the street since the last bulletin that the sun rose in the east this morning, SocGen management winked at Kerviel’s trading positions:

Jerome Kerviel was able to amass 50 billion euros ($78.7 billion) in unauthorized futures positions at Societe Generale SA because of fragmented internal controls, a report commissioned by the bank said today.

Kerviel’s supervisors failed to “react in an appropriate manner to several alert signals” and missed at least 1,071 bogus trades, a special committee of the bank’s board found. Unwinding those positions cost a record 4.9 billion euros, the biggest trading loss in banking history.

His supervisors missed the level of his gains, cash flows, brokerage expenses and overlooked warnings from Eurex AG, Europe’s biggest futures exchange, the report said.
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Kerviel’s manager “tolerated” bets on the direction of index futures and certain equities that were unjustified by his “assignment and level of seniority,” the document said. As a trader on the bank’s “Delta One” desk, his job was to use large volumes to arbitrage small price differences between equity index futures and forwards.
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In the first three months of 2007, when most of Kerviel’s “massive fraudulent and concealed positions on index futures” were built up, he had no direct supervisor, the report said. His new manager “did not carry out any detailed analysis of the earnings generated by his traders” and received insufficient support from the head of the Delta One desk, the committee found.

Eric Cordelle, who wasn’t identified in the report, was brought in as Kerviel’s direct supervisor in April 2007.

I am unable to determine whether Eric Cordelle went to a good school, or if he’s just another disposable barrow-boy.

The Globe has some more detail:

The internal report, the second published by SocGen into the debacle, said the unidentified assistant had manually entered a large number of fraudulent transactions done by Mr. Kerviel.

It said the assistant registered “several abnormally high intra-monthly provision flows, without having obtained any valid explanations as to their validity.”

It added that the assistant had registered a total of almost 15 per cent of Mr. Kerviel’s fictitious trades.

Thus, they have grounds to pin a big chunk of the blame on a $30,000 p.a. trading assistant … and from the sounds of SocGen’s operation, it wouldn’t surprise me if traders had license to bully the trading clerks. If I remember correctly, that was part of the explanation at RT Capital.

Update, 2008-5-24: Kerviel’s lawyer had a great comment reported in today’s Globe:

“We notice that while protecting the superiors of Jerome Kerviel, the Société Générale has found a new scapegoat – who just happens to be a 23-year-old assistant,” said Guillaume Selnet, a lawyer for Mr. Kerviel.

He noted that the directors’ report was prepared by the bank’s own services and insisted that SocGen’s version of events keeps changing.

“My feeling is that – we are now on the second report – by the third report it’s going to be the fault of the cleaning ladies,” he added.

* end update.

I will say, however, that SocGen’s new-found frankness is refreshing compared with Scotia’s in the David Berry affair. The OSC has released its reasons for the David Berry decision. Of particular interest is the summary of Berry’s “Scotia Defence”, paragraphs 25-31. Those contemplating a career with a bank are urged to remember that:

• All your actions will be recorded in minute detail
• The bank may, or may not, review these actions
• If the bank needs a scapegoat – or wishes to win a contract dispute – it will find something in the records to hang you with

Preferreds had a good solid day, on what passes in these lackadaisical times for average volume.

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

Accrued Interest has a good piece today, elaborating his thoughts on the GSEs (which he insists on spelling with an apostrophe).

Did Freddie Mac move their ABS portfolio into Level 3 because they didn’t like the bid indications they were using for valuation? The company says no.
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Buddy Piszel, CFO: We made a determination in the first quarter, that given how widely the pricing we were getting on the ABS portfolio, that it no longer made sense to leave that in Level 2…. We were still using the mean price that we were getting from the pricing services and the dealers. So we are not using a model price
…
So if you believe what he’s saying, that means that the actual valuation would be the same either way. By moving to Level 3, they are saying they no longer believe the valuations represent “observable inputs.”

It seems clear that The Financial Accounting Standards Board is feeling some heat about Level 3, the so-called “Mark to Make-Believe” level of financial assets. They have published an article rather desperately titled Some Facts about Fair Value:

Like the many other estimates used in financial reporting (some of which require complex calculations), Level 3 estimates can be difficult and require the use of significant judgments. However, many investors clearly have indicated that such estimates provide more relevant and useful information than alternatives that ignore current economic conditions and that can introduce management bias into the estimation process (for example, alternatives that involve “smoothing” techniques and predicting recoveries in value).

To increase investor awareness about Level 3 estimates, SFAS 157 requires expanded disclosures about the Level 3 estimates used for financial assets and liabilities that are reported at fair value on an ongoing basis. Those disclosures focus on the effect of the estimates on reported earnings and financial position. More recently, the staff of the Securities and Exchange Commission issued a letter that encourages public companies to provide additional disclosures about the Level 3 estimates used for financial assets (including asset-backed securities, loans, and derivatives) in their Management Discussion & Analysis. The letter does not, as some have asserted, interpret, amend, or otherwise change the application of SFAS 157.

The SEC letter referred to has been published in generic form by the SEC:

Depending on your circumstances, the following disclosure and discussion points may be relevant as you prepare your MD&A:
…

• The amount and reason for any material increase or decrease in Level 3 assets and liabilities resulting from your transfer of assets and liabilities from, or into, Level 1 or Level 2.
• If you transferred a material amount of assets or liabilities into Level 3 during the period, a discussion of:
  • the significant inputs that you no longer consider to be observable; and
  • any material gain or loss you recognized on those assets or liabilities during the period, and, to the extent you exclude that amount from the realized/unrealized gains (losses) line item in the Level 3 reconciliation, the amount you excluded.

It was Bloomberg that first – I think – broke the story about $157-billion in Level 3 assets, and an example of the kind of comments it has attracted is:

Freddie told investors right to their faces, “We manipulated the numbers,” and investors applauded like a bunch of idiots, pushing Freddie Mac shares up more than 9%. I wish this was the end to the tragic comedy, but Freddie’s conference call was even more ridiculous.
…
And Freddie Mac just moved its entire Asset-Backed Security [ABS] portfolio to Level 3.

As a result, its Level 3 assets ballooned from $39 billion to over $157 billion in the first quarter. Its reasoning? The pricing the market was giving these securities varied too much. In other words, when the market was responsible for figuring out how much these assets were worth, the price fluctuated dramatically, providing the potential for major losses. So Freddie moved these assets to Level 3, where the market no longer has any say in their value. It’s yet another nail hammered into the coffin of what was supposed to be a capitalist free market.

The author is a newsletter writer, not (so far as I can tell) a portfolio manager.

The “smoking gun” in the financials is note 3, page 13 of Financial Statements and Core Tables:

At March 31, 2008, our fair value results were impacted by several changes in our approach for estimating the fair value of certain financial instruments, primarily related to our valuation of our guarantee obligation as a result of our adoption of SFAS 157 on January 1, 2008. These changes resulted in a net increase in the fair value of total net assets of approximately $4.6 billion (after tax).

See update below for more Freddie

Anyway … one man’s pain is another man’s gain! I mentioned the UBS Close-Out Special at about 68 cents on the dollar yesterday … today, Naked Capitalism observes that Bank Hapoalim has done the same:

the second largest bank in Israel, sold its entire portfolio of MBS to Pimco for 75 cents on an already-written-dollar (or in this case, shekel). Note that the previous writedowns were at least $90 million on an portfolio valued before the sale at $3.42 billion.

And the war between the Credit Analysis Department and the Market Price Department continues:

Based on the model supplied by the company, the Bank applied an even more severe scenario in which housing prices in the USA (excluding California and Florida) fell by about 30% from their peak (by 22% when compared with the present price level) and in California and Florida by about 40% from their peak (by 28% when compared with the present price level). Given such an severe scenario and assuming that the rate of default by mortgage takers will be about 47%, the accumulated loss from the portfolio is liable to reach about 340 million US Dollars over the life span of the securities.

The loss on sale was $870-million. I said it about Blackrock … I’ll say it about PIMCO … they’re going to make out like bandits. These well-publicized moves into the asset class by “real money” accounts bode well for normalization of the credit markets – although I will admit that Hapaolim’s 3.5-billion portfolio is a small part of the 1,400-billion problem.

Those who take my encouraging words about normalization as being the ravings of a Pollyanna are reminded that “normal” does not mean “good”. Spreads are still elevated and credit is still relatively scarce … and corporate defaults are rising. By “normalizing”, I mean that the chances of apocalyptic financial meltdown are declining, that’s all.

But real money is big-time sub-prime:

Gross, 64, anticipated the collapse of the U.S. housing market and the Fed’s subsequent interest-rate cuts. He shunned riskier corporate debt in 2006, a call that caused his fund to lag behind peers. Gross’s $128 billion Total Return Fund slipped as much as 4 percent in the first half of 2006.

The decision to sidestep subprime-linked debt has helped the fund surge 12 percent in the past year to beat 95 percent of its rivals, according to data compiled by Bloomberg.

Earlier this year, Gross started piling back into mortgage bonds to take advantage of slumping prices. In April, he lifted his holdings in mortgage-related debt to the highest since 2000, and lowered his stakes in U.S. Treasuries after calling them “overvalued.”

As of April 30, Gross’s Total Return Fund held 65 percent in mortgage debt, according to data posted on the firm’s Web site. The fund also holds 6 percent of assets in emerging-market debt. This year, Gross’s Total Return Fund has returned 4.1 percent, beating 94 percent of peers, Bloomberg data show.

As expected after the court ruling on BCE / Teachers’, BCE stock got slaughtered today, while Credit Default Swaps came in to 315bp from 595bp. Now, that’s a move! It appears that frenetic trading (over 26-million shares) gave the new Quantum trading system a work-out … BCE was halted in the mid-afternoon … a glitch this morning caused many issues (including CPD) to be temporarily halted. Finally, the TSX announced:

TSX Group has determined the root cause of a service disruption that affected trading on 37 of the more than 2100 issues trading on Toronto Stock Exchange.

The interruption was caused by a trading message protocol issue with one invalid message, and was entirely unrelated to TSX Quantum performance or capacity.

Corrective measures have been implemented.

Shares of BCE Inc. were halted at 2:14 p.m. to address data integrity concerns.

TSX expects trading in shares of BCE Inc. to open as usual tomorrow morning.

Not a lot of detail there, but there never is. It strikes me that if the system was compromised by a single “trading message protocol issue with one invalid message”, then Quantum probably needs a better input editor to prevent these data issues from fouling up the internal engine … but there isn’t enough information to make that conclusion firm.

There’s a bit more colour on BCE / Teachers’ … Bloomberg reports that a failure would help unwind the LBO crisis:

The potential cancellation of BCE Inc.’s C$52 billion ($52.9 billion) leveraged buyout may help loan prices recover by removing the largest portion of high- yield, high-risk debt banks need to sell from last year’s deals.

“If BCE is canceled it reduces the amount of debt on bank balance sheets substantially,” Chris Taggert, an analyst at fixed income research firm CreditSights Inc. in New York said in a telephone interview. “It’s the largest piece of the pipeline out there and would be a boost to the market.”

Loan prices have climbed as banks this year found a way to reduce their pipeline of loans promised last year to private- equity firms to $81.6 billion from $156 billion, according to Standard & Poor’s. Loans backing the acquisition of Montreal- based BCE, Canada’s biggest telephone company, comprise $16.8 billion, or 20.6 percent of the backlog.

Prices are up to an average 91.86 cents on the dollar, from a record low of 86.3 cents in February, according to S&P. Private-equity firms including Blackstone Group LP and Apollo Management LP have bought loans from banks, and the risk of financial institutions failing has subsided.
…
“This is good news for” Toronto-Dominion, Desjardins Securities analyst Michael Goldberg wrote in a note to investors today. “A new deal or no deal would mean that TD would not experience losses on the syndication of its financing.”

The bank has probably marked down its BCE financing commitment by about C$150 million, mostly in the past two quarters, Goldberg said. The bank has said it agreed to finance about 10 percent of the equity portion of the BCE purchase, or about C$3.3 billion.

The excitement of the day was BCE, but the enormous price moves occurred on small volume. Apart from this name, the market was off slightly – not a lot, but enough to notice – on average volume.

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

Update: The specific disclosure of the move to level 3 is in the Supplement:

At March 31, 2008, we measured and recorded on a recurring basis $156.8 billion, or approximately 23% of total assets, at fair value using significant unobservable inputs (Level 3), before the impact of counterparty and cash collateral netting across the levels of the fair value hierarchy. Our Level 3 assets consist of non-agency residential mortgage-related securities and our guarantee asset. We also measured and recorded on a recurring basis $113 million, or less than 1% of total liabilities, at fair value using significant unobservable inputs, before the impact of counterparty and cash collateral netting across the levels of the fair value hierarchy. Our Level 3 liabilities consist of derivative liabilities, net.

During the first quarter of 2008, our Level 3 assets increased because the market for non-agency mortgage-related securities became less liquid, resulting in lower transaction volumes, wider credit spreads and less transparent pricing for these assets. In addition, we have observed more variability in the quotations received from dealers and third-party pricing services. Consequently, we transferred $153.8 billion of Level 2 assets to Level 3 during the first quarter of 2008. These transfers were primarily within non-agency mortgage-related securities backed by subprime and Alt-A mortgage loans where inputs that are significant to their valuation became limited or unavailable. We concluded that the prices on these securities received from pricing services and dealers were reflective of significant unobservable inputs. We recorded $11.2 billion in additional losses primarily in AOCI on these transferred assets during the first quarter of 2008, which were included in our Level 3 reconciliation. See “NOTE 14: FAIR VALUE DISCLOSURES— Table 14.2 —Fair Value Measurements of Assets and Liabilities Using Significant Unobservable Inputs” to our consolidated financial statements for the Level 3 reconciliation. For discussion of types and characteristics of mortgage loans underlying our mortgage-related securities, see “CREDIT RISKS” and “CONSOLIDATED BALANCE SHEETS ANALYSIS—Table 15 —Characteristics of Mortgage Loans and Mortgage-Related Securities in our Retained Portfolio.”

Update, 2008-5-23: Split-Share Performance, 2008-5-23

The big news today is a Moody’s methodological scandal:

Moody’s Investors Service said it’s conducting “a thorough review” of whether a computer error was responsible for assigning Aaa ratings to debt securities that later fell in value.

Some senior staff at Moody’s were aware in early 2007 that constant proportion debt obligations, funds that used borrowed money to bet on credit-default swaps, should have been ranked four levels lower, the Financial Times said, citing internal Moody’s documents. Moody’s altered some assumptions to avoid having to assign lower grades after it corrected the error, the paper said.

Naked Capitalism is ecstatic. Publication of the official release from Moody’s was delayed, but it there … albeit scooped by FT Alphaville.

Heads will roll. And quite rightly.

An Accrued Interest post on Freddie Mac was referred to yesterday. For those interested-but-not-all-that-much in the issue, Jonathan Weill reviews the accounting issues.

On the sub-prime front there is (via FT Alphavill) that UBS is having a close-out special on some sub-prime

UBS sold positions with a nominal value of approximately USD $22 billion to the new fund for an aggregate sale price of approximately USD $15 billion. Based on UBS categorizations, the vast majority of the positions are Subprime and Alt-A in roughly equal parts and the remainder is Prime. The fund purchased the securities using approximately USD $3.75 billion in equity raised by BlackRock from investors and a multi-year collateralized term loan of approximately USD $11.25 billion provided by UBS.

UBS is notorious for having an assets-to-capital multiple that was way off the charts. But, holy smokey! Sixty-Eight cents on the dollar? Since UBS is the seller, we may assume that the great bulk of it, if not all, is AAA tranches … and even Greenlaw forecast a mere 18.9% average loss. I think the Blackrock guys – and their investors – are going to make out like bandits on this.

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

Sorry folks! Today was boring on the news front AND I was busy, so there’s no macro-level commentary. Accrued Interest wrote a good piece on How Safe are the GSEs?.

Strength in the Floating Rate sector continues to astound; they’re really coming back a lot from their extreme depths. I don’t think it has anything to do with the credit, because the BAM perpetuals are still bumping along without any huge gains. PerpetualDiscounts are doing well, but this is simply in line with long corporates, which have returned +1.44% in the month to 5/20.

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

Not much today, folks!

Naked Capitalism republishes some of a piece by Gillian Tett of the Financial Times regarding the advisability of managers talking to each other; her recommendations echo those of the International Report on Risk Management Supervision and provide a little bit of psychological colour.

Iceland is in trouble! Their Central Bank has had to borrow EUR 1.5-billion to prop up the currency:

The krona has dropped as much as 26 percent against the euro this year on concern Iceland’s commercial banks have taken on too much foreign debt, prompting speculation the central bank may have to step in.

The offer of aid from neighbors “will help stabilize the financial markets, but not the basic imbalances of the Icelandic economy,” said Lars Christensen, senior emerging markets strategist at Danske Bank A/S in Copenhagen.
…
The country’s three biggest banks have combined assets of 11.4 trillion kronur, or nine times the size of the economy. At the biggest lender, Kaupthing Bank Hf, foreign currency holdings make up 87 percent of assets.

Meanwhile, the lines between “private equity funds” and “vulture funds” seem to be getting a little blurred:

McGoldrick, 49, was co-head of the Goldman group that buys corporate debt that is near default, lends to financially struggling businesses and trades shares of companies emerging from bankruptcy. His new firm, Mount Kellett Capital Management LP, will do transactions around the globe, said the people, who asked not to be identified because the venture is private.

Private-equity firms raised $163.5 billion in the first three months of 2008, the second-biggest quarter since London- based Private Equity Intelligence Ltd. started tracking the data in 2003. The money is coming from pension funds, endowments and sovereign wealth funds even as a shortage of credit has stopped most deal-making.

“There’s an appetite for serious distressed investors and he has a track record of having done a good job on those deals, so there will be some receptivity,” said Steven Kaplan, a finance professor at the University of Chicago’s business school.

“Private Equity” has a much nicer ring to it, doesn’t it?

Bloomberg has a good piece on the collapse of the Auction Rate Securities Markets. Amusingly – in a sick sort of way – is that the front-page link is “Auction-Rate Market Loses $1.7 Billion for Taxpayers Misled by Governments”, while the actual story headline is “Auction-Rate Collapse Costs Taxpayers $1.65 Billion”. There’s nothing that I can see in the story that would justify a charge that taxpayers were misled by governments … but in these days of heroic investor advocacy, it’s very fashionable to claim that anything not to one’s liking is unethical.

The story suggests:

Many issuers are getting out of auction-rate debt and say they will never use it again. State and local governments have already replaced or announced plans to replace at least $66 billion of the securities, according to Bloomberg data. Many are switching to variable-rate demand bonds, whose 2.25 percent average in the past month is about half the 4.56 percent for auction-rate bonds. Others are stuck, unable to issue new debt. Some investment banks, including Citigroup, say the market will never come back.

“It’s a damaged product, and I can’t imagine issuers using it again,” said Wisconsin’s Hoadley. “A lot of people will have to die and institutional memory go away before people will come back to it.”
…
Gallatin, the father of auction-rate securities, doesn’t hold out much hope. He expects auction-rate bonds will be replaced by other debt because too many investors and issuers lack confidence.

“The back of the market is broken,” he said. “I think the market’s problem started with credit, but now credit isn’t the problem.”

Who knows? The doomsayers may well be right, and I must be very cautious when questioning Citigroup’s opinion regarding what they can sell … but it seems to me that the market could be resurrected in the same manner as Canadian (Bank Sponsored) ABCP … slap a global liquidity guarantee on the stuff and away you go! In other words, Citigroup could underwrite such an issue, with a guarantee that it will put in a permanent bid for the entire issue at, say BAs + 500 (guaranteeing a fixed rate for 40 years might be a little dicey!).

Again, who knows? Let’s wait for things to calm down and revisit the issue in, say, five years. The basic issuers’ Holy Grail of financing long term assets at short term rates, and the basic investors’ Holy Grail of getting an extra 20bp on pretend-short-term paper will never go out of style!

The drive to get authority for the Fed to pay interest on reserve balances (discussed on May 7 and April 29) continues with Bernanke writing Pelosi:

Federal Reserve Chairman Ben S. Bernanke asked Congress to immediately give the central bank authority to pay interest on commercial-bank reserves, according to a letter from the Fed chief to House Speaker Nancy Pelosi.

“Congress recognized that payment of interest on reserves would contribute to the efficiency of the financial system,” Bernanke, 54, said in a letter sent to Pelosi, a California Democrat. The central bank isn’t authorized by Congress to begin making such payments until October 2011.

“We recommend that the date be changed to make the legislation effective immediately,” Bernanke wrote in a letter dated May 13.

Performance was again nicely positive today, but volume was awful.

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

I’m becoming more and more convinced that the Credit Crunch has evolved from its fundamental role as Reducer of Excesses to a new position as Political Football.

My thoughts on this are influenced by many things. For instance, compare the sub-prime credit loss estimates of the Bank of England with those of the IMF. These estimates are, as has been noted, not just wildly at variance with each other, but prepared without even taking note of each other. For all my respect for these two institutions, this smacks of intellectual dishonesty – and in my book, there is no greater crime.

Quite frankly, I believe the methodology of the IMF report (which leaned heavily on the paper by Greenlaw et al.) to be deeply flawed; and not just deeply flawed but deliberately skewed. So why would the IMF adopt it? They have a lot of smart people on staff; I won’t be the only person in the world to have noticed the dicey bits; why was this methodology used holus-bolus instead of simply providing the top end of a range of estimates?

My hypothesis is that it’s simply politics. The two basic factions in the investment world are those who want lots of regulation to save us from the evil Bonfire of the Vanities and those who feel that over-regulation is simply promoting inefficiency of the capital markets. These opposing forces are not comprised exclusively of idealogically pure crusaders, either! In Canada, for instance, the banks can be counted upon to promote wise regulation, not too much, not too little …. as long as whatever happens favours capital markets players who have deep, deep pockets.

There will be members of both factions on staff at the IMF, and at any regulatory group or ultimately responsibile government. Sometimes you win, sometimes you lose, in general things proceed in an ultimately half-way reasonable manner, albeit with one step back for each two steps forward. Forecasting the effects of regulation is no easier than forecasting markets … and at least when you attempt to forecast the market you have a pretty good idea of your ultimate objective!

The hard-liners in either faction are never satisfied, however – and the more cynical players, taking whatever position best serves their business will always be looking for more. Thus, every development in the capital markets is carefully examined to determine its value as a weapon in the struggle.

Canadian ABCP? It’s been used to justify a call for higher pay for regulators, to justify calls for the OSFI to expand its mandate to ensure nobody ever loses money on anything and to justify a federal regulator. The Bank of Canada has brought forth some rules to ensure that the banks never again have to worry about competition in the ABCP market from snot-nosed small corporation scum.

And so it is with Bear Stearns. I wrote about the Econbrowser post yesterday. The Econbrowser piece wanted Bernanke (i.e., the Fed) to Do Something about leverage in the brokerage industry … which is not the Fed’s purview at all, it’s in the SEC’s bailiwick. There was a note from Dave Altig of the Atlanta Fed in the Econbrowser comments, drawing attention to the Fed’s preventative measures … and still, not a word about the SEC. You can find inumerable instances of hand-wringing on the web, bewailing the fact that the Fed is (sort-of) forced to backstop a system over which it has no direct supervisory function – although, as I have pointed out, separation of lending/monetary functions and bank supervision functions are more standard throughout the world than otherwise.

The more I think about it, the more convinced I am that most of the discussion of Bear Stearns has absolutely nothing to do with a genuine desire for better regulation (you want more margin and less leverage? OK, how much more margin and how much less leverage? Let’s discuss it!) and a lot more to do with a desire to change the identities of the regulators. It’s a world-wide bureaucratic turf fight; the credit crunch, sub-prime and Bear Stearns are merely the latest weapons of convenience.

For the record, my position at the moment is that supervisory responsibility for the brokerage sector should remain with the SEC. Assiduous Readers will by now be sick and tired of reading this, but I believe the brokerages should represent a riskier and less constrained layer surrounding a banking core in the financial system. If the Central Bank has supervisory functions, there will be both a higher degree of expectation of emergency assistance in times of stress and a higher probability as well, since staff at the Central Bank – however upright and angelic their characters – will be somewhat more inclined to double-down with assistance from the discount window than to admit a possible failure of regulation and let an insolvent firm go bankrupt.

I might work this up into a formal article at some point. Remember, you read it on PrefBlog first!

As remarked by Accrued Interest, now that reports are increasing that the credit crunch is over and companies might actually be able to pay back some money, there are also growing concerns that the money we get might not be worth very much:

Bernanke and San Francisco Fed President Janet Yellen, in separate speeches yesterday, said markets remain “far from normal” after some improvement since March. Yellen, Cleveland Fed President Sandra Pianalto, Kansas City Fed President Thomas Hoenig and the Dallas Fed’s Richard Fisher said they’re concerned about rising prices.
…
Yellen, 61, who doesn’t vote on rates this year, also said she anticipates consumer prices will moderate as the labor market weakens and “commodity prices level off.”

The Fed can’t be “complacent about inflation,” she told the CFA Institute Annual Conference. Recent measures of price expectations “highlight the risk that our attempts to deal with problems in the real economy could lead to higher inflation expectations and an erosion of our credibility,” she said.

Fisher, speaking in Midland, Texas, said the U.S. may be in for a “prolonged” period of slow growth, which may end with faster-than-desirable inflation.

“How deep that slowdown will be is a question mark,” said Fisher, who voted against the last three rate cuts. “I am not sure it will be very deep at all, but it may be prolonged, because we have to correct the excesses of this credit crisis.”

Naked Capitalism notes a post by Willem Buiter, who burnishes his monetarist credentials:

In a fiat money world, central banks cause inflation, or, more precisely, only central banks are resposible for inflation. Other shocks, real and nominal, can influence the general price level if the central bank does not respond swiftly and determinedly, but these non-central bank-induced changes in the general price level can always be offset by the central bank, given enough time, freedom to act and courage.

But, in the medium and long term (at horizons of two years and over, say) central banks choose the average rate of inflation. Not globalisation; not indirect taxes; not bad harvests; not OPEC and the price of oil; not the Chinese and their exchange rate management. There is no oil inflation, food inflation or cost-push inflation. There is just inflation. Inflation may be accompanied by changes in key relative prices – in the real prices of oil, of food, of oil and of labour for instance – if other relative demand and supply shocks accompany the inflationary impulses created by the central bank. Large increases in the real price of food will be bad news to food importers (including most urban households) and good news to rural food producers and exporters. But don’t confuse it with inflation.

In the petty annoyances department, Andrew Willis discusses the Sprott IPO:

Brokers are using the “anonymous” function on the TSX to do much of their selling, with 1.5 million shares sold this way. Disguising orders by not disclosing the name of the brokerage house doing the transaction fits that segment of the hedge fund and dealer crowd that prefers to be discreet. Dealers are sensitive to the issue of flipping an IPO from a money manager who also counts as a major trading client.

Does Mr. Willis know or care that it would be grossly unethical for Sprott to allow annoyance with IPO selling to influence – in any way – its trading with client money?

From Prefblog’s Out-of-time-here’s-the-links Department:

• What we know and what we would like to know about Central Bank communication
• Fed’s Direct Loans to Banks Climb to Record Level
• Bernanke Urges ‘Hunkering’ Banks to Raise Capital

Floaters finally had a bad day … they are now up a mere 8.26% on the month.

BNS issues did well:

In general, volume dropped off a little, but it was a very strong day.

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