Category: Market Action

There’s a story in Vanity Fair about the Bear Stearns collapse – good reading! All fluff, of course, but entertaining fluff.

Today’s factoid is the claim that US Financials have just experienced an 11-standard-deviation price move. But don’t tell Merrill!

Speaking of multiple standard deviation events … PerpetualDiscounts didn’t lose money today! The last up-day was June 24; since then, there were sixteen consecutive down days, in the course of which PerpetualDiscounts lost 8.85% of their value, with the weighted-mean dividend yield increasing from 6.01% to 6.63%. I hope that’s some kind of record … all this pain has to be worth something! We shall now wait with bated breath to see whether today’s return represents a turning of the tide or a dead cat bounce.

After the bounce, PerpetualDiscounts yield 6.56%, equivalent to 9.18% interest after the 1.4x conversion factor. Long corporates ticked up to about 6.18%, so the Pre-Tax Interest Equivalent Spread is now about 300bp.

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

James Hamilton of Econbrowser asks Did Fannie and Freddie Cause the Mortgage Crisis, reviewing an op-ed piece by Paul Krugman. Krugman states of the implicit guarantee of the GSE debt:

This implicit guarantee means that profits are privatized but losses are socialized. If Fannie and Freddie do well, their stockholders reap the benefits, but if things go badly, Washington picks up the tab. Heads they win, tails we lose.

This is certainly true to some extent, but more analysis is needed. What have Fannie & Freddie’s Return on Equity been, relative to “real banks”? To the extent that this ROE has exceeded the ROE on real banks, the profits have been privatized to the benefit of the common equity holders. And, importantly, to the extent that mortgage rates have been reduced – and all the other bells and whistles (reviewed on May 7, referencing Crony Capitalism) thrown in – the profits have been privatized to the benefit of the mortgage-borrowing public.

The distinction is important if for no other reason than, for better or worse, privatizing the profits to the mortgage-borrowing public was precisely the public policy purpose behind the GSE legislation. Which is not to say I agree with this purpose, mind you, but if we’re going to identify villains, let’s at least identify them correctly.

As pointed out Calculated Risk and by Michael Carliner, a large portion of the blame for excessively loose lending can be ascribed to a fight for market share between the GSEs and private lenders.

This, to me, looks like a natural consequence of reducing the risk premium on qualifying mortgages. There will always be investors who wish to outperform by taking risks – this may be a well-thought out strategy, or … er … otherwise. The risk premium on GSE mortgage-backeds has been much smaller than it should be:

“If the agencies’ debt and mortgage-backed securities (MBS) were priced based on their stand-alone financials, the paper would pay more than 100bp, rather than around 20bp over Treasuries,” [UC Berkeley finance professer Dwight] Jaffee says. So Fannie and Freddie have access to a more favourable funding on the back of a de facto credit guarantee.

Mind you, “risk premium” is an imprecise term. Credit risk? Liquidity risk? Prepayment risk? Ignoring such bond-geek adjustments, there is widespread agreement that agency MBS traded to yield a lot less than they would have had they been issued by normal corporations – but that was the whole point of the GSEs in the first place.

The miniscule risk premia available in normal corporate debt in the early part of this decade created an appetite for higher risk debt. The artificial lowering of the risk premia on agency MBS was a large factor in guiding this appetite towards riskier mortgages.

For my part, I have two questions for those who take the position that the GSEs played no significant role in causing our current mortgage problems. First, what economic justification is there for the dramatic increase in the share of loans guaranteed or held by the GSEs between 1980 and 2003 that is seen in the first graph presented above? What sense did it make to increase the ratio of such loans to GDP by a factor of 12 over this period?

Second, what forces caused the explosion of private participation in a much more reckless replication of the GSE game? A year ago, I suggested one possible answer– private institutions reasoned that, because the GSEs had developed such a huge stake in real estate prices, and because they were surely too big to fail, the Federal Reserve would be forced to adopt a sufficiently inflationary policy so as to keep the GSEs solvent, which would ensure that the historical assumptions about real estate prices and default rates on which the models used to price these instruments were based would not prove to be too far off.

Is that the answer to the second question? I’m not sure. But if anybody has a better answer, I’d still like to hear it.

Well, I can’t answer the first question! I’ll just rather pedantically point out that there is an implicit assumption that 1980 was “right” and 2003 was “wrong” … probably a pretty safe assumption, but an assumption nevertheless. Either way, it can be fairly safely ascribed to the deliberate policy decision taken by the US Govt. when creating the GSEs – guarantee or no guarantee, they are subject to much less stringent capital rules than are commercial banks. At the very least, the ability to offer a steady series of MBS in size will reduce the liquidity premium on their issues.

Prof. Hamilton’s suggested answer to his second question strikes me as too clever. I will simply suggest that subPrime paper should – after structuring – trade at a reasonable spread to prime paper. When the risk premia on prime paper is artificially reduced, the premia on sub-prime paper will be reduced likewise – despite the fact that the sub-prime paper has no guarantee, implicit or explicit. And when there is sufficient demand for spread paper … it gets met!

Wells Fargo reported non-apocalyptic earnings, sparking a huge rally in US Financials:

U.S. stocks rallied after higher- than-estimated profit at Wells Fargo & Co. sparked the biggest- ever gain in financial shares and a two-day tumble in oil prices brightened the outlook for transportation companies.

Wells Fargo, which avoided the worst of the fallout from the subprime mortgage market’s collapse, jumped the most since at least 1980, leading Citigroup Inc., JPMorgan Chase & Co. and Bank of America Corp. higher.

Accrued Interest ascribes the move to short covering:

CDS on WFC fell 25bps, with other banks 10ish tighter.

Now this is mostly short-covering, I’m sure. You have Wells Fargo, the most staid bank in the country, rallying 30% in a single day. Only panicky shorts can cause such a sudden shift in a name like Wells. Hell, the whole S&P Financials sector is up over 10%.
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This bear market isn’t going to end with investors suddenly having confidence in financials. It will end when shorting financials doesn’t seem like an easy trade any more.
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Anyway, we’ll see how J.P. Morgan and Merrill Lynch come out tomorrow. I expect a good market reaction either way after J.P Morgan’s numbers. Merrill is more risky. Continue to be short duration.

Merrill has some juicy assets on the block – Bloomberg and Blackrock.

Short duration? One rationale is a US refunding crisis. Naked Capitalism passes on some apocalyptic clippings.

Well, volume picked up a bit, there were some crosses put on the board … and the PerpetualDiscount index continued its plunge. I saw some activity that looked like bottom fishing … but I’m ALWAYS going to see activity that looks like bottom-fishing. You figure it out!

PerpetualDiscounts now have an average yield of 6.63%, which is 9.28% interest-equivalent at the standard 1.4x conversion factor. Since long corporates still haven’t noticed the world is about to end and continue to yield about 6.1%, this makes the spread 318bp.

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

The concept of credit protection on the United States of America has captured imaginations all around, with Accrued Interest referring to it as a “chaos trade” – defining this as “positions designed to produce big returns if all hell breaks loose” and Naked Capitalism comparing US Treasuries to senior debt of the GSEs. Certainly the greenback continues to sink against the Euro.

Equities did very poorly today, with General Motors suspending its dividend.

Cheyne Finance, last mentioned on October 22 and November 13, is having a $6-billion fire sale:

The first auction of assets by a structured investment vehicle drove Moody’s Investors Service to downgrade the Cheyne Finance Plc SIV by five levels, describing it as a “fire sale.”

The $6 billion SIV set up by London-based Cheyne Capital Management (UK) LLP is scheduled to auction its assets this week or transfer them to a new company under a reorganization by receivers Deloitte & Touche LLP and Goldman Sachs Group Inc. Moody’s said it cut the SIV’s senior debt to Ca, its second- lowest grade, in a report today.

And Willem Buiter fulminates on the real meaning of the GSE bailout:

The Treasury has taken another big step on the road to Utter Fiscal Obfuscation. It is doing everything it can to disguise the fact that it is entering in commitments that create potentially massive contingent liabilities for the US tax payer. Even if the purpose served by this increase in contingent liabilities is worth the cost, the manner in which it is done is designed to avoid fiscal accountability. This is as welcome to the Executive as it is to the Congress.

Note to all aspiring politicians: guarantees are not a cost-free method of accomplishing social goals. They will be called in at the most inopportune time.

Here’s an interesting factoid:

The S&P 500 Financials Index dropped 3 percent, capping its steepest-ever five-day retreat and giving the industry a smaller market value than health care for the first time since 1992, S&P data show.

Amidst all this gloom, I will remind readers that Bombardier first halved, then suspended its common dividend a few years back – the common dividend has only recently been reinstated. But the preferreds kept on paying through the period. First loss protection is not just a theoretical construct!

What a life! If anything, the panic is spreading … the price-movers list is longer today than it was, there were a number of block trades in the volume highlights and the PerpetualDiscount index was down more than a point for the second day running, to yield 6.58% … 9.21% interest-equivalent, long corporates +311bp. On the other hand, a few CM issues were up significantly on the day … which could imply the emergence of bottom fishers, it could be a dead-cat bounce, or it might mean absolutely nothing at all. I’ll let you know when it’s all over.

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

The implicit guarantee of the GSE will – probably – shortly become explicit.

James Hamilton of Econbrowser reviews the situation and approves of the plan:

The first thing I like about this plan is the fact that the ultimate determination of the level of risks to be absorbed by the federal government is being left to Congress.
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The second thing I like about the plan is that such action by Congress would take the form of a dollar limit– here’s how much we’re willing to stake, and no more– with residual losses presumably laid on the GSE creditors.

Accrued Interest mourns bad decisions of the past:

its a sad day for free markets. I see the Treasury as between a rock and a Depression, and has selected the rock. I’d have done the same. I don’t blame Treasury so much as I lament that its come to this. Exactly who to blame for this or what could have been done differently in the past is a discussion for another time.

The WSJ Economics Blog collected some opinion from Street economists – mostly neutral and a bit bewildered, but with one interesting observation that it made shorting the stock a riskier proposition than otherwise. Jim Rogers and George Soros hate it. Naked Capitalism supplies further clippings.

From the Interesting Factoid department comes an estimate of Canadian banks’ exposure to the US:

BMO had the highest loan exposure at $51 billion, while TD’s exposure was estimated to be $46 billion. The two Canadian banks have focused their U.S. banking businesses on different regions – Chicago and the Midwest in the case of Bank of Montreal and the U.S. Northeast in the case of Toronto-Dominion.

Commercial loans to real estate and financial services companies made up about 43 per cent of the total amount at both banks.

[Blackmont Capital analyst Brad] Smith also noted that Royal Bank (TSX: RY.TO) only had a “modest exposure” worth $25 billion or 10 per cent of the outstanding loans, “surprisingly, given its well-established U.S. retail banking and global capital markets business.”

The least at risk were CIBC (TSX: CM.TO) and Scotiabank (TSX: BNS.TO), both with single-digit exposure.

He concludes … :

[TD & BMO] could see their earnings per share decline as much as seven per cent next year

Wow, earnings down as much as 7%, eh? Holy smokes! There’s a little perspective for you! Stockbrokers, I’m sorry to say, are busily attempting to convince clients that preferred dividends from banks in Canada are at risk. I’ll start paying attention when I hear a little less “could” and “might” and a few more numbers.

This market is getting surreal. PerpetualDiscounts are now yielding 6.49%, equivalent to 9.09% interest at a conversion factor of 1.4x. Long corporates continue to yield 6.1%, so the Pre-tax Interest-Equivalent spread is now just a hair under 300bp.

In the volume leaders, only two blocks were traded – both by CIBC and both 60,000 shares, so there’s even a possibility they’re related.

If I was seeing any confirmation in the bond market that the world was about to end, I’d be taking this a lot more seriously. I wouldn’t necessarily agree with the bond market’s analysis, understand, but I would have to consider predictions of impending doom with a sharper eye to detail. But we’re not seeing any of that. Volume is light and there are incredible moves happening on featherweights! PerpetualDiscounts were down over 1% today! That’s a bad MONTH!

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

Panic, Chaos, Confusion! And then it got worse!

It looks like the US administration, quite properly, will ensure investors are wiped out before taking over Fannie & Freddie:

A government takeover of one or both companies is among several options that have been considered, Joshua Rosner, an analyst at Graham Fisher & Co., said after meetings with administration officials. U.S. Treasury Secretary Henry Paulson said today that federal regulators are backing Fannie Mae and Freddie Mac in “their current form.”

“The administration is considering all options in its contingency planning,” Rosner said. “That doesn’t mean to say that we’re at an inflection point where any decision is required immediately.”

The U.S. is reluctant to step in before Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac, which own or guarantee about half the $12 trillion in home loans outstanding, exhaust their options for raising capital, according to Rosner and U.S. Representative Spencer Bachus of Alabama.

… but this will have very serious knock-on effects …

“It is impossible to contemplate all of the negative events that will occur if Fannie and Freddie go under,” said Richard Bove, an analyst at Ladenburg Thalmann & Co.

Fannie Mae fell $4.40 to $8.78 as of 11:21 a.m. after closing at the lowest level in 17 years yesterday. Freddie Mac slid $2.85 to $5.15.
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“Fannie and Freddie’s demise mean the investment banks can’t do any more securitization for a while, but their securitization revenue being zero has been written off from their share prices already,” said Brad Hintz, an analyst at Sanford C. Bernstein & Co.

There is considerable opposition to a bail-out:

Former U.S. Treasury Secretary John Snow said that Fannie Mae and Freddie Mac have relied on leverage to fund their businesses in the same fashion as a hedge fund, and that the government should avoid taking them over.

“Congress ought to be embarrassed” for years of delays in passing legislation aimed at strengthening regulation of the two companies, Snow, now chairman of New York-based buyout fund Cerberus Capital Management LP, said in a telephone interview. He said he flagged when in office that “the business model they were using was really the model of a hedge fund.”

The government-chartered companies, which grew to account for almost half of the $12 trillion in U.S. mortgages, were able to borrow at cheap rates because of an implicit federal guarantee, Snow said. His opposition to a full government takeover echoes the signal sent today by his successor, Treasury Secretary Henry Paulson.

Naked Capitalism has further clippings.

After the bell IndyMac was siezed by regulators:

IndyMac Bancorp Inc. became the second-biggest federally insured financial company to fail today after a run by depositors left the California mortgage lender short on cash.

The Federal Deposit Insurance Corp. will run a successor institution, IndyMac Federal Bank, starting next week, the Office of Thrift Supervision said in an e-mail today. Customers will have access to funds this weekend via automated teller machines.

The Pasadena, California-based bank specialized in so-called Alt-A mortgages, which didn’t require borrowers to provide documentation on their incomes. Its home state has been among the hardest hit by foreclosures.
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IndyMac becomes the largest OTS-regulated savings and loan to fail and second-biggest financial institution to close behind Continental Illinois in 1984, according to the FDIC.

The lender racked up almost $900 million in losses as home prices tumbled and foreclosures climbed to a record. California ranked second among U.S. states, with one foreclosure filing for every 192 households in June, 2.6 times the national average.

The Office of Thrift Supervision comments:

The immediate cause of the closing was a deposit run that began and continued after the public release of a June 26 letter to the OTS and the FDIC from Senator Charles Schumer of New York. The letter expressed concerns about IndyMac’s viability. In the following 11 business days, depositors withdrew more than $1.3 billion from their accounts.

“This institution failed today due to a liquidity crisis,” OTS Director John Reich said. “Although this institution was already in distress, I am troubled by any interference in the regulatory process.”

Schumer comments:

“If OTS had done its job as regulator and not let IndyMac’s poor and loose lending practices continue, we wouldn’t be where we are today,” Schumer, a New York Democrat, said in an e-mail today. “Instead of pointing false fingers of blame, OTS should start doing its job to prevent future IndyMacs.”

Naked Capitalism has other media clippings.

Credit woes? You know things are really getting out of hand when people need to be reassured about … :

U.S. debt is “well within” the guidelines for an Aaa rating, said Steven Hess, vice president and senior credit officer at Moody’s in New York. The U.S.’s AAA rating is not at risk, said Nikola Swann, S&P’s primary U.S. credit analyst.

Treasuries got crushed and Accrued Interest provides us with a little nugget about credit swaps:

credit default swaps on the United States of America moved 11bps wider today (from 9bps to 20bps).

Who’s the counterparty?

Accrued Interest comments on monoline re-structuring initiatives with the telling line:

In other words, bonds are trading as though there is a penalty for once carrying Ambac or MBIA insurance. While this would seem to present a buying opportunity, be sure you can handle the illiquidity. Many institutional municipal buyers don’t want to explain to their clients why they hold so much MBIA paper, so even at higher yields, bids can be hard to come by.

This is an unfortunate reality of the business. There are many who take great joy in pointing out that the average investment manager (by which they generally mean “stockbroker”, an entirely different thing) is average. Chasing rainbows, panicking … there are a great many investment managers (and many more stockbrokers) who simply reflect the greed and fear of their clients without adding any value of their own. But … if they don’t reflect the greed and fear of their clients, they’ll get fired and the next guy will reflect this greed and fear.

Investment pundits love a hard-nosed maverick who sticks to his guns, right or wrong … until the first time he’s wrong.

Things went blahooey today all right! Yet another ghastly day, with some extremely sloppy trading (great market making there, guys! Keep up the good work!), not terribly exciting volume and … none of the volume leaders had any block trades at all. Retail’s panicking, Institutional’s at the cottage … I get a little trading done now and then. Not much, but enough to be worthwhile.

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

We may be nearing the point of crisis.

Accrued Interest is getting panicky:

Unfortunately, the panic is legitimate. No one knows what a GSE bailout will look like.
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There are also rumors that PIMCO and SAC were not trading with Lehman. Both PIMCO and SAC have denied the rumor. Worth noting that PIMCO was one of the first to stop trading with Bear Stearns.
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The more panicky things get, the more likely we get a relief rally after bank earnings are out. Odds are good that it will be a mixed bag, with some banks looking particularly ugly (Wachovia this morning warned of a huge loss) and others will be bad but not that bad.

What’s all this about? The GSEs are looking sick … very sick indeed:

Chances are increasing that the U.S. will bail out Fannie Mae and Freddie Mac because they don’t have enough capital to weather the worst housing slump since the Great Depression, former St. Louis Federal Reserve President William Poole said in an interview. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules. The fair value of Fannie Mae assets fell 66 percent to $12.2 billion, data provided by the Washington- based company show, and may be negative next quarter, Poole said.

“Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer,” Poole, 71, who left the Fed in March, said in the interview yesterday.

There are soothing words from the administration:

U.S. Treasury Secretary Henry Paulson said he’s been assured by the regulator for Fannie Mae and Freddie Mac that the two government-chartered mortgage companies have enough capital.

The Office of Federal Housing Enterprise Oversight “has made clear that they are adequately capitalized,” Paulson told the House Financial Services Committee.

… but as of noon:

Freddie Mac (FRE US) sank 16 percent to $8.57, a 16-year low. UBS AG analysts cut their price target on the second-largest mortgage-finance company to $10 from $28, citing growing credit losses and problems raising capital.
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Fannie Mae slumped 5.2 percent to $14.52, the lowest since July 1991. MGIC Investment Corp. (MTG US), the largest U.S. mortgage insurer, lost 17 percent to $5.55.

… even while the implicit guarantee became a whole lot more explicit …

Fannie Mae and Freddie Mac, the largest buyers of U.S. home loans, are too big for the government to let them fail, leading Republican and Democratic lawmakers said.

The government-chartered companies, which own or guarantee about half the $12 trillion of U.S. mortgages, can count on a federal lifeline, said Republican Senator John McCain of Arizona and Democratic Senator Charles Schumer of New York.

The remarks by the presumptive Republican presidential candidate and the head of the congressional Joint Economic Committee followed a slide in the firms’ shares to the lowest level since 1991. They indicate Congress would push the administration to use government funds to prevent the companies failing and threatening a deeper housing recession.

Naked Capitalism reviews media stories on disaster planning

I said it most recently on May 2:

The GSEs have to start being regulated like banks; there’s no question in my mind about that.

If Congress wants to cut a special deal with them to achieve politically favourable goals, it should simply buy a preferred share – with cash – make it puttable to the company unless the company does A, B and C, and write a specific exclusion to the capital rules allowing this to be Tier 1 capital. Then … walk away and let the regular regulators do as they please.

Yet another thoroughly appalling day, with PerpetualDiscounts getting absolutely hammered. The average yield of 6.34% is equivalent to 8.88% interest (with a conversion factor of 1.4x), representing a spread of about 278bp over long corporates.

You know … I’m not worried about myself so much (I’m fairly phlegmatic about market prices), and I’m not worried about the fund so much (while it’s underperforming due to PerpetualDiscount exposure, it’s executing a steady stream of little income-enhancing trades that will eventually pay off), and I’m not worried about the market so much (all we have to fear is defaults, and none of those are even on the horizon, for instruments I hold. None of this excitement is showing up in the Canadian bond market at all.), but I am worried about retail. This is the type of environment where even very reasonable people might panic – or, worse, indulge in a little market timing – and these investors could hurt themselves badly.

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

Times are tough! European banks are paying a spread of 542bp for Innovative Tier 1 Capital:

European banks are having to pay the highest costs in at least a decade to raise capital reserves required by regulators.

Investors now demand 542 basis points of extra yield over government debt to buy so-called Tier 1 securities, which regulators demand banks hold to buffer depositors and senior bondholders against losses, according to Merrill Lynch & Co.’s Euro Sub-Debt Tier 1 Index. The index started the year at 284 basis points.
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Regulators consider Tier 1 securities as close to equity because in some circumstances issuers can defer interest payments. Instead of a fixed due date, the bonds often give the issuer the option of redeeming them after five or 10 years and inflict higher interest payments if that doesn’t happen.

As financing costs increase banks may no longer view a higher coupon as penalizing them, meaning investors risk holding bonds that may never mature, said Simon Adamson, an analyst at debt research firm CreditSights Inc. in London.

I don’t know the details of the “Euro Sub-Debt Tier 1 Index”, but the spread probably relates to 10-year governments; the so-called bonds will (probably!) have a call and step-up provision at that time so the salesmen can pretend it’s 10-year money.

By way of comparison, we know from yesterday that PerpetualDiscounts are trading to yield 265bp over long corporates, and long corporates are trading about 200bp over Canadas. As a further comparison, the NBC CaPS II, 7.447% until the pretend-maturity 2020-6-30 (after which it’s BAs + 409bp), are quoted at 370bp over the Canada 2018s.

No prizes will be awarded for guessing which direction the market took today! This is getting awfully depressing, you know? But there’s no way of telling when this trend will reverse … and in the meantime, there are some awfully juicy swaps popping up often enough to make life interesting for a fully invested portfolio that isn’t afraid of trading.

The sloppiness of the market is well illustrated by the fact that the market did not appear to notice that National Bank went ex-Dividend today.

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

Bradford & Bingley, a small UK mortgage bank with a market cap of about $400-million seems to be in trouble:

Bradford & Bingley dropped as much as 26 percent, the largest decline since it sold shares to the public in 2000, and was down 8 pence to 34 pence at 11:30 a.m. The shares fell 16 percent yesterday and 18 percent July 4, bringing this year’s decline to 88 percent and valuing the bank at 212 million pounds ($419 million).
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Bradford & Bingley has been hurt by the seizure in credit markets because it depends on capital markets for about 52 of its funding. Leicester, England-based Alliance & Leicester Plc, which gets about 59 percent from wholesale markets, declined as much as 10 percent today in London and traded at 226.25 pence at 11:20 a.m.

As a warning to those who might put too high an emphasis on the (very important) Tier 1 ratio and Total Capital ratio … as of Dec. 31/2007 they had GBP 1.4-billion in Tier 1 Capital, Tier 1 Ratio of 8.6%, Total Capital Ratio of 15.1%. You can’t put all your trust in one number!

Meanwhile, OFHEO says that, contrary to yesterday‘s speculation, Fannie & Freddie don’t need capital:

Freddie Mac and Fannie Mae, whose shares have tumbled more than 60 percent this year, have enough capital to survive a slump in the housing market and meet new accounting rules, their regulator said.
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“An accounting principle should not drive a capital decision by a regulator,” Lockhart later told reporters at a mortgage conference in Arlington, Virginia, today sponsored by the Federal Deposit Insurance Corp.

However, there’s lots of bad news to go ’round! IndyMac is looking fairly ill:

IndyMac Bancorp Inc., the California- based lender that is firing half its employees, is facing “elevated levels of deposit withdrawals” after U.S. Senator Charles Schumer said the bank may be on the brink of failure.
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Because it doesn’t have enough capital to meet the “well capitalized” threshold set by regulators, IndyMac said it can’t fund its lending with deposits acquired through independent brokers. IndyMac’s request for a waiver from the FDIC to allow for brokered deposits hasn’t been approved, the company said.

Naked Capitalism has more details.

Remember my table of CM issues on June 26? And the table of PWF issues yesterday, that Assiduous Reader prefhound noted was the last cum-dividend day? Well, here’s the table again, now that the dividend has gone ex:

I said it yesterday … I’ll say it again: Negative Convexity? Negative Schmonvexity! It just doesn’t make any sense!

I hate to say it … but it was yet another bad day for PerpetualDiscounts! This is the ninth consecutive loss; the last gaining day was June 24; the cumulative loss since then is 3.73%.

Long corporates still yield about 6.1% … the perpetualDiscount weighted mean pre-tax bid-YTW of 6.25% dividend is equivalent (with a 1.4x factor) to 8.75% … spread to long corporates is now 265bp.

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

VoxEU has put together a book comprised of selected columns about the sub-prime crisis.

The GSEs got whacked today, on reports that they may need to raise $75-billion:

Freddie Mac fell $2.59 to $11.91 after earlier dropping as low as $10.28. Fannie Mae declined $3.04 to $15.74 and earlier fell to $14.65.

The new FAS 140 rule that seeks to stop companies keeping assets in off-balance sheet entities may force Fannie Mae and Freddie Mac to bring mortgages back onto their books, requiring them to put up capital, Lehman analysts led by Bruce Harting wrote in a note to clients today.

Fannie Mae would need to add $46 billion of capital and Freddie Mac would need about $29 billion, the Lehman analysts wrote.

The companies will probably get an exemption from the rule because it would be “very difficult” for them to raise that amount of capital, the analysts said.
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“The provision discussed by Lehman could have an effect on our ability to serve the housing mission,” Freddie Mac spokeswoman Sharon McHale said. “We would hope FASB would take into account our mission” when it writes the final rule, McHale said.
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Yields on agency mortgage securities relative to U.S. Treasuries rose to the highest since March 13 on concern that banks may need to sell off the debt.

Bank of America Corp., the second-largest U.S. bank, may sell mortgage assets after buying Countrywide Financial Corp., Kenneth Hackel, the managing director of fixed-income strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut, said in a note to clients.
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The difference between yields on the Bloomberg index for Fannie Mae’s current-coupon, 30-year fixed-rate mortgage bonds and 10-year government notes widened 7 basis points, to 204 basis points. The spread has climbed 18 basis points since June 18.

Note that Accrued Interest comments that he does not believe that the sell-off and Lehman’s analysis are related.

Remember my table of CM issues on June 26? Well, here’s a table of PWF issues, just to make sure you’re thoroughly confused.

Negative Convexity? Negative Schmonvexity! It just doesn’t make any sense!

Update: Assiduous Reader prefhound points out in the comments that PWF goes ex-dividend tomorrow … so be careful when comparing! … end update

The market got thumped again, on average volume with a notable paucity of block-trades. What can I say? It looks retail-driven … but it’s pretty depressing anyway. But with long corporates still hanging around 6.10% and PerpetualDiscounts now yielding 6.23% … tax-advantage? We don’t need no stinking tax advantage! But for those who do, AND who have an interest-equivalency factor of 1.4x, that’s +262bp. Wow.

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

Maple bonds aren’t selling well this year:

Four banks outside Canada raised just C$500 million ($492 million) selling Maple bonds, or foreign debt denominated in Canadian dollars, according to Bloomberg data. That compares with C$20.6 billion from 55 issues in the first half of 2007.

“Investors are having a preference for well-known, well- understood companies, and they have a home-market bias,” said Chris Seip, head of Canadian debt capital markets at RBC Capital Markets in Toronto.
…
By contrast, bond sales by Canadian governments rose 19 percent in the first half of the year, to C$40.5 billion. Corporate bond sales rose 1.4 percent to C$45.3 billion, according to Bloomberg data.

Speaking of “home market bias”, I suspect that FTU.PR.A (US Financial 15 Split) is ripe for another downgrade … it was downgraded to Pfd-3 when asset coverage was 1.4+:1 … asset coverage is just under 1.1:1 as of June 30.

My notes from yesterday attracted some comment on Financial Webring Forum:

To quote Preferred Share High Priest Hymas from his Prefblog of yesterday:
…
Let’s see: 250bp over long corporates, 10-year high and short-lived…

Need I say more?

Let’s hope people don’t come to their senses too fast

Well, I like flattery as much as anybody else … but remember my feelings about market timing! I may think that this episode is overblown, I may be able to show it’s a ten-year high, I may think that in the past spikes such as the current episode have been short-lived … but I don’t know anything. Markets teach you to be humble and not to get too greedy! So … well, if you’ve been looking for an entry point, now seems to be a good time! But don’t over-allocate (my rule of thumb is a maximum of 50% of the fixed income portion of your portfolio can go into prefs), don’t get greedy and don’t mortgage the house.

And FWF participant has a very good idea:

I’ve also been trying to swap ‘weak pairs’ of perpetuals that I already owned before the slide to book those losses. I may as well make a positive out of a negative.

This is smart thinking. ‘Weak Pairs’ were discussed in an article I published last year. They can even be extremely weak pairs … that is, it’s also reasonable to do this with PerpetualDiscounts from the same issuer as long as the coupon isn’t all that much different … maybe I’m being too fussy, but the more similar the elements of a swap, the better it is for a retail investor who doesn’t trade very much and doesn’t want to spend a lot of time on analysis.

Look …. say you own one of the RY low coupon issues and you’re sitting on a capital loss. Swapping it into another RY low coupon issue and crystallizing that loss for tax purposes is good business, as long as you don’t give up yield after paying commission. In this market, you might even be able to pick up a few basis points, if you show some discipline and watch the market.

As long as the coupons aren’t too different, and the issuer is the same, overall investment characteristics of the issues will be almost identical and (when following this particular example and swapping RY issues) then you can take advantage of the fact that the ex-dates are identical and trade off current yield rather than YTM. Just make absolutely sure when you do this that ex-Dates are identical! Some issuers have different dates for different issues.

Anyway … the markets. I’ve got some good news, some bad news and then some good news.

The good news BCE issues rocketted today on the BCE announcement that financing has been arranged.

The bad news is that PerpetualDiscounts got hammered again.

The good news is that the markets will be closed for the weekend.

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