PrefBlog

Former Lehman executives (and note that an “executive” can be anybody with a title) who, it would seem, prefer to remain anonymous, are trying to play down Repo 105, discussed on PrefBlog on March 12. But it’s a tangled web we weave…:

The only people who would worry about using an old trick to reduce leverage from 13.9 to 12.1, the second executive said, are “yappers who don’t know anything.”

Again, the examiner’s report takes pains to show otherwise. It quotes a senior vice president calling Lehman’s leverage targets “a very hot topic.” The firm’s own definition of a material leverage shift was one-tenth of a point.

In my experience, 95% of the sell-side are yappers who don’t know anything, and the other 5% are simply disingenuous.

And, of course, blind faith in the regulators is misplaced:

Securities and Exchange Commission Chairman Mary Schapiro said her agency’s oversight of Lehman Brothers Holdings Inc. was “terribly flawed,” days after a bankruptcy examiner found the SEC didn’t try to stop the firm’s exaggeration of liquid assets.

“It was so terribly flawed in design and execution,” Schapiro testified to a Congressional committee today, referring to SEC examinations aimed at monitoring the soundness of Wall Street’s biggest investment banks. “We were ill-suited because of our enforcement and disclosure mentality.”
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Valukas’s March 11 report describes a gap between how Lehman and the SEC viewed the firm’s so-called liquidity pool, used to pay bills in a pinch, in the firm’s final months. Behind the scenes, the SEC questioned how quickly some assets could really be tapped. Still, Lehman didn’t tell investors that a growing share of the pool was being pledged as collateral to clearing firms, the report found.

The SEC deemed assets to be liquid only if they were convertible to cash within 24 hours. Lehman afforded itself five days. The SEC told Lehman it preferred the shorter limit and never enforced it, according to the report.

In another instance, the SEC didn’t take action after determining in June 2008 that Lehman had counted a $2 billion deposit at Citigroup Inc. among cash-like assets available in an emergency, according to the report. SEC analysts deemed the deposit’s designation as “problematic,” because withdrawing the money could have impaired Lehman’s trading.
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The silence of examiners, who focused more on stability than honesty with investors, was invoked as a defense as Valukas quizzed more than 100 executives and other witnesses about the financial health and reporting at Lehman, based in New York.

The Bloomberg story doesn’t explore the regulators’ obsession with “stability” in detail, or even define what it is. Stability of the Financial System? Stability of Lehman? Stability of their jobs? What? One way or another … so much for the third pillar!

Greece is still trying to extract better terms for its EU bail-out:

As long as “Greece is still borrowing at an unreasonably high interest rate, over 6 percent,” the country will keep “all options open” while preferring an EU solution, Papandreou said at a press conference in Brussels today with European Commission President Jose Barroso.

Bad news at the trough on St. Patrick’s day! The little green piggies haven’t spent enough on lobbying:

“Until government policies favor renewable energy over dirty coal, solar may seem too risky now for some investors,” said Landis, whose $260 million fund include SunPower Corp. and Suntech Power Holdings Co. “Coal may make sense short term.”

Solar companies’ profitability is falling because of competition from China and cuts to state support in Germany and Spain, where about 72 percent power-producing photovoltaic panels were installed in 2008.
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Germany may install 3,000 megawatts, or about a third of the world’s total, Simonek said. In the Czech Republic, a country of 10 million people, about 900 megawatts of solar power will be deployed, almost matching existing U.S. installations.

The rising global demand will help some companies weather the slump in panel prices caused by Chinese manufacturers stepping up production and cuts in solar subsidies in Germany and Spain known as feed-in tariffs, said Richard Caldwell, chairman of Australia’s Dyesol Ltd., which makes a conductive dye that produces electricity on glass and sheet metal.

“Companies in the industry like First Solar have had a shocker,” he said. “The Chinese have been flooding the market with cheap product. And we’re still getting over the change to the German feed-in tariff. It hasn’t been a good market.”

Who woulda thunk it? Competition in solar panels! And there we all were, thinking it was all about peace, love, granola and subsidized green jobs to replace all those subsidized auto jobs that have evaporated! Just think, if they can cut costs by another 90%, maybe it will even be worth thinking about!

Volume was good in the Canadian preferred share market today, but PerpetualDiscounts fell by 7bp. FixedResets gained 2bp to take yields to within a hairsbreadth of their all-time lows … another tenth of a beep in yield and we’ve got a new record.

PerpetualDiscounts now yield 5.97%, equivalent to 8.36% interest at the standard equivalency factor of 1.4x. Long Corporates now yield about 5.7% (maybe a little bit more) so the pre-tax interest equivalent spread (also called the seniority spread) now sits at about 265bp, a significant widening from the 245bp reported on March 10. I consider it highly peculiar that the spread should be so wide in the absence of any serious credit-based panics; I can only conclude that retail has decided that massive inflation is imminent – which is consistent with low yields on FixedResets – contrary to the beliefs of institutional bond investors. I note that Long Canadas now yield 4.02% while long RRBs yield 1.57% real, for a breakeven of 245bp.

Click for Big

…. and you can call the recent rocketing in the breakeven spread either a return to normalcy or a harbinger of hyperinflation, depending on what answer you want to get … or what your client wants to hear.

The IMF has released the March 2010 edition of Finance & Development.

Europe will bail out Greece, if necessary:

Europe’s blueprint for a financial lifeline to Greece amounts to an unprecedented bet by finance ministers that they can avert a euro crisis by sidestepping the no-bailout rules intended to sustain the 11-year-old currency.

Improvising their way through the euro’s harshest test since its debut in 1999, officials meeting in Brussels late yesterday and today worked out a strategy for emergency loans in case Greece’s plan for 4.8 billion euros ($6.6 billion) in tax increases and wage cuts fails to stave off fiscal disaster.

There is no word as to whether the EU will demand management changes, vilify the top guys, claw back pay or threaten criminal charges. S&P affirmed Greece at BBB+.

Moody’s is shift municipal ratings to the global scale:

Municipal bond issuers led by California Treasurer Bill Lockyer began pressing companies that rate their debt two years ago to show investors how they would be rated on a corporate scale. They claimed that the scale cost them more in interest rates because state and local borrowers default at a lower rate than higher-rated corporations.

U.S. Representative Barney Frank, a Massachusetts Democrat who chairs the House Financial Services Committee, called the different rating scales “ridiculous” at a hearing on the $2.8 trillion market in May 2008.

This cosmetic change was last reported on PrefBlog in September 2008 in Global Scale for Municipal Credit Ratings a Bust?. So, the story so far is: CDOs, etc., must get their own scale because global scales are ridiculous. Municipalities must get their own scale because the global scale is ridiculous. Can’t tell your players without a political programme, can you?

In a speech at the Heyman Center on Corporate Governance, Julie Dickson acknowledged the issue of regulatory capture, but didn’t offer any insights:

Simon Johnson, a professor at MIT, says that the failure of supervisory judgement is often linked to regulatory capture. Regulatory capture refers to supervisors thinking like the industry they regulate because they either come from industry, or hope to work in the industry. In some cases there may be a belief that it is easier to just agree with industry rather than to fight their lobbying efforts. He has written many articles on this, which I read with great interest as they contribute to the debate around regulators, incentives, and judgement.

My own view is that clear mandates and accountabilities, independence, resources, and international assessment programs are key to getting the incentives right. I would also say that I have seen some very courageous supervisors in my time, and that sometimes people recruited from industry are even more demanding, having experienced first hand some of the dynamics within institutions. So this issue is rather complex.

There was an interesting and unusual note in today’s FOMC release:

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability.

A good day in the Canadian preferred share market, with volume at above-average levels. Six issues traded more than 100,000 shares on the Toronto Exchange. PerpetualDiscounts gained 3bp and FixedResets were up 8bp, which took yields of the latter down to 3.47%, the second-lowest on record.

Under proposed legislation, the New York Fed will be politicized:

The Federal Reserve Bank of New York president, who supervises five of the seven largest U.S. banks, would be subject to White House appointment and lawmakers’ approval under legislation proposed today.

Also, one member of the Fed Board of Governors would be designated vice chairman for supervision, and no firm under Fed oversight would be allowed to vote for or have past or present employees serve as directors of regional Fed banks, according to the bill to overhaul financial regulation. Senate Banking Committee Chairman Christopher Dodd, a Democrat from Connecticut, unveiled the proposed legislation in Washington.

This might make a bit of sense if one could point to elements of the Credit Crunch and make a case that Fed failure to regulate was responsible. Unfortunately for logic lovers, however, it was basically Fed-regulated entitites who bailed out Non-Fed-regulated entities (JPM/BSC, BAC/MER) and the spectactular bankruptcies (AIG, LEH) were non-regulated. But it’s not logic, it’s politics!

CLOs are coming back!:

The market for collateralized debt obligations backed by high-yield, high-risk loans is poised to reopen in the U.S. for the first time in a year after losses on mortgages prompted investors to flee bundled securities.

Citigroup Inc. is underwriting a $500 million fund managed by New York-based WCAS Fraser Sullivan Investment Management LLC, scheduled to price as soon as this week, according to people familiar with the offering, who declined to be identified because terms are private. The deal refinances an existing collateralized loan obligation and increases its size by more than 50 percent.

The offering would mark the first new issue backed by widely syndicated loans in the $440 billion market for CLOs since last March and a return to investments that contributed to $1.76 trillion of writedowns and credit losses at the world’s largest financial institutions. Citigroup and WCAS Fraser Sullivan are marketing the deal after prices on CLO debt staged a record rally on signs of economic recovery.
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JPMorgan Chase & Co., Bank of America Corp. and Deutsche Bank AG have also been approaching managers of leveraged loans since last year to offer terms for new CLOs to restart the market, according to people familiar with the discussions. CLOs pool loans and slice them into securities of varying risk intended to provide higher returns than similarly rated investments.

Volume slackened off today, with only twenty-two issues trading more than 10,000 shares. PerpetualDiscounts lost 9bp on the day – yields are approaching 6.00% – and FixedResets hovered at their 3.50% yield level.