PrefBlog

More nonsense from Congress about user-pay credit ratings:

“We are not going to correct this problem if in the future they can let us down again by the user paying the ratings agency for the value of their valuation,” Mr. Kanjorski said.
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While Mr. Kanjorsky did not go into specifics on how the ratings agencies might be compensated for their analysis in the future — currently, they get paid by the debt issuers, which many see as a huge conflict of interest — the lawmaker did mention that in the past, it was the user that paid for the rating.

CIT’s problems are two-fold: first, it has to deal with deteriorating credit quality of its assets – like every other lender, particularly in America – and second, it has been shut out of the bond market for well over a year. The second is usually related to the first, of course, but the descent to hell was so swift, so deep, so thorough and so extended that I think there’s other things going on. The bond market simply isn’t all that smart, y’know? I suggest technical factors like, f’rinstance, forced liquidation of CPDOs (they’ve been out of the news for a while, since 2008-9-4): CIT was a favoured ingredient of CDOs and I assume the same could be said for CPDOs – although that thought must be marked “speculative”. The potential for a near-term credit event could have widespread impact:

CIT Group Inc (CIT.N) tops the list of names in portfolios of European synthetic CDOs rated by Standard & Poor’s, which would mean widespread default losses in the nearly $600 billion market if it files for bankruptcy.

S&P said in late 2008 that 1,053 European synthetic collateralised debt obligations (CDOs) — 66 percent — included CIT, a New York-based lender to small and mid-sized businesses, in their portfolios of credit default swaps (CDS).
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Meanwhile, in the underlying CDS market, net notional exposure to CIT amounted to $3.465 billion in the week ended July 3, according to data from the Depository Trust and Clearing Corp (DTCC).

Given that CIT is a member of the CDX IG, which is the main U.S. investment-grade CDS index, “further developments are likely to be a focus for the market in the near term”, Deutsche Bank credit strategists wrote.

Out of the 1,000 top reference entities in the CDS market listed by the DTCC, CIT ranked 34th in net notional exposure.

Excluding sovereign CDS, it ranked 19th among corporate names after General Electric Capital Corp (GEA.N) and mostly banks including Deutsche Bank (DBKGn.DE), Morgan Stanley (MS.N) and Goldman Sachs (GS.N).

DBRS downgraded CIT today.

I’ve been reporting the CIT news as it comes in, but California is also dreamin’:

California had its credit rating, already the lowest of all U.S. states, cut for the second time in as many weeks over lawmakers’ failure to close a $26 billion deficit that left the most-populous U.S. state issuing IOUs to creditors.

Moody’s Investors Service said it lowered California’s credit rating two steps to Baa1 from A2 and said it could be reduced further if legislators don’t quickly address the state’s cash problem. The new grade is three levels above non-investment grade. Fitch Investors on July 6 lowered its evaluation of California’s general obligation bonds by two steps to BBB from A-, placing the debt two ranks above so-called high-yield, high- risk junk ratings.
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Even with the credit rating tumbling, investors say there is little risk of default. California Controller John Chiang resorted to issuing IOUs to insure that the state would have enough cash to make payments that have the highest priority under the state constitution, including those on its bonds, if there is a prolonged battle over the budget. Chiang said the IOUs mean the state should have funds to meet those obligations through September.

All the way through September, eh? Wow.

A rip-roaring day for the preferred share market, with PerpetualDiscounts regaining ground vs. the somewhat-less-strong-but-still-quite-strong FixedResets, on good volume throughout.

CIT has hired a bankruptcy specialist:

CIT Group Inc., the century-old lender to 950,000 businesses that has been unable to persuade the Federal Deposit Insurance Corp. to guarantee its debt sales, hired bankruptcy specialist Skadden, Arps, Slate, Meagher & Flom LLP as an adviser amid a plunge in its stock and bonds.

CIT has stated:

in response to recent media reports regarding its pending Temporary Liquidity Guarantee Program (TLGP) application with the FDIC, confirmed that its application to participate in the TLGP remains outstanding. CIT continues to be in active dialogue with the government. There can be no assurance that CIT’s application will be approved by the FDIC, nor as to the timing or terms of any such determination.

and

today confirmed that it remains in active discussions with its principal regulators on a series of measures to improve the company’s near-term liquidity position.

Among the matters being discussed are the Company’s application to participate in the FDIC’s Temporary Liquidity Guarantee Program. The Company is also actively discussing liquidity solutions that do not involve access to the TLGP program, such as the near-term transfer of assets into CIT Bank through Section 23A waivers and the transfer of its Vendor Finance and Trade Finance businesses into CIT Bank; these transfers if approved would enhance CIT’s liquidity position

After the bell, it was reported that:

The U.S. government is in advanced discussions to give aid to CIT Group Inc., the Wall Street Journal reported on its Web site, without saying where it got the information.

One option would have the FDIC backing the company’s debt, according to the newspaper.

The fallout from the BofA/Merrill takeover continues to be fascinating:

Regulators contend Bank of America owes at least part of a $4 billion fee it agreed to pay in January — even without a completed legal document — because the company benefited from implied U.S. backing on about $118 billion of Merrill Lynch assets, such as mortgage-backed bonds, people familiar with the matter said. The Charlotte, North Carolina-based bank says it owes the Treasury nothing, according to the people, who declined to be identified because the negotiations are confidential.

The major subindices squeaked out another win today, amidst good volume.

Bloomberg has a little more speculation regarding the CIT death-spiral:

The Federal Deposit Insurance Corp. is unwilling to guarantee CIT Group Inc.’s bond sales because the commercial lender’s credit quality is worsening, according to people familiar with the regulator’s thinking.

The FDIC, which has backed $274 billion in bond sales under its Temporary Liquidity Guarantee Program since Nov. 25, is concerned that standing behind CIT debt would put taxpayer money at risk, said the people, who declined to be identified because the application process is private.

The federal agency, run by Chairman Sheila Bair, is in discussions with CIT about how the lender can strengthen its financial position to get approval, including raising capital, said one of the people. New York-based CIT’s measures to improve its credit quality, such as by transferring assets to its bank, have been insufficient, the person said.

Comrade Obama is proposing extraordinary powers for the SEC:

The Obama administration is seeking to give the U.S. Securities and Exchange Commission power to prohibit pay practices at brokerages and investment advisers and broader authority to bar individuals from work in the industry.

The Treasury Department today sent Congress legislation that would let the SEC ban “sales practices, conflicts of interest and compensation schemes” deemed harmful to investors. The measure authorizes the agency to remove individuals who violate rules from all aspects of the industry, rather than just a specific segment such as selling securities or managing money.
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The measure gives the SEC authority to reward whistle blowers who give the agency tips about those violating all securities laws. The SEC currently has power to pay individuals who provide the agency with tips on insider-trading violations.

Super! Paid informers! Just the thing that’s needed to further improve society’s moral fibre!

No response or acknowledgement from MFC regarding my queries on the MLI IT1C issue. What a surprise!

Continued gains, albeit pretty small ones, for preferred shares today. Volume dropped off a bit.