PrefBlog

There was an interesting joint Treasury / Fed Press Release today that raised as many questions as it answered:

The Federal Reserve to avoid credit risk and credit allocation
The Federal Reserve’s lender-of-last-resort responsibilities involve lending against collateral, secured to the satisfaction of the responsible Federal Reserve Bank. Actions taken by the Federal Reserve should also aim to improve financial or credit conditions broadly, not to allocate credit to narrowly-defined sectors or classes of borrowers. Government decisions to influence the allocation of credit are the province of the fiscal authorities.

This is eminently sensible – but why is it being repeated? There has been some concern expressed that the Fed is usurping fiscal functions (which I have disagreed with) – are these concerns gaining traction?

Need for a comprehensive resolution regime for systemically critical financial institutions
The Treasury and the Federal Reserve remain fully committed to preventing the disorderly failure of systemically critical financial institutions. To reduce the risk of future crises, the Treasury and the Federal Reserve will work with the Congress to develop a regime that will allow the U.S. government to address effectively at an early stage the potential failure of any systemically critical financial institution. As part of the framework set forth, the legislation should spell out to the extent possible the expected role of the Federal Reserve and other U.S. government agencies in such resolutions.

It looks like the Fiscal Stability Regulator plan is going to happen.

In the longer term and as its authorities permit, the Treasury will seek to remove from the Federal Reserve’s balance sheet, or to liquidate, the so-called Maiden Lane facilities made by the Federal Reserve as part of efforts to stabilize systemically critical financial institutions.

Is this an admission that the Maiden Lane facilities were not, in fact, adequately collateralized?

Equities were on fire today:

Canadian stocks rose the most in three months after the U.S. Treasury said it will spend $1 trillion to purchase distressed assets and Petro-Canada agreed to be bought in the biggest deal for a Canadian oil company.

Manulife Financial Corp., Canada’s largest insurer, climbed 16 percent after the Treasury said it will provide capital and financing for private investors to buy illiquid loans and securities held by banks.
…
Royal Bank of Canada increased 7.6 percent to C$37.94. Toronto-Dominion Bank rose 10 percent to C$45.50. A gauge of financial shares surged 8.7 percent, the most of the 10 industries in the S&P/TSX.

The Treasury’s Public-Private Investment Program will use $75 billion to $100 billion from the $700 billion Troubled Asset Relief Program enacted last year, giving the government “purchasing power” of $500 billion. The Treasury said the program may double “over time.”

Thoughts of imminent mass-bankruptcy disappeared (at least for today) and prefs did really well – in fact, the sub-investment grade split share preferreds did really, really well.

Late Update: Andrew Cuomo proudly announced the success of his extortion racket:

New York state’s attorney general, Andrew Cuomo, said late Monday that 15 of the top 20 recipients of $165 million in retention bonuses from American International Group Inc.’s Financial Products unit have agreed to give back their bonuses — amounting to in excess of $30 million in cash.
…
He added that he sees no public interest in disclosing the names of people who return their bonuses, and he acknowledged that returning the money is a difficult decision for many people in the unit who weren’t involved in devising the problematic transactions that helped topple AIG.

I like to think I’d hang on to the money and force Congress to illustrate the depths of their moral bankruptcy by taxing it all way. I also like to think I’d quit – CEO Liddy threw his people to the wolves rather than stand up for them. CEO Liddy is not a leader.

Assiduous Readers will remember I am following the Lyondell bankruptcy – the last mention was on February 24 … there’s more news today:

LyondellBasell Industries AF SCA missed an interest payment on bonds that will trigger payouts on credit-default swaps guaranteeing as much as $1.5 billion of the company’s debt.

Dealers and investors in the market will start the process of settling contracts linked to Netherlands-based LyondellBasell after it failed to pay interest on 500 million euros ($679 million) of bonds maturing in 2015, the International Swaps and Derivatives Association said in a statement today.
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Traders had bought or sold a net $744 million in protection on LyondellBasell debt through credit swaps as of March 13, according to data from the Depository Trust & Clearing Corp., which runs a central registry for the market. Another $786 million of protection was bought through index contracts that include LyondellBasell among a group of 50 companies.

The net figures don’t include contracts covering a gross amount of about $16.6 billion that economically offset each other and typically wouldn’t be paid as long as there are no defaults by the firms selling the protection, DTCC data show.
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Credit-default swaps on LyondellBasell, one of the world’s largest closely held chemical producers, cost 94 percent upfront and 5 percent a year, according to CMA Datavision prices at 5 p.m. in London. That means it costs 9.4 million euros in advance and 500,000 euros a year to protect 10 million euros of the company’s bonds from default for five years.

That’s a nice price for protection, eh? I wonder if anybody paid it!

Good volume and fine performance from the Fixed-Resets today, probably inspired by some portfolio reshuffling with the closing of BMO.PR.O. PerpetualDiscounts continued their recovery from their recent dip.

A correlation has been found between fails-to-deliver (associated with naked shorts) and the demised of Bear Stearns & Lehman:

As Lehman Brothers Holdings Inc. struggled to survive last year, as many as 32.8 million shares in the company were sold and not delivered to buyers on time as of Sept. 11, according to data compiled by the Securities and Exchange Commission and Bloomberg. That was a more than 57-fold increase over the prior year’s peak of 567,518 failed trades on July 30.

The SEC has linked such so-called fails-to-deliver to naked short selling, a strategy that can be used to manipulate markets. A fail-to-deliver is a trade that doesn’t settle within three days.
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Twice last year, hundreds of thousands of failed trades coincided with widespread rumors about Lehman Brothers. Speculation that the company was being acquired at a discount and later that it was losing two trading partners both proved untrue.

After the 158-year-old investment bank collapsed in bankruptcy on Sept. 15, listing $613 billion in debt, former Chief Executive Officer Richard Fuld told a congressional panel on Oct. 6 that naked short sellers had midwifed his firm’s demise.

The Fed has announced:

that the set of eligible collateral for loans extended by the Term Asset-Backed Securities Loan Facility (TALF) is being expanded to include four additional categories of asset-backed securities (ABS):

• ABS backed by mortgage servicing advances
• ABS backed by loans or leases relating to business equipment
• ABS backed by leases of vehicle fleets
• ABS backed by floorplan loans

“Floorplan loans”, by the way, are loans made to auto dealers to finance inventory, secured by that inventory.

Another good day for prefs – PerpetualDiscounts are now up 1.89% Year-to-Date and up 5.20% from the low on March 10, but still down 5.36% from the high on January 13.