PrefBlog

The situation in the States just keeps getting more bizarre … there are major problems in the commercial paper market:

The Federal Reserve will provide up to $540 billion in loans to help relieve pressure on money- market mutual funds beset by redemptions.

“Short-term debt markets have been under considerable strain in recent weeks” as it got tougher for funds to meet withdrawal requests, the Fed said in a statement in Washington. About $500 billion has flowed out of prime money-market funds since August, a Fed official said.

Assiduous Readers will remember my proposal to have banks consolidate their branded MMFs for capital purposes … I thought that was pretty radical, but I’m beginning to wonder if it’s enough. If MMFs are sensitive to runs AND these runs have a major economic effect … perhaps its time to start regulating them as banks.

Whack-a-Mole financial problems continue … this time with Australian mortgage funds:

The East Coast Mortgage Trust, Northern Investment Trust Fund and the Richmond Mortgage Fund — holding a combined $660 million — all froze redemptions yesterday as spooked investors attempted to liquidate holdings.

The latest freezes followed an announcement yesterday by the giant Challenger Howard Mortgage Fund that it had frozen $2.8 billion of funds, claiming the federal Government’s pledge to guarantee bank deposits had exacerbated a run on redemptions.

There has been a lot of chatter lately alleging Fannie & Freddie caused the sub-prime argument. Menzie Chinn of Econbrowser rebuts the charge and provides an interesting graph:

The graph is taken from the IMF Global Financial Stability Report, October 2008 … which I may get around to reading soon!

Accrued Interest continues his push for exchange traded CDSs in a post titled CDS could be fair and simple, but implicitly supports a decoupling of the CDS and cash markets:

Third, in the event of default, the seller of the contract pays the buyer 60 cents on the dollar. No actual bonds change hands.

This type of CDS is known as a “recovery lock” and have been discussed on PrefBlog. The instrument has caused huge problems in connection with the Fannie/Freddie technical default. I cannot support any plan that allows – not just allows, idealizes! – the decoupling of cash and derivative markets.

Meanwhile, there’s a turf-war going on about who gets to regulate CDSs (hat tip: Naked Capitalism): the Fed, the CFTC or the SEC? More jobs for more regulators to tick off more boxes on more forms! Yay!

On the other hand (hat tip: Dealbreaker), Sen. Tom Harkin (D-Iowa) just wants to ban them:

Sen. Tom Harkin (D., Iowa), chairman of the Senate Agriculture Committee, which regulates derivatives and so has a claim to authority over credit default swaps, has repeatedly questioned whether the $60 trillion industry should be outlawed.
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“They’ve been touted as reducing risk, but as we have seen, it has actually increased the risk, the systemic risk, of the whole society,” Harkin said during an Oct. 14 hearing exploring the need for greater regulation of the derivatives.

On a brighter note, there is speculation that settlement of CDSs on Lehman has had no effect.

Technical difficulties prevent me from publishing the three regular tables today. I will update this post tomorrow.

Update, 2008-10-23: Tomorrow, indeed! And only one of the tables! Boy, the things you have to put up with in a free blog, eh?

Bloomberg has some interesting colour on the US TIPS market:

Treasury Inflation-Protected Securities fell 8 percent since June as investors shunned all but the most easily traded debt amid the seizure in credit markets. TIPS were the only part of the U.S. government bond market to lose money in that time as Treasuries of all maturities gained 2.12 percent, according to Merrill Lynch & Co. indexes.

BlackRock Inc., Brown Brothers Harriman & Co., DWS Investment GmbH and New Century Advisors are buying the securities because inflation will likely increase at a faster pace over the next decade than the 1 percent annual rate TIPS yields suggest. Consumer prices, unchanged in September, may increase 4.5 percent this year and 2.65 percent in 2009, according to the median estimate of 69 forecasters surveyed by Bloomberg.

The Cleveland Fed’s liquidity adjusted inflation expectations estimator shows a ten year expectation of 1.48% as of 10/16, vs. the unadjusted figure of 0.95%.

A very good day for markets in general, credit markets particularly and especially prefs! PerpetualDiscounts now yield 6.77% dividend, equivalent to 9.48% interest at the standard factor of 1.4x, while long corporates are now at 7.25% for a pre-tax interest-equivalent spread of 223bp.

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

The post regarding Tuesday’s appearance on BNN has been updated.

Naked Capitalism republishes extracts from a Financial Times article about the unintended consequences of Treasury’s Whack-a-Mole efforts:

US mortgage rates have soared this week in an unexpected reaction to the latest Treasury financial rescue plan, which has prompted investors to buy bank debt and sell bonds backed by home loans.

Interest rates on 30-year fixed-rate mortgages, as measured by Bankrate.com, rose to 6.38 per cent on Thursday from 5.87 per cent last week – before the Treasury said on Tuesday that it would take equity stakes in banks and guarantee new bank debt.

Investors responded to the new guarantee by buying existing bank debt, reckoning it could be refinanced with the new government-supported bonds.

An unrelated (as far as explicit mention is concerned, anyway) story on Bloomberg makes the BCE buy-out look either less likely to happen or more likely to cause massive and instant write-downs:

High-yield, or leveraged, loans have plummeted to a record low of 66.1 cents on the dollar from 88.5 cents on Sept. 2 and from above face value in June 2007, according to Standard & Poor’s LCD.

There are more details in a story about just how horrible the LBO-debt market is at the moment:

Prices of loans rated below investment grade declined to a record low 66.1 cents on the dollar, virtually guaranteeing investors get their money back, based on historical recovery rates, according to data compiled by Standard & Poor’s.
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The selling is being compounded by hedge funds and mutual funds dumping holdings to meet redemptions, which may push prices even lower, according to analysts at UBS AG.

Barclays Plc, the U.K.’s second-biggest bank, is auctioning $642 million of loans seized this week from Dallas-based Highland Capital Management LP, according to people with knowledge of the sale who declined to be identified because the sale hasn’t been announced. Hedge funds Tudor Investment Corp., run by Paul Tudor Jones, and SAC Capital Advisors LLC, managed by Steven Cohen, sold assets this month to raise cash as stock prices dropped, according to people with knowledge of the sales.

BCE common has traded in a 10% range today, closing at $34.89, +8.02%.

On another note, I have no idea whether Andrew Lahde was lucky or smart. But either way, I like him!

“I was in this game for money,” Lahde, 37, wrote in a two-page letter today in which he said he had come to hate the hedge-fund business. “The low-hanging fruit, i.e. idiots whose parents paid for prep school, Yale and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government.

“All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other sides of my trades. God Bless America.”

The market performed well today, on reasonable volume. Still relatively illiquid and volatile – the performers table is limited to absolute moves of more than 2% today – but improving.

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