PrefBlog

Canadas efforts to join the Banksgiving Moneyday rescues have now commenced implementation. The results of the first mortgage reverse-auction have been announced:

Auction Date: October 16, 2008
Settlement Date: October 23, 2008
Maturity Date: October 15, 2013
Amount: $5 billion
High Yield: 4.679%
Low Yield: 4.041%
Average Yield: 4.241%

There are rumours that old What-Debt? is going to have to run a deficit:

While his Oct. 14 victory left him with more Conservative Party seats in Parliament, the deepening global financial crisis may force him to backpedal on both pledges.

Harper yesterday said his first move may be a taxpayer- funded package to keep financial institutions competitive amid bailouts in the U.S. and Europe. With the budget surplus shrinking and Harper lacking a parliamentary majority, he’ll also probably end up spending more than he wants because he’ll need help passing legislation from opposition parties that want to expand social programs.

Geez … having cut taxes and run the structural budget balance to zero in order to goose an already over-stimulated economy, we now find that bad times may require a deficit. What a surprise. What an absolutely incredible surprise.

On the bright side US inflation is moderating, although the headline number is still scary looking:

Prices increased 4.9 percent in the 12 months to September after a year-over-year gain of 5.4 percent in August. The core rate increased 2.5 percent from September 2007, the same as the year-over-year increase in the prior month.

Via Dealbreaker comes news that Iceland’s Glitnir Bank has defaulted on a $750-million FRN.

And the Fed’s discount window is wide open:

The Federal Reserve’s direct loans to commercial banks rose to a record $101.9 billion yesterday versus $98.1 billion a week earlier as still-high money market rates encouraged more borrowing from the lender of last resort.

Borrowing by securities firms through the Fed’s Primary Dealer Credit Facility totaled $133.9 billion, up from $123 billion, the central bank said today in its weekly report.

“The ability to borrow 90-day funds at 1.75 percent is a good deal for a lot of banks,” said Michael Feroli, economist at JPMorgan Chase & Co. “The stigma of borrowing from the Fed is declining.”

Borrowing 90-day funds at 1.75 is a very good deal for a lot of banks. I have no objections to the facility itself, but the discount rate is set way too low, in defiance of Bagehot.

Closed off the ‘performers’ table at +/- 2% today. Volatility continues high, liquidity continues dry.

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

There is some speculation that:

Flaherty is considering increasing deposit insurance beyond the current C$100,000 per person and guaranteeing short-term bank debt, the Globe and Mail reported today, citing people it didn’t name. The Bank of Canada may let mutual funds and pension funds take part in its short-term debt purchases aimed at shoring up liquidity in credit markets, the Globe also said.

The Globe story said:

The Bank of Canada also broadened the list of participants in such actions, which are normally reserved for a select group of financial institutions such as the big banks, to include “other money market participants” that sources said will likely include pension funds and mutual funds.

Well, they might be ready to make that change, to include pension and mutual funds, and they may have the intent of allowing these funds to bid indirectly, but that’s not what the Bank of Canada press release says:

Second, to enhance the distribution of liquidity, effective the 21 October auction, term PRAs will be transacted with direct participants in the Large Value Transfer System (LVTS) as well as with Primary Dealers until further notice.

LVTS participants are:

Alberta Treasury Branches
Bank of America, National Association
Bank of Montreal
The Bank of Nova Scotia
BNP Paribas (Canada)
La Caisse centrale Desjardins du Quebec
Canadian Imperial Bank of Commerce
Credit Union Central of Canada
HSBC Bank Canada
Laurentian Bank of Canada
National Bank of Canada
Royal Bank of Canada
State Street Bank and Trust Company
The Toronto-Dominion Bank

These participants may well allow their clients to bid through them on a back-to-back basis, and the Bank may well be encouraging such transactions, but pension funds and MMFs are not actually included in the list. The list has been broadened from primary dealers only to include LVTS participants.

The SEC is seeking the power to have all CDS positions reported to them:

One way to guard against misinformation and fraud is to create a mandatory system of recordkeeping and reporting of all CDS trades to the SEC.
…
OTC market participants generally structure their activities in CDSs to comply with the CFMA’s “swap exclusion” from the Securities Act and the Exchange Act. These CDSs are “security-based swap agreements” under the CFMA, which means that the SEC currently has authority to enforce antifraud prohibitions under the federal securities laws, including prohibitions against insider trading. If CDSs were standardized as a result of centralized clearing or exchange trading or other changes in the market, and no longer individually negotiated, the “swap exclusion” from the securities laws under the CFMA would be unavailable.

Bloomberg reports that perpetual preferred assets can be regarded as debt, allowing historical cost accounting rather than mark-to-market, although I cannot find the letter on the SEC website.

The U.S. Securities and Exchange Commission agreed to back an effort by banks that may delay writedowns on some securities tied to losses that have cost companies more than $640 billion.

Banks in certain cases may account for perpetual preferred securities as debt, allowing them to postpone writing down their value, SEC Chief Accountant Conrad Hewitt wrote in a letter yesterday to Financial Accounting Standards Board Chairman Robert Herz.
…
The SEC’s interpretation may help resolve a debate over accounting for the securities, which are issued without maturity dates. Auditors have determined the securities should be treated as equity and banks sought to count the assets as debt. Banks can treat them as debt “if there has been no evidence of deterioration in the credit of the issuer,” such as a decline in cash flows from the investment or a downgrade in the security’s rating below investment grade, Hewitt wrote

Fine tuning on the weekend bank rescues continues, with the UK softening its doctrinaire rhetoric:

Prime Minister Gordon Brown said the U.K. government is talking to banks about the ban on paying dividends imposed on those institutions taking taxpayer money, signaling ministers may soften the rules.
…
Brown said Oct. 13 that banks tapping a 37 billion-pound ($64.5 billion) bailout program won’t be allowed to pay dividends until the government redeems its investment. The banks say the rule is making it more difficult to raise cash from private investors, two people familiar with the matter said.

The comments suggest the government may drop rules Brown has said were necessary to protect taxpayer money and penalize the banks for reckless lending. That would anger rival lawmakers and unions what want to see more curbs on the industry.

Well, the sensible thing to do is “whatever works” and forget about theory and idealogy. But, says I, it seems to me that if the banks aren’t able to sell their stock without a dividend, then they can just reduce the price further and dilute their existing shareholders more. But the story does not go into details about the real-life options available to the firms.

S&P had some interesting things to say today regarding the bank rescue:

Standard & Poor’s Ratings Services believes that the bank bailout plan announced by the U.S. government on Oct. 14, 2008, will likely mark the turning point in the crisis of confidence currently afflicting credit markets, according to a report published today (“U.S. Banks: Back To Fundamentals,” available on RatingsDirect).
…
“We believe the recent moves by the various governments will likely have a meaningful market stabilizing influence. Although, from a rating perspective, we view the potential effects of the plan as favorable to the credit quality of U.S. financial institutions, we do not anticipate an immediate impact on participating bank ratings. We are in the process of reassessing both industry risk and individual bank and bank holding company debt ratings in light of recent events,” said Standard & Poor’s credit analyst Tanya Azarchs.

… but on the other hand:

Standard & Poor’s said it may downgrade $280.1 billion of Alt-A mortgage securities, the most that the ratings company has identified in a single announcement for bonds backed by the loans.

The debt may be cut in part because S&P has boosted estimates for losses on each foreclosure on Alt-A loans with at least five years of fixed rates to 40 percent, from 35 percent, the New York-based company said today in a statement.
…
Loans at least 90 days late among those underlying the securities that S&P downgraded today totaled 13.1 percent of the balances as of September, up 27.6 percent from June, S&P said. Loss severities will be higher because property prices will probably fall further amid “continued foreclosures, distressed sales, an increase in carrying costs for properties in inventory, expenses associated with foreclosures, and further declines in home sales,” the firm said.

The table of notable performers has been limited to those issues with an absolute change in bid price of over 3%. I hope to get back to 1% some day!

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