PrefBlog

The FDIC will now be separating good assets from bad when disposing of failed banks:

“FDIC staff has referred to a ‘good bank/bad bank’ model described as the sale of the failing bank’s better assets wrapped with loss-share coverage to another bank and the sale of the ‘bad’ assets,” into a limited liability company, spokesman Andrew Gray said today in an e-mail statement, adding the agency now plans to proceed with such sales.

Potential bidders may be interested in higher risks in the failed lender’s bad loans, while the agency auctions the remaining assets in combination with an agreement to share any losses with the buyer, he said.
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Gray said loss-sharing arrangements and structured transactions “are proven ways to maximize bidder interest and value.”

I missed this when it was fresh … CalPERS is suing the rating agencies:

The California Public Employees’ Retirement System said in a lawsuit filed last week in California Superior Court in San Francisco that it might lose more than $1 billion from structured investment vehicles, or SIVs, that received top grades from Moody’s Investors Service Inc, Standard & Poor’s and Fitch Inc.
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By giving these securities their highest ratings, the agencies “made negligent misrepresentations” to the pension fund, Calpers said. Such ratings, which typically accompany investments with almost no risk of loss, “proved to be wildly inaccurate and unreasonably high.”

In other words, CalPERS CEO Anne Stausboll, who ” oversees 2,300 employees, a budget of more than $332 million” in the course of managing USD 176.1-billion in assets, is grossly incompetent and should be fired. Taking $1-billion exposure in SIV’s without even a cursory due-diligence? She – and presumably a host of others at CalPERS – should be in jeopardy of not just getting fired, but of losing their licenses.

The target firms have noted that they were not responsible for CalPERS investment decisions – if Stausboll wants to abnegate fiduciary responsibility, she must at the very least pay for it.

ZeroHedge has some commentary as well as a copy of the lawsuit.

And … that’s it for another month! Quite a good month for preferreds, with CPD up about 3.33%. My fund, Malachite Aggressive Preferred Fund, will have outperformed CPD by a significant margin … but Assiduous Readers will have to wait until I post the performance review sometime within the next week.

Volume continued high to close the month, with FixedResets again being mostly elbowed out of the Volume Highlights table by PerpetualDiscounts. PerpetualDiscounts had a gain of almost 15bp on the day to close with a yield of 6.06%, equivalent to 8.48% interest at the standard equivalency factor of 1.4x. Long Corporates now yield about 6.3%, so the pre-tax interest-equivalent spread ends the month at about 218bp; basically unchanged from the 215bp spread reported on July 29.

The campaign to ensure that retail’s choice of investment be restricted (or, at least, attract a blizzard of paper) has gained some ground, with American brokerages restricting sales:

Morgan Stanley and Wells Fargo & Co. are reviewing whether to continue sales of leveraged and inverse exchange-traded funds as regulators caution that the securities might not be suitable for individual investors.
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UBS AG’s brokerage unit in New York, St. Louis-based Edward Jones and Ameriprise Financial Inc. of Minneapolis have halted sales of leveraged ETFs.
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David Weiskopf, a Schwab spokesman, said the San Francisco- based company’s representatives don’t recommend leveraged ETFs.
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Individual investors at Bank of America Corp. have been permitted to buy leveraged and inverse ETFs from its brokerage unit since 2006 only when they specifically request them, said Selena Morris, a spokeswoman for the Charlotte, North Carolina- based company.

Felix Salmon writes a review of High Frequency Trading that I found rather shallow; but some people like it. However, it looks like Flash orders will be prohibited:

NYSE Euronext, the world’s largest owner of stock exchanges, told the SEC in May that flash orders result in most investors getting worse prices. The practice is used by some high-frequency traders, who stream hundreds of bids and offers a minute and help pair off investor orders.

Analysts including Raymond James Financial Inc.’s Patrick O’Shaughnessy said earlier this week that regulators’ response to flash orders might result in restrictions on computer-driven trading, which could hurt profit for exchanges.

John Nester, a spokesman for the SEC, didn’t immediately return a telephone call seeking comment.

Bats CEO Joe Ratterman said today in an e-mail to clients that the Kansas City, Missouri-based exchange would support an industrywide ban on flash orders. Nasdaq CEO Robert Greifeld told Schumer July 28 that Nasdaq would also support a prohibition, according to a statement issued by the New York senator’s office.

Both introduced the systems over the past three months to compete against Direct Edge, which has gained market share through its three-year-old Enhanced Liquidity Provider program.

“If regulators get rid of it, or do anything to significantly circumscribe the program, it will hurt Direct Edge and help Nasdaq and NYSE,” Justin Schack, vice president of market structure analysis at New York-based Rosenblatt Securities Inc., said in an interview. “It takes away a big competitive weapon that Direct Edge used to gain market share.”

Schumer’s statement:

U.S. Senator Charles E. Schumer (D-NY) announced Tuesday that the head of the NASDAQ stock exchange supports his call to ban the practice of so-called “flash trading” that gives advance knowledge of stock orders to certain traders. Schumer said he was assured by Robert Greifeld, the CEO of NASDAQ, that the exchange, which has long prided itself on bringing transparency to public markets, began reluctantly offering the practice only after competing marketplaces did so.

I profoundly doubt whether anybody knows one way or the other whether pricing and liquidity are positively or negatively affected by Flash Orders; I don’t even know whether it would be possible to generalize about such a thing. But hell, facts don’t matter, right?

But it should be obvious that this is all about money anyway – who cares about trivialities like market efficiency?:

Both introduced the systems over the past three months to compete against Direct Edge, the trading platform that has gained market share through its three-year-old Enhanced Liquidity Provider program. Direct Edge, which is not regulated by the SEC, more than doubled its market share since November to 11.9 percent of the total volume traded in the U.S. in June by using revenue from its ELP program to cut other costs.

Preferred shares had another very good day, with PerpetualDiscounts rocketting up 72bp, with FixedResets putting in a decent performance of +10bp. Volume continued to be high (a nice day for RBC), with FixedResets again locked out of the volume highlights table … is the bloom off the rose?

It will be most fascinating to see what happens once we hit September and new issue season. I’m really not sure if issuers will be able to get anywhere near market rates for FixedResets … a rate of, say 4.25%+150 might find takers to be less enthusiastic than normal. On the other hand, recent market improvements suggest that they should be able to issue straight perpetuals at around 6%. Even paying 5%+225 would be a good improvement on that, but that would indicate a huge concession to market … we shall see!

Good column by Jane Bryant Quinn on Bloomberg, Money Funds Are Ripe for ‘Radical Surgery.

Quadravest has announced semi-annual results for most of its funds (DF, DFN, FTN, FFN …), but neither the announcements nor the semi-annual statements are yet available. I’ll post links when this situation changes.

I’ve been very pleased with the response to yesterday‘s plea for reviews of my essay on Preferred Shares and GICs. There is definitely more work to be done on the essay … more comments will be appreciated, and those who would like to review the first draft may still eMail me to receive it.

Another very good day for the Canadian preferred share market, with PerpetualDiscounts posting a gain of 0.45%, bringing their median YTW to 6.10%. This is equivalent to 8.54% interest at the standard equivalency factor of 1.4x, while long corporates remain at about 6.4%, having returned +1.36% month-to-date and +19.15% year-to-date. The pre-tax interest-equivalent spread is thus about 215bp, tightening in about 15bp in the week since July 22, but still above the Credit Crunch norm of about 200bp and, of course, well above the pre-Credit Crunch range of 100-150bp.