PrefBlog

The transfer of wealth from the banking to the shadow-banking sector got a boost today when Citigroup sold Philbro to Occidental:

Oil producer Occidental Petrol Corp., based in Los Angeles, will pay “net asset value” for the unit, the companies said today. Occidental’s net investment in Phibro will be about $250 million. The sale won’t be material to Citigroup earnings, the New York-based bank said.

Phibro had become a flashpoint for critics of excessive compensation at banks receiving federal aid because its chief, 58-year-old Andrew J. Hall, was paid more than $100 million in 2008 and is set to earn about the same this year. Citigroup, the third-biggest U.S. bank by assets, received a $45 billion taxpayer-funded bailout last year.
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Vikram Pandit, 52, Citigroup’s chief executive officer, is parting with one of his most consistently profitable businesses.

Phibro, based in Westport, Connecticut, has been profitable each fiscal year since 1997, with pretax earnings averaging $371 million during the past five years, Occidental said in its statement. Citigroup had a record $27.7 billion net loss last year as the financial crisis brought mortgage-trading losses and higher loan charge-offs.

Hall, who has a degree in chemistry from the University of Oxford, is paid under a contract that gave him a portion of the unit’s trading results, and he may be owed $100 million this year under the terms of his contract with Citigroup, according to people familiar with the matter.

In Canada, of course, we solve such problems by putting an army of accountants and lawyers on the case, finding a few minor transgressions and firing the bum who made the mistake of being too good at his job. I am glad to see that Citigroup executives have more personal integrity.

Government bonds got hammered today. Across the Curve articulates my thoughts on the matter:

I was in the insomniac zone last night and was up late writing. I wrote about the Bernanke speech. I thought that he broke no new ground. Absolutely none. But some of the headline writers have focused on the fact that he mentioned that the Federal Reserve will raise rates when the economy recovers. Well, I wonder who would have been so obtuse as to think otherwise?

Aided by the Canadian jobs number, the Canadian five-year got smacked for 23bp today, closing at 2.75%. It is interesting to speculate whether the implied narrowing in required reset spreads will bring a flood of FixedReset issuance next week … I trust all the newly indentured investment bankers will be working their telephones from their call-centres.

There could be an interesting ‘cram-down’ battle going on with Energy Future:

— Energy Future Holdings Corp.bondholders are forming a group to block the electricity provider’s offer to swap $6 billion of debt for $4 billion of new secured notes with less protection for investors, according to two people familiar with the matter.

Lenders owning as much as 50 percent of Energy Future’s bonds maturing in 2017 oppose the terms of the exchange, said an attorney familiar with the matter who declined to be identified because the discussions are private.

Dallas-based Energy Future, formerly TXU Corp., needs to reduce debt after KKR & Co. and TPG Inc. paid $43 billion for the company using a combination of high-yield, high-risk loans and bonds in October 2007. That was before gas prices fell, credit markets seized up and equity markets tumbled.
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Energy Future has $44.5 billion of loans and bonds, including $22.5 billion coming due in 2014, according to data compiled by Bloomberg.

The company “is suffering under the weight of an untenable debt load created by an ill-timed leveraged buyout at the top of the market,” Carl Blake, a Washington-based analyst at Gimme Credit LLC, wrote in an Oct. 6 report.

We will see more of this as the smoke clears – we saw some yesterday with the BAM acquisition of BBI.

I mentioned the controversy regarding the Federal Housing Authority yesterday. Here’s a defense of their business practices from the chair of the House Subcommittee on Housing and Community Opportunity, Maxine Waters:

It is a myth that FHA is the new subprime and has adopted lower underwriting standards and the other worst abuses of the subprime market. In fact, just the opposite is true. A recent Federal Reserve report indicates that over 60 percent of the increase in FHA purchase activity between 2007 and 2008 was to borrowers with prime-quality FICO scores. Additionally, the percentage of loans in FHA’s portfolio with loan-to-value ratios above 95 percent has fallen from 72 percent in 2007 to 67 percent in 2008. And unlike the subprime market, all of FHA’s mortgages require full documentation and verification of the borrower’s income and assets.

The preferred share market was down again today, with PerpetualDiscounts down 24bp and FixedResets giving up 7bp; as always, figures are given in terms of total return. The S&P/TSX Preferred Share Index was down 41bp, as opposed to no change yesterday; I have been asked about such differences and suspect that S&P uses the Close to price the index, rather than the Closing Bid used by HIMIPref™, although their published methodology does not make this absolutely explicit. Volume was good.

This is way, way, way WAY off topic, but I grew up with Vivien Leigh telling the Beatrix Potter stories (on 45s – if anybody remembers what those were) and have been looking for re-releases for years. Found ’em! The best is Peter Rabbit.

Yet another major US housing subsidizer is in trouble:

The Federal Housing Administration, which insures mortgages with low down payments, may require a U.S. bailout because of $54 billion more in losses than it can withstand, a former Fannie Mae executive said.

“It appears destined for a taxpayer bailout in the next 24 to 36 months,” consultant Edward Pinto said in testimony prepared for a House committee hearing in Washington today.
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The FHA program’s volumes have quadrupled since 2006 as private lenders and insurers pulled back amid the U.S. housing slump, Pinto said. The jump has left the agency backing risky loans and exposed to fraud in a “market where prices have yet to stabilize,” he said.

Representative Scott Garrett, a New Jersey Republican, introduced legislation this month to boost the FHA’s minimum down payment to 5 percent from 3.5 percent to help shore up the agency’s insurance fund, a move that could add to the housing market’s burdens as it struggles to recover.
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Falling prices will push the FHA’s single-family fund’s reserves below a 2 percent cushion required by Congress, Commissioner David H. Stevens, who will also speak today, said last month. “Under no circumstances will a taxpayer bailout be needed” because the shortfall will be cured over time, he said.

The idea the FHA needs a rescue is “just plain wrong,” Stevens said in an Oct. 6 letter to the Wall Street Journal. That’s in part because the FHA’s accounting method mean its reserves are enough to cover more than 30 years of projected losses, assuming no revenue from new business, he said.

FHA’s total reserves exceed $30 billion, or more than 4.4 percent of its insurance, according to Stevens. The loan- insurance ratio, which compares the reserves with the loans insured, was 6.4 percent a year ago, government data shows.
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Official figures on FHA’s reserves as of Sept. 30 won’t show a shortfall when released because “the assumptions used will be overly optimistic relative to loss mitigation resulting from both loan modifications and recent and expected underwriting changes,” Pinto said.

In the early days of MLEC (remember MLEC? It was going to save the world from a possible credit crunch) I argued that the only way it could work would be if it had the plan of buying wonderful assets from distressed SIVs. Now that PPIP is the acronym of the day, it looks like I was right:

Starwood Capital Group LLC and TPG’s agreement to buy $4.5 billion of Corus Bankshares Inc.’s real estate assets shows investors are ready to bet on distressed property — as long as the U.S. helps finance the deals.

The private-equity firms led a group that won the auction for loans and properties of the failed Chicago lender, offering $554 million, the Federal Deposit Insurance Corp. said Oct. 6. They will take a 40 percent stake and manage the portfolio, while the FDIC keeps 60 percent and lends the buyers as much as $2.39 billion to complete the sale.

The investors, who are paying about 60 cents on the dollar, beat out seven other bidders.

Some may quibble over my equating these distressed mortgages with “wonderful assets” … but with vendor financing of over 80% of the price on a non-recourse basis … well, it works just like that extra glass of beer in a pick-up bar near closing time, you know?

THUMP! The preferred share market got whacked again today, with PerpetualDiscounts down 43bp and FixedResets losing 16bp on good volume. I am pleased to see a lot of volatility evidenced in the composition of the performance table: there were fifteen index included issues losing more than a point (total return), but five gained more than this. Increasing volatility means more trading chances!

The new PWF 5.80% Straight starts trading tomorrow … that should be fun.