PrefBlog

Encouraging news regarding Wall Street’s structure is being reported:

Smaller firms are emerging from the wreckage of the world’s largest financial companies, which are conserving capital following more than $1.2 trillion of writedowns and credit losses since the start of 2007. They’re luring traders with a shot at $500,000 commissions for two days’ work as banks that accepted federal bailouts retrench and slash bonuses.
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“I don’t mean to dance on anybody’s graves here, but it’s just this incredible opportunity to reassemble a securities firm that does business the right way,” said Lee Fensterstock, chief executive officer of one of the firms, Broadpoint Securities Group Inc. in New York. “That business is going to lead with brain as opposed to capital. We’re not planning to run big balance sheets or big leveraged positions.”

Let’s just hope this trickles down to Bay Street! Since the banks took over the industry in 1990, there has been a marked evolution towards bond traders and salesmen being jumped-up tellers more than anything else.

In shocking news, a UK bond auction has failed:

The U.K. failed to find enough buyers for 1.75 billion pounds ($2.55 billion) of bonds for the first time in almost seven years as debt investors repudiated Prime Minister Gordon Brown’s plan to stem the worst economic crisis in three decades.

Gilts slumped after the London-based Debt Management Office, which manages bond auctions on behalf of the Treasury, said investors bid for 1.63 billion pounds of the 40-year securities. The last time the U.K. government was unable to attract enough investors was in 2002 when it tried to sell 30- year inflation-protected bonds. The yield on the 4.5 percent gilt due 2049 rose 10 basis points to 4.55 percent.
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“This sinks Brown below the waterline,” said Bill Jones, professor of politics at Liverpool Hope University. Brown’s “whole strategy is based on borrowing and now he can’t get anyone to buy his gilts. This means the prospect of going cap in hand to the IMF hovers increasingly into view.”
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The auction failure comes as the Bank of England uses newly printed money to purchase government and corporate debt in an attempt to drive down borrowing costs. The Treasury gave the central bank authority March 5 to purchase as much as 150 billion pounds of securities.

“It doesn’t help to have your central bank say it’s buying government debt and then when you’re selling it you can’t find enough buyers,” Kit Juckes, head of fixed-income research at Royal Bank of Scotland Group Plc in London, said in an interview today on Bloomberg Radio. “It doesn’t impress.”

Watch out, Kit Juckes, head of fixed-income cheerleading at Royal Bank of Scotland Group PLC in London! You work for a nationalized firm! No bonus for YOU!

Equities were having a nice day, until the Treasury 5-Year auction drew weak interest. Across the Curve is not impressed by the Fed’s implementation of its somewhat offsetting buy-back programme.

The political incitement to riot continues; politicians can be proud that their efforts have not just resulted in the bleating of sheep, but much more direct action.

Kudos to the Hospitals of Ontario Pension Plan, which delivered superb performance in 2008:

The Hospitals of Ontario Pension Plan (HOOPP) announced an investment rate of return for 2008 of -11.96 per cent, closing the year 97% funded.

“HOOPP weathered the financial market storm better than most in 2008, but it’s our long-term ability to pay pensions that counts…and we want to assure our members that their pensions are secure. Whether markets are up or down, by focusing first and foremost on our obligations HOOPP continues to provide a pension our members can count on,” said John Crocker, President and CEO. “HOOPP’s joint governance structure ensures that our Board of Trustees is continuously engaged and able to take action as required to keep our pension promise.”

An example of this active Board involvement is HOOPP’s change in investment strategy in late 2007 to reduce risk by adjusting the asset mix to better match the maturing plan’s pension liabilities. This change minimized losses by significantly reducing public equity exposure and increasing investments in Canadian bonds.

Can you imagine? Paying attention to liabilities when investing the assets? Incredible! Revolutionary! John Crocker is a GENIUS!!!

The Chief Investment Officer, John Keohane, was promoted from his position as Vice-President of Portfolio Strategy & Derivatives. John Crocker was promoted from CIO.

Assiduous Readers may remember my thesis that outperformance is very easy for large institutional funds. All you need is a captive investment team that can concentrate on performance and is rewarded for performance, without having to worry about sales and story-telling. OMERS & Teachers are such plans. Even the Caisse qualifies, although just barely. Unfortunately, this thesis will never be stringently tested by academics; there’s too much risk that it might be found that markets are not efficient, which would mean forty years’ work down the drain.

There is a lot of blather about replacing the USD as the international reserve currency of choice; this is mere political mischief making. Replacing the USD is easy, you can do it tomorrow, if you like. Simply ask for international payments to be made in some other currency and accept no substitutes. Accrued Interest has ridiculed the Chinese position on US investments, which is a rather dangerous view to take: trends don’t have to execute completely overnight to cause a lot of problems … Americans will become very upset over time if they discover in ten years that their mortgage rates are set in Peking.

A dull day, price-wise, but volume was good. PerpetualDiscounts now yield 7.30%, equivalent to 10.22% interest at the standard equivalency factor of 1.4x. Long Corporates continue to be DULL and BORING, trading in a tight range around 7.5%, so the pre-tax interest-equivalent spread is now 272bp; high by any standards but those of the past six months.

Bernanke & Geithner continued their campaign to have the Fed become the regulator of everything:

The top two U.S. economic leaders called for new powers to take over and wind down failing financial companies after the government’s troubled rescue of American International Group Inc.

“As we have seen with AIG, distress at large, interconnected, non-depository financial institutions can pose systemic risks just as distress at banks can,” Treasury Secretary Timothy Geithner said in testimony to a House Financial Services Committee hearing today in Washington. Federal Reserve Chairman Ben S. Bernanke said “AIG highlights the urgent need for new resolution procedures.”

I can’t support it. The only reason AIG posed a risk to the banking system was because the banks were insufficiently regulated … by the Fed. Why were the banks allowed to pair off their long/short CDS positions to such an extent? This would only be appropriate in the case in which AIG had posted a lot of collateral … and they didn’t post any collateral. Had the banks & brokerages been required to put up capital against this lack of collateralization, it wouldn’t have been a problem.

PerpetualDiscounts advanced and FixedResets declined, the latter on heavy volume as it appears that the RY new issue announcement caused a certain amount of portfolio rejigging.

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.
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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.
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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.