PrefBlog

Sorry, folks! This is a busy time, so there’s no commentary.

DBRS reports that the ABCP Clean-up Vehicle is underpaying its first interest payment:

notice delivered by BlackRock (Institutional) Canada Ltd. (the Administrator) regarding the first payment date for Master Asset Vehicle I and Master Asset Vehicle II (collectively, the MAVs).

The notice advised that insufficient proceeds would be available to pay accrued interest in its entirety on the Class A-1 Notes and Class A-2 Notes (collectively, the Class A Notes). The Administrator identified the following three factors that it believes contributed to the interest shortfall:

(1) The MAVs were required to pay certain expenses related to the closing of the transaction.

(2) There was an abbreviated first interest period and a mismatch in the payment dates for certain underlying assets.

(3) A fixed-floating interest rate mismatch exists between the margin funding facility fees and the return generated by the underlying assets.

As outlined in the MAV rating reports published on January 21, 2009, the rating of the Class A Notes addresses the payment of interest as set out in the terms of the transaction documents. According to their respective Trust Indentures, the MAVs have no legal obligation to pay interest before January 22, 2019. Therefore, no negative rating action will result from the failure to pay the full amount of accrued interest on the Class A Notes on any given payment date. However, if after reviewing the first payment date report, DBRS determines that expenses and/or proceeds from the underlying assets are materially different from what was originally modelled, negative rating action may be required.

The saga just never ends, does it?

The Globe & Mail reports more pressure for captive pension managers to become commercial asset managers:

Michael Nobrega, chief executive officer of the Ontario Municipal Employees Retirement System (OMERS), said yesterday that his fund is now open for business and is actively seeking mandates to manage other pension funds’ assets.
…
And while Mr. Nobrega said OMERS should become a superfund manager, he insisted his vision is not motivated by a personal desire to build an empire.

“This is not about Michael Nobrega trying to be president of a superfund,” he told reporters yesterday. “This is about what’s right for plan members. You need resources to manage these [plans]. These are very complex areas.”

There are a number of things that are massively wrong – well, suspicious, anyway – about this idea:

• Regardless of Mr. Nobrega’s personal motivations, concious and unconcious, turning a captive asset manager into just another asset management firm will change the culture. Sales is anti-thetical to performance; and once third-party run-awayable assets become important to the organization, then it’s bang, game over.
• I still see no evidence that large managers outperform small managers, or even medium-size managers. Take a look at all the biggest firms you can think of: they will tell you their headcount, they tout their Assets-under-management, they wax ecstatic about their multiplicity of offices that ensures that clients can be taken out to lunch no matter where they are …. but don’t spend too much time looking for audited performance reports, compliant with what are rather hopefully described as industry standards, unless you want to get as cynical as I am
• Private equity is – at least to some extent – a shell game. The reason you take something private is so that you can discount the expected cash flows from the private entity in your own way rather than marking to market; a bit like the infamous Level 3 Assets that people get so upset about. I will not suggest that private equity is not a good idea; I’ll just say that I suspect returns are subject to inherent smoothing
• Superfunds? Am I lekniW naV piR, the only guy in town who’s been awake for the past twenty years? One of the great scandal-shock-horrors of the recent credit crisis has been the discovery that some banks are too big to fail and that the cost of bail-outs represents an unprecedented strain on public finances. Willem Buiter, particularly, has been scornful of financial systems in which the banking system is not only concentrated, but large relative to GDP. What happens if a superfund gets into trouble? McGuinty is already wetting his pants about the prospect of having to bail-out (or take the political heat for not bailing out) a little rinky-dink plan like GM Canada. Do we really want to take the chance that half (at least) of all Ontario plans are going to make the same Big Bad Mistake?
• And there’s market influence. A certain teflon-coated regional superfund recently took investment action that had the effect of rigging the market in Canadian ABCP (whatever its intentions may have been; and it with some help from its allies) and remember? When it went bust it went bust big-time and in a hurry. Who is prepared to guarantee to me that that won’t happen again? Don’t waste my time snivelling that Bad People will be Frowned At. Guarantee that it won’t happen.

Very good volume today, with the market slightly off; FixedResets might have been adversely affected by news of $300-million+ new supply from RY.

Julia Dickson of OSFI gave a speech to the ABA clearly demonstrating her contempt for investors, the despised third pillar of the banking system. The role of investors – and their reliance on mandated disclosures – was, basically, ignored.

Bloomberg has reported on the Fed’s response to the controversy regarding the size and nature of its emergency actions:

Former Fed Chairman Paul Volcker said Congress will probably review the authority granted to the Fed following the expansion in its assets.

“I don’t think the political system will tolerate the degree of activity that the Federal Reserve, in conjunction with the Treasury, has taken,” Volcker, head of President Barack Obama’s Economic Recovery Advisory Board, said in remarks to the conference at Vanderbilt University.

U.S. lawmakers from both political parties, including House Financial Services Committee Chairman Barney Frank, have expressed concern in recent months that the central bank has overstepped its authority by providing emergency credit.

In his speech, Vice Chairman Donald L. Kohn said:

For the credit facilities that we make available to multiple firms, we are not taking significant credit risk that might end up being absorbed by the taxpayer. For almost all the loans made by the Federal Reserve, we look first to sound borrowers for repayment and then to underlying collateral. Moreover, we lend less than the value of the collateral, with the size of the “haircuts” depending on the riskiness of the collateral and on the availability of market prices for the collateral. Some of our lending programs involve nonrecourse loans that look primarily to the collateral rather than to the borrower for repayment in the event that the value of the collateral falls below the amount loaned. In these circumstances, we insist on taking only the very highest quality collateral, lend less than the face amount of the collateral, and typically have other sources to absorb any losses that might nonetheless occur–for example, Treasury capital for our lending against securitized loans.
…
Will These Policies Lead to a Future Surge in Inflation?
No, and the key to preventing inflation will be reversing the programs, reducing reserves, and raising interest rates in a timely fashion. Our balance sheet has grown rapidly, the amount of reserves has skyrocketed, and announced plans imply further huge increases in Federal Reserve assets and bank reserves. Nonetheless, the size of our balance sheet will not preclude our raising interest rates when that becomes appropriate for macroeconomic stability. Many of the liquidity programs are authorized only while circumstances in the economy and financial markets are “unusual and exigent,” and such programs will be terminated when conditions are no longer so adverse. Those programs and others have been designed to be unattractive in normal market conditions and will naturally wind down as markets improve.

All this is Central Banking 101; we have to rely on the Fed to execute the theory correctly – and this will be fodder for academic arguments for the next century.

Bloomberg notes that inflation concerns are driving down bill yields:

Rates on three-month bills turned negative in December for the first time since the government began selling them in 1929 as investors sacrificed returns to preserve principal. After increasing at the start of the year, rates have dropped 0.20 percentage point since the beginning of February to 0.13 percent on April 17.

Demand for bills is rising again because investors including foreign central banks are snapping up the shortest- term U.S. securities as the Federal Reserve buys Treasuries to drive down borrowing costs in a policy of so-called quantitative easing. China, the largest U.S. creditor, with $744 billion of debt, has questioned the practice and shifted purchases to bills from longer-maturity securities.

“There’s a group of investors out there who are looking at what the Fed is doing and the policy action they’ve taken and the asset purchases, and saying ultimately this is inflationary,” said Stuart Spodek, co-head of U.S. bonds in New York at BlackRock Inc., which manages $483 billion in debt. “You’re going to invest in very short-term bills because you absolutely need not just the quality but also the absolute liquidity.”

An alleged leak of the US bank stress tests has been touted on the Web but frankly, it doesn’t look too credible. We shall see!

Today’s excitement was the DBRS Mass Review-Negative of bank prefs; this was not released in time to have an effect on the market, but we will see what tomorrow brings.

The PerpetualDiscount winning-streak came to an end today; sorry folks, that was my fault. I shouldn’t have posted about it after Friday’s gain. The market was well behaved, with few individual issues showing price changes of much note, on continued good volume.