PrefBlog

The concept of credit protection on the United States of America has captured imaginations all around, with Accrued Interest referring to it as a “chaos trade” – defining this as “positions designed to produce big returns if all hell breaks loose” and Naked Capitalism comparing US Treasuries to senior debt of the GSEs. Certainly the greenback continues to sink against the Euro.

Equities did very poorly today, with General Motors suspending its dividend.

Cheyne Finance, last mentioned on October 22 and November 13, is having a $6-billion fire sale:

The first auction of assets by a structured investment vehicle drove Moody’s Investors Service to downgrade the Cheyne Finance Plc SIV by five levels, describing it as a “fire sale.”

The $6 billion SIV set up by London-based Cheyne Capital Management (UK) LLP is scheduled to auction its assets this week or transfer them to a new company under a reorganization by receivers Deloitte & Touche LLP and Goldman Sachs Group Inc. Moody’s said it cut the SIV’s senior debt to Ca, its second- lowest grade, in a report today.

And Willem Buiter fulminates on the real meaning of the GSE bailout:

The Treasury has taken another big step on the road to Utter Fiscal Obfuscation. It is doing everything it can to disguise the fact that it is entering in commitments that create potentially massive contingent liabilities for the US tax payer. Even if the purpose served by this increase in contingent liabilities is worth the cost, the manner in which it is done is designed to avoid fiscal accountability. This is as welcome to the Executive as it is to the Congress.

Note to all aspiring politicians: guarantees are not a cost-free method of accomplishing social goals. They will be called in at the most inopportune time.

Here’s an interesting factoid:

The S&P 500 Financials Index dropped 3 percent, capping its steepest-ever five-day retreat and giving the industry a smaller market value than health care for the first time since 1992, S&P data show.

Amidst all this gloom, I will remind readers that Bombardier first halved, then suspended its common dividend a few years back – the common dividend has only recently been reinstated. But the preferreds kept on paying through the period. First loss protection is not just a theoretical construct!

What a life! If anything, the panic is spreading … the price-movers list is longer today than it was, there were a number of block trades in the volume highlights and the PerpetualDiscount index was down more than a point for the second day running, to yield 6.58% … 9.21% interest-equivalent, long corporates +311bp. On the other hand, a few CM issues were up significantly on the day … which could imply the emergence of bottom fishers, it could be a dead-cat bounce, or it might mean absolutely nothing at all. I’ll let you know when it’s all over.

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

The implicit guarantee of the GSE will – probably – shortly become explicit.

James Hamilton of Econbrowser reviews the situation and approves of the plan:

The first thing I like about this plan is the fact that the ultimate determination of the level of risks to be absorbed by the federal government is being left to Congress.
…
The second thing I like about the plan is that such action by Congress would take the form of a dollar limit– here’s how much we’re willing to stake, and no more– with residual losses presumably laid on the GSE creditors.

Accrued Interest mourns bad decisions of the past:

its a sad day for free markets. I see the Treasury as between a rock and a Depression, and has selected the rock. I’d have done the same. I don’t blame Treasury so much as I lament that its come to this. Exactly who to blame for this or what could have been done differently in the past is a discussion for another time.

The WSJ Economics Blog collected some opinion from Street economists – mostly neutral and a bit bewildered, but with one interesting observation that it made shorting the stock a riskier proposition than otherwise. Jim Rogers and George Soros hate it. Naked Capitalism supplies further clippings.

From the Interesting Factoid department comes an estimate of Canadian banks’ exposure to the US:

BMO had the highest loan exposure at $51 billion, while TD’s exposure was estimated to be $46 billion. The two Canadian banks have focused their U.S. banking businesses on different regions – Chicago and the Midwest in the case of Bank of Montreal and the U.S. Northeast in the case of Toronto-Dominion.

Commercial loans to real estate and financial services companies made up about 43 per cent of the total amount at both banks.

[Blackmont Capital analyst Brad] Smith also noted that Royal Bank (TSX: RY.TO) only had a “modest exposure” worth $25 billion or 10 per cent of the outstanding loans, “surprisingly, given its well-established U.S. retail banking and global capital markets business.”

The least at risk were CIBC (TSX: CM.TO) and Scotiabank (TSX: BNS.TO), both with single-digit exposure.

He concludes … :

[TD & BMO] could see their earnings per share decline as much as seven per cent next year

Wow, earnings down as much as 7%, eh? Holy smokes! There’s a little perspective for you! Stockbrokers, I’m sorry to say, are busily attempting to convince clients that preferred dividends from banks in Canada are at risk. I’ll start paying attention when I hear a little less “could” and “might” and a few more numbers.

This market is getting surreal. PerpetualDiscounts are now yielding 6.49%, equivalent to 9.09% interest at a conversion factor of 1.4x. Long corporates continue to yield 6.1%, so the Pre-tax Interest-Equivalent spread is now just a hair under 300bp.

In the volume leaders, only two blocks were traded – both by CIBC and both 60,000 shares, so there’s even a possibility they’re related.

If I was seeing any confirmation in the bond market that the world was about to end, I’d be taking this a lot more seriously. I wouldn’t necessarily agree with the bond market’s analysis, understand, but I would have to consider predictions of impending doom with a sharper eye to detail. But we’re not seeing any of that. Volume is light and there are incredible moves happening on featherweights! PerpetualDiscounts were down over 1% today! That’s a bad MONTH!

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