PrefBlog

Freddie Mac had a gushing review on Bloomberg today:

Freddie Mac rose 17 percent in New York trading after a $2 billion sale of short-term debt stoked confidence the second-largest U.S. mortgage-finance company can still attract investors.
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Freddie Mac sold $1 billion of three-month notes at a yield of 2.58 percent, the company said today. That translates to about 90 basis points more than similar-maturity U.S. Treasuries and 23 basis points less than the three-month London interbank offered rate. The spreads from last week’s sale were 61 basis points over Treasuries and 32 basis points below Libor, according to Stone & McCarthy Research Associates.

The company also sold $1 billion of six-month debt at a yield of 2.858 percent, a spread of about 92 basis points above Treasuries and 25.5 basis points below Libor; compared with 80 basis points and 32 basis points last week. A basis point is 0.01 percentage point.

Well … it’s nice that they were able to finance through LIBOR, but let’s not get carried away! Let’s see how well they can finance the next month’s needs:

Fannie has about $120 billion of debt maturing through Sept. 30, while Freddie has $103 billion, according to figures provided by the companies and data compiled by Bloomberg.

… on the bond market, rather than the Money-Market, before breaking out the champagne. Unless my trusty calculator has let me down, $2-billion is less than half their daily quota until September 30 … each.

Fortunately for oenophiles, there is an excuse for some bubbly. PerpetualDiscounts were up 21bp today, bringing the total return index back to slightly above its June 30 levels … OK now it’s time to start working on June (a really, really lousy month).

The perpetualDiscount index now has a weighted average mean yield to maturity of 6.11%, equivalent to 8.55% interest at the standard 1.4x equivalency factor. Long corporates now yield in the 6.15-6.20% range, so the pre-tax interest-equivalent spread is now about 235bp.

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

Update: Dealbreaker passes on a rumour that Fed Pressures Treasury Not To Wipe Out Fannie Mae Preferreds:

The Federal Reserve has been quietly pressuring the Treasury Department not to adopt a rescue plan for Fannie Mae and Freddie Mac that would wipe out the value of their preferred shares, according to a source familiar with the matter. The Fed fears that any move that hurt the preferred could worsen the crisis in regional banks that is already under way.
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The situation is complicated, however, by the large share of preferred stock held by regional banks, many of which are viewed as possible candidates for failure in these credit crunched times. As the Financial Times reported over the weekened regional banks and US insurers hold the majority of Fannie and Freddie’soutstanding preferred stock. The Fed has begun advocating against wiping out these shares, saying the threat to stability of the banks is greater than the ‘moral hazard’ argument, a source familiar with the matter says.

As usual, it’s not clear what is meant by “wiping out”.

An Assiduous Reader sent me an article from Barrons today The Endgame Nears for Fannie and Freddie:

Should the agencies fail to raise fresh capital, the administration is likely to mount its own recapitalization, with Treasury infusing taxpayer money into the enterprises, according to our source. The infusion would take the form of a preferred stock with such seniority, dividend preference and convertibility rights that Fannie’s and Freddie’s existing common shares effectively would be wiped out, and their preferred shares left bereft of dividends. Then again, the administration might show minimal kindness to preferred shareholders; local and regional bankers have been lobbying the Bushies not to wipe out the preferred since the bankers own a lot of that paper and rely on the bank preferred-stock market for much of their own equity capital.

This is similar to the scary-scenario-base-case I outlined yesterday … but the airy assertion that the result would be “preferred shares left bereft of dividends” is more than just a little vague. Left bereft for how long? That’s the key.

As with all investing, it’s important to look behind the headlines and put actual numbers together … to date, I’ve seen no actual analysis that goes beyond “The sky is falling!”.

As an illustration – a very rough one! – of what I mean, let’s work out the value of FNMPRG under the scenario above – and let’s say that the dividend is halted for five years. Given the uncertainty in the market, we’ll say we want a yield of 10%.

FNMPRG pays a dividend of $2.29 annually; we’ll assume that this is in one payment, due exactly one year from now. At ten percent, this would imply a value of $22.90 for these prefs, before accounting for five years of missed dividends.

The five years of missed dividends, discounted at 10%, have a present value of $8.44. Subtracting this from the $22.90 that the perpetual annuity is worth, we arrive at a fair value of $14.46 for the prefs, compared to their market value of $9.76. Under this scenario, the prefs are a bargain.

This, at least, represents an attempt to put numbers on the table. Is the scenario too harsh? Too lax? Change it. Put some percentage chances on it and stick it in a pot with all your other scenarios, come up with a range of values and – if it turns out to be an attractive speculation – put a little bit of money into it, with all the other little bets in your portfolio. And, if you’ve done your homework properly, and you have kept all your bets sufficiently small that a run of bad luck or bad analysis won’t hurt you – you’ll do fine.

Naturally, if you do your homework and decide that …

• Dividends will be stopped immediately, probability 100%
• There will be no recovery, ever, probability 100%

… then your analysis will result in a fair value estimate of the prefs of $0 and you will consider them expensive. But at least you will have done your homework and put your assumptions and scenarios on the table where you can look at them.

You can let the yumps who cry Oh, the dividend might be stopped and everything is worthless boo-hoo-hoo run along home to play with their dollies.

Amidst all this, I will stress again that I am not taking a view, one way or another, on the investment merits of the GSE prefs. I haven’t done my homework. All I’ve done is try to find an actual reference to actual analysis in the press reports and been disappointed.

Accrued Interest has passed on some GSE speculation from Merrill.

Moody’s downgraded Fannie’s prefs today:

The preferred stock ratings and BFSRs remain on review for possible further downgrade. Fannie Mae’s and Freddie Mac’s Aaa senior long-term debt and Prime-1 short-term debt ratings were affirmed with stable outlooks. The firms’ Aa2 subordinated debt ratings were affirmed, but the outlook was changed to negative from stable.
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Moody’s believes these firms currently have limited access to common and preferred equity capital at economically attractive terms.
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The downgrade and continued review for further downgrade of the preferred stock ratings reflects a greater risk of dividend omission on the preferred stock.
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Should a capital injection result in the subordination of the existing preferred stock, or should it result in any missed preferred dividends, then the preferred stock rating would be lowered further.

I will point out that the Moody’s downgrade still leaves the prefs at investment grade, although not by much; I will further point out that the rating is an opinion on the probability of the prefs not deferring any dividends at all – in which case, the yield will be about 25%, not the 10% net that I demanded in my scenario.

All this is reminiscent of my musings on the proper analysis of FTU.PR.A; there is some doubt as to whether this will be able to pay all its dividends and 100% of principal, so its credit rating has suffered; but it’s so cheap right now that that particular scenario results in a phenomenal return. Formally, the asset coverage is only about 1.2:1, as of August 15 according to the company – but that asset coverage figure is based on the par value of $10 and the unit value of $12. Based on the current market price of the preferreds of about $7.50, asset coverage is 1.6:1 of the amount invested, a much nicer number! Even if the underlying US Financials do terribly over the next few years and the prefs eventually recover only the current price of $7.50 (which counts as a default), interim dividends (if actually received, of course) of $0.525 p.a. will have resulted in a yield of 7%, which some might consider to be rather good. There are other scenarios, which result in returns being “extremely good” … and yet other scenarios, which result in returns ranging from “lousy” to “disastrous”. Do yer homework, gents, and place yer bets! Small ones!

Oh! And I like to keep abreast of the Thornburg Mortgage situation, since that’s been the most spectacular flame-out so far into the current crunch or preferreds in North America. Investing Thoughts brings to my attention a press release on the story so far:

As of 5:00 p.m., New York City time, on August 19, 2008, holders of Preferred Stock had tendered approximately (i) 88.7% (5,786,035 shares) of the Series C Preferred Stock; (ii) 83.5% (3,340,873 shares) of the Series D Preferred Stock; (iii) 91.7% (2,900,546 shares) of the Series E Preferred Stock and (iv) 96.2% (29,161,031 shares) of the Series F Preferred Stock.

Shareholders who participate in the Exchange Offer will receive $5.00 in cash and 3.5 shares of the company’s common stock for each share of Preferred Stock validly tendered and accepted. Holders of the Preferred Stock who have previously tendered their shares of Preferred Stock continue to have the right to revoke such tenders at any time prior to the new expiration date by complying with the revocation procedures set forth in the Offering Circular relating to the Exchange Offer.

Total book value of all series of Thornburg’s preferreds was around $832-million as of Dec. 31/07.

I suppose that every now and then I should mention something about the Canadian preferred market, seeing as that’s what this blog is supposed to be about … although the market has rationalized itself somewhat over the past month, there’s still plenty of craziness left. For instance, good old BAM.PR.O, which had a very poorly received underwriting in June and performed poorly in the last half of July. Credit concerns, possibly? Well, riddle me this: Why does it yield more than the perps? It is bid at 22.90 to yield 7.33% until optionCertainty 2013-6-30, while the perpetuals BAM.PR.M and BAM.PR.N are both bid at 16.90 to yield 7.17%.

An extremely quiet day on the preferred share market today, but PerpetualDiscounts did creep up and have almost repaired July’s damage.

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

More excitement and speculation regarding Fannie and Freddie today, with some rather vague television commentary:

The companies’ preferred securities are typically held by insurance companies, mutual funds and banks, analysts said. That may cause Paulson to stop short of eliminating their holdings in any government intervention.

“The common shareholders will probably be completely wiped out,” Paul Miller, an analyst at FBR Capital Markets, said in a Bloomberg Television interview. “Preferred will also see a lot of pain. But that is up in the air because a lot of banks own the preferred. You put a lot of banks in trouble if you just wipe out the preferred also.”

The mechanism for wiping out preferreds was not specified – even the gloomiest commentary Naked Capitalism could dig up did not make Fannie’s net worth significantly negative. Forced sales of inventory could make things worse, of course – but would any responsible receiver or creditor’s committee do this?

Freddie Mac is in a much worse position, according to a somewhat more credible commentator:

Chances are increasing that the U.S. may need to bail out Fannie Mae and the smaller Freddie Mac, former St. Louis Federal Reserve President William Poole said in an interview. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules, he said. The fair value of Fannie Mae’s assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter, Poole said.

It should be noted that all this kerfuffle isn’t just of interest to bloated plutocrats: the troubles are being passed through to retail mortgage rates:

Rates on average 30-year fixed mortgages rose to 6.37 percent this week, about the highest in six years, as yields on bonds guaranteed by Fannie Mae and Freddie Mac increased to almost the highest since 1986 relative to Treasuries. More than 70 percent of new home loans are bought or guaranteed by the government-chartered companies, known as “prime” mortgages.

I will note, yet again, that I am not taking a view on the merits or lack thereof of the Fannie and Freddie prefs – but the matter holds some general interest, at the very least, for preferred share investors because it’s an example of a situation in which the common dividend of a financial corporation has been cut and the prefs have plummetted. And I won’t say that the resolution of the problem will set a precedent … but to some extent, it will set a benchmark.

Besides, it annoys me to read stuff like: “Preferred will also see a lot of pain. But that is up in the air because a lot of banks own the preferred. You put a lot of banks in trouble if you just wipe out the preferred also.” without any indication of the mechanism or rationale underlying “wipe out” and “lot of pain”. Just once, it would be nice to see some actual analysis!

In further fallout from the unwinding of irrational exuberance, CMBS spreads are widening:

Yields on commercial real estate securities relative to benchmarks rose to near record highs on concern that Riverton Apartments, a high-rise complex in Manhattan’s Harlem neighborhood, will default on a loan.

AAA rated commercial mortgage-backed bonds widened about 37 basis points to 305.57 basis points more than 10-year swap rates during the week ended yesterday according to data from Bank of America Corp. A basis point is 0.01 percentage point.

The gap, or spread, jumped after a trustee report showed payments wouldn’t be made in September on a $225 million loan on the 1,230-unit Riverton.
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Almost 93 percent of the New York property’s units were rent stabilized when the loan was originated, according to a JPMorgan report on Aug. 15 from analysts led by Todd. The owners intended to deregulate 53 percent of all the apartments by 2011, more than doubling the average monthly rent on those units from $894 to $2,261.

Only 10 percent of the units in the 12 buildings were converted to fair-market rents as of July, according to the Aug. 13 report from trustee LaSalle Global Trust Services Ltd. in Chicago.

Maybe the investors can run crying to mommy.

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

Update: A bit more speculation on the Fannie/Freddie prefs was reported by Bloomberg:

Small, regional banks may have the most to lose from the stumbles in Fannie and Freddie, and Paulson may risk bank failures unless he protects preferred stockholders, said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York. The impact on the preferred holders “may be an important driver” in Paulson’s decisions, Jersey said.

“Any wipeout of the preferreds could have implications for the capital of the greater financial system and these regional banks that might have reasonably precarious capital situations,” Jersey said. “You don’t want to make that worse if you’re the government.”

This nuance was noted by Accrued Interest in a post last Monday. Back to Bloomberg…

Treasury probably will get preferred shares as part of any bailout, eliminating the value of the common shares and causing “a lot of pain” for preferred shareholders, who will rank behind the government in payments and may have their dividend cut, according to Friedman Billings Ramsey & Co. analyst Paul Miller in Arlington, Virginia. CreditSights Inc. analyst Richard Hofmann in New York said holders should “brace” for a deferral of dividends.

The Treasury may wait until Fannie and Freddie’s capital is so eroded that regulators can put them into a receivership, said Andrew Laperriere, managing director at International Strategy & Investment Group, a money management and research firm in Washington.
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Paulson must also weigh whether hurting preferred shareholders would cripple the $350 billion market that banks across the country also rely on for financing, said CreditSights’ Hoffman. Banks sold $76 billion of preferreds this year to bolster capital after more than $500 billion of credit losses and writedowns

Well … at least there’s been a bit of discussion of the possibilities! The trigger could be an inability to roll debt:

If either company has trouble selling bonds to finance maturing debt, Paulson’s hand may be pressed. They have about $20 billion of unsecured debt due on average every week, with more than $220 billion maturing by the end of next month.

A takeover could also be triggered if either company fails to meet its regulatory capital standards, to be released by the Federal Housing Finance Agency next month.

It should be noted that a failure to meet regulatory capital guidelines – which, as has been noted repeatedly – are pretty lax to begin with, is not the same thing as insolvency. Even Naked Capitalism was able to get that one right:

Mere solvency is not an appropriate standard for the GSEs. In their role of providing/guaranteeing mortgages, they have to be able to fund at the very best rates. That means they need to be an AAA credit, or at worst, a very strong AA. Mere solvency is BBB, perhaps even BB or B. Simply being solvent doesn’t cut it.

But … mere solvency does pay off the preferreds.

So … here’s my take on the most likely scary scenario:

• GSE can’t roll debt on terms that allow them to make a profit
• Treasury buys senior prefs, convertible into common in X years at $1
• GSE cuts dividend on junior prefs, for an indefinite period

With respect to the “indefinite period” part … it would be in the company’s best interests for the highly dilutive conversion to take place as soon as possible, since this would – presumably – reduce the dividend outflow. But it may also be assumed that no holder in his right mind will convert for as long as he gets a fat dividend while retaining convertability. Treasury might – possibly – account for this and

• Keep the conversion period short
• Step up the conversion price within the conversion period

In any event, it may be assumed that dividends to the junior prefs would resume very shortly after conversion of the senior prefs.

Have a look at the books, make up your own minds! I am not taking a view on the investment merits of the GSE prefs – but I will observe that the market can usually be counted upon to grossly overreact to adverse news; and (provided one does one’s homework, makes only bets that are favorable according to fundamentals, and KEEPS THOSE BETS SMALL AND DIVERSIFIED) … taking an informed contrary opinion (as opposed to an opinion that is simply contrary) can often be rather profitable.

Excitement over the Fannie and Freddie preferreds continues, with Accrued Interest noting in a late post that they showed good strength in the last hour of trading yesterday.

Amidst all this talk about how the preferred shareholders could be hurt by a bail-out, I think it’s time to take a better look at the mechanics of how they could be hurt. What can be done to them?

It’s easy to figure out how to hurt the common shareholders. Their dividend has already been slashed, the companies could just walk to the end of that road and cut it completely. After that, they could be diluted all to hell – for instance, the Treasury could backstop an issue of senior preferreds, convertable into common at $1. Presto! Permanent impairment for the common holders.

But pain by dilution is not a worry for the preferred shareholders. They have a claim for $X annual dividend and $Y liquidation value on the company, and that claim is not affected by how many prefs are outstanding. The enforcibility of that claim is affected – there’s the potential, for instance, for a liquidation to pay less than 100% – but (a) the claim is unchanged and (b) the company needs to be liquidated for this to happen. Liquidation is the ultimate step and will be a political decision – I don’t consider it too likely, frankly, but make up your own minds.

Another possibility is an offer they can’t refuse – as happened with the Thornberg prefs reported on PrefBlog on July 22. They were given the opportunity to exchange into a new series at twenty cents on the dollar, and all sorts of horrible outcomes were threatened if they didn’t accept. They had to accept; in liquidation they almost certainly would have gotten less, while there was an offer on the table to recapitalize the company provided they allowed impairment of their claim.

Is this scenario a valid fear for the Fannie and Freddie prefs? Well, make up your own minds – there’s plenty of people willing to state pseudonymously on the internet that everything is worthless. I’m not convinced. If such an offer were to be made to the Fannie and Freddie prefholders, I think that they could very well win a staring contest.

The most likely scary scenario that their dividends get cut off. This is basically the only action the company can unilaterally take – but it means no dividends to the common shareholders, either. Not a single penny until the preferred dividends re-start; and there may be other remedies in the prospectuses that I haven’t read. Such an action will make the common a little difficult to sell, eh? Even at $1.

And finally, Treasury could simply expropriate their rights – re-write the law and do whatever they like. Frankly, I don’t consider this a credible outcome; not when the base-case scenario of issuing senior, convertable preferred accomplishes the policy objective of wiping out the common shareholders and recapitalizing the company. If Treasury wants to punish the preferred shareholders, they might insist that dividends get suspended for ‘the duration of the crisis’; interested readers may work out for themselves what the yields are when dividends are suspended for a variety of periods. Sadly, all series of FNM prefs are non-cumulative – I haven’t done much investigation of the particulars, but I did check that!

Note that this is not intended to be an endorsement of the Fannie and Freddie prefs – I haven’t looked at the financials for myself and I haven’t parsed all of the political statements for myself. I am merely trying to point out that the common shareholders’ pain will not necessarily be transmitted 100% to the preferred shareholders.

However, Accrued Interest posted his latest thinking on the issue today – interestingly, his plan is very pref-favourable, and involves recapitalizing the GSEs to bank levels, although he does not explicitly support my desired outcome of turning them into banks, plain and simple. He notes:

Today both Fannie Mae and Freddie Mac management are meeting with Treasury officials. My take is that Treasury is setting a deadline for them to raise new capital before the Treasury acts.

As far as the common goes … well, the short interest is something fierce!

Marco Onado of Boccini University, Milan, writes a good review article in VoxEU regarding Bank Losses and Capital. He makes the points:

• Total assets grew much faster than the risk-weighted assets against which banks must hold capital – in other words, there is a good indication that European investment banks were “gaming the system”, by concentrating on assets with a low risk weight as defined by the Basel accords. At the same time, the Assets to Capital multiple of these players increased dramatically.
• The tangible component of equity decreased, which means that a part of the capital cushion was largely made of intangible assets deriving from the merger process within the banking system.
• new capital trails write-downs (i.e. the emergence of unexpected losses) by some $ 100 billion (See the IMF July Update to the Global Financial Stability Report)
• Much of the capital has been replaced with hybrid instruments (e.g., preferred shares and Innovative Tier 1 Capital), which has a lower equity content than the 100% equity content of the losses

Basically, he wants more regulation in future:

But regulators must face the hard truth, as Merrill Lynch did: “the credit crisis has destroyed the idea that unregulated financial markets always efficiently channel savings to the most promising investment projects”. This means that regulation must be thoroughly revised and capital adequacy rules must be strengthened

I must point out that his interpretation is logically fallacious. The failure of capital markets to achieve 100% efficiency does not imply that their level of efficiency can be increased by central planning. It could be – I’m willing to grant that much – I’ll listen to arguments! But it’s a non-sequiter.

PerpetualDiscounts had their second straight down-day on light volume.

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

Fannie and Freddie continue to be the focus of attention; Accrued Interest reminds us of an important point:

FRE and FNM preferreds are down another 20% or so today, threatening the $10 area on FRE Z. One trader told me he’s started to see bottom fishing here, which seems incredibly stupid to me. Bottom fishing can work as a strategy, but no one can put odds on whether the impending GSE nationalization will make preferred shareholders whole or not. This isn’t about financial analysis anymore.

Lacker just wants the damn things privatized:

Richmond Federal Reserve Bank President Jeffrey Lacker called for “demonstrably” privatizing Fannie Mae and Freddie Mac, becoming the first Fed official to publicly clash with the Bush administration’s strategy of keeping them as federally backed firms.

“I would prefer to see them credibly and demonstrably privatized,” Lacker said today in an interview with Bloomberg Television. He agreed with former Fed Chairman Alan Greenspan’s view that the two largest U.S. mortgage finance firms ought to be nationalized, then split up and sold off.

Amidst all this, there is speculation that Lehman will write off $4-billion this quarter and Naked Capitalism passes on reports that the Lehman delevering process continues:

From the New York Times

There has been widespread speculation that Lehman was contemplating a sale of Neuberger Berman, whose value is estimated by analysts to vary from less than $7 billion to as high as $13 billion (Lehman’s entire market capitalization is about $10.5 billion).

And here’s a report from the front lines:

“I’ve been at National City for 30 years and a month and for 29 of those we’ve seen nothing like it,” Thomas Richlovsky, National City’s 57-year-old treasurer, said in a telephone interview. “In past cycles certainly lending, or credit, has gotten more difficult. The cost of credit would go up. In this particular phenomenon of the last year it’s not like you can borrow money and the price went up. No, the market’s closed.”

National City on July 24 reported a $1.76 billion second- quarter loss and increased its 2008 forecast for uncollectible debt to as much as $2.9 billion. The Cleveland-based bank raised $7 billion of capital in April, which Richlovsky said is more than enough to weather the seizure in the credit markets.

The stock sale wasn’t enough to stop National City’s bonds from tumbling. Its $700 million of 6.875 percent notes due in 2019 traded last week at 61 cents on the dollar, down from 77.5 cents in June and 99 cents at the beginning of the year, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The Ontario judgement on non-bank ABCP will be challenged by Ivanhoe, perhaps with others.

Amidst all this certainty, we can be glad that one thing in life is constant – there’s a lot of regulatory posturing on the US Auction rate market:

U.S. Securities and Exchange Commission Chairman Christopher Cox said investigations into the collapse of the auction-rate bond market extend beyond the banks that created the debt and settled with regulators to include brokerages that sold the investments.

“Nobody is getting a pass,” Cox said at a news conference in Washington today.
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Regulators should force Wall Street banks to buy back all the auction-rate securities they created instead of investigating brokers that sold the debt, the Washington-based Regional Bond Dealers Association said in a letter to the SEC and other regulators last week.
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Regulators focused first on the biggest underwriters, claiming they pitched securities as safe alternatives to money- market investments, even as the risk grew that the market would freeze.

Safe? What does “safe” mean? Are they talking about credit risk, liquidity risk, term risk, taxation risk, inflation risk, or one of the other million things that can go wrong? My view is that it should be treated in the same way as Canadian non-Bank ABCP should have been treated: brokers should be held liable for recommending overexposure to the asset class, but not for reasonable exposure. The credit was fine – and, as far as I know, remains fine (there are two exceptions to this generalization, I think). Liquidity … not so good.

However, consideration of more than one kind of risk – and genuine acceptance of the fact that black swans happen and all you can hope for is loss limitation by diversification – will make news reports longer than 500 words and involve a little judgement, so it won’t happen.

Amazingly, PerpetualDiscounts were weak today, losing 0.14% in their second down-day since July 16. From the close July 16 to the close today, they’ve gained 8.60%, with yields dropping from 6.63% to 6.13%. So … er … let me see … one month at 6.63% is about 0.55%, call it, so capital gain is 8.60-0.55 = call it 8% on a yield drop of 0.5% … the effective modified duration was about 16 years. Give or take. Remember, HIMIPref™ under-calculates modified duration (which is precisely 1/YTM) as a matter of computational and reporting convenience.

Today’s closing yield of 6.13% is equivalent to 8.58% interest at the standard conversion factor of 1.4x. Long Corporates currently yield a little under 6.1% … I think we can say the spread is maintaining itself around 250bp without anybody fussing too much. That used to be a long-term record!

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

Rumours swirled around Fannie and Freddie today, after a gloomy story in Barrons:

It is growing increasingly likely that the Treasury will recapitalize Fannie and Freddie in the months ahead on the taxpayer’s dime, availing itself of powers granted it under the new housing bill signed into law last month. Such a move almost certainly would wipe out existing holders of the agencies’ common stock, with preferred shareholders and even holders of the two entities’ $19 billion of subordinated debt also suffering losses.

Bloomberg’s rumours are more detailed:

Both Fannie and Freddie slid as much as 12 percent after Barron’s said government officials anticipate the companies will fail to raise the equity capital they need, prompting the U.S. Treasury to step in. Fannie is down 82 percent this year. Freddie has fallen 85 percent.
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A rescue would include preferred stock with a seniority, dividend preference and convertibility right that would wipe out common stockholders, Barron’s reported, citing an unidentified source in the Bush administration. Treasury Secretary Henry Paulson, who received the authority he requested from Congress to help the companies, has said a bailout won’t be needed.
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Standard & Poor’s cut Fannie and Freddie’s preferred stock and subordinated debt ratings by three levels last week to A- from AA-. S&P affirmed the companies’ AAA senior debt rating, reflecting perceived government support.

At the close, Accrued Interest made some good observations:

GSE securities of all types getting hit hard today. Interestingly, both the common and preferred shares are down ~20%. Sub debt some 200bps wider with poor liquidity.
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The ultimate problem here is best described by Merrill Lynch’s Ken Bruce. You can dive into Freddie Mac or Fannie Mae’s balance sheet and make a good case that they don’t need new capital, at least under current forecasts for housing. You’d therefore conclude that if they were a truly private company, they’d best serve shareholders by trying to stick it out. But they aren’t a truly private company. As the perception of their capital strength wanes, policy makers are going to conclude that we are better off nationalizing the GSEs.
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As for wiping out preferred shareholders… Remember that the big preferred shareholders are smaller banks. I don’t think it would make sense for the Administration to bolster one part of the banking system (Fannie and Freddie) at the expense of another part of the banking system (regional banks). And besides, I don’t think its necessary to protect tax-payers interests.
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The trade is to be long senior Agency debt. There is just no way the Treasury allows anything to happen to senior debt holders. I don’t know who is playing in sub notes or preferred shares in here. No amount of investment analysis is going to help you figure what the Treasury’s next move is.

There was some discussion of the Fannie and Freddie prefs on August 8.

There was a great graph published by the Cleveland Fed in a discussion of the Student Loans Market:

Note: The spread is the three-month LIBOR rate minus the three-month financial commercial paper rate.
Sources: The Board of Governors of the Federal Reserve System; Financial Times.

The enormous volatility seems much more illustrative to me of the credit crunch than the more usual graphs of enormous spread increases:

Sunlife issues did very well today – it would appear that nobody noticed they went ex-Dividend today. PerpetualDiscounts had yet another up-day today, but the total return index is still a fraction under the June 30 value of 877.24. The fact that there has been a gain of almost exactly 8.75% since the July 16 nadir – with only one down-day in that period – should really rub it in about just how bad the first half of July was!

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