PrefBlog

The Department of Finance announced today a programme of writing Credit Default Swaps on bank paper – the Canadian Lenders Assurance Facility:

which will provide insurance on the wholesale term borrowing of federally regulated deposit-taking institutions. This initiative will help to secure access to longer-term funds so that Canadian financial institutions can continue lending to consumers, homebuyers and businesses in Canada.

This temporary program will be offered to lenders on commercial terms so there is no expected fiscal cost.
…
Additional details of the Canadian Lenders Assurance Facility will be released shortly, after consultations with financial institutions.

We can hope that they’re a little better at it than, say, AIG!

There is at least one player shouting that Treasury’s Whack-a-Mole efforts to restore normality to the credit markets are more like Whack-a-Mountain:

Banks getting $125 billion from U.S. taxpayers to unlock the credit crunch are saying they’d rather hoard the money than use it for loans, the head of the largest independent mortgage company said.

Treasury Secretary Henry Paulson is injecting capital into institutions including Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc. on the expectation they would step up lending and investing to prevent the economic slowdown from getting worse. That isn’t happening, said Lee Farkas, chairman of Ocala, Florida-based Taylor, Bean & Whitaker Mortgage Corp.

Many large banks have told Farkas the U.S. rescue isn’t boosting their interest in offering or expanding credit lines to lenders such as his, even for borrowing secured by “low-risk, highly liquid loans,” he said.

“By their own admission, they’re taking the money and they don’t want to put it to work,” he said in an interview during the Mortgage Bankers Association’s conference in San Francisco. “Every single one you talk to, from the biggest to medium biggest, is saying the same thing, they want to de-lever.”

****************

Sorry, folks! I can’t keep my eyes open any more, and tomorrow could be an interesting day!PerpetualDiscounts were off 22bp on the day and now yield 6.77%, equivalent to 9.48% interest at the standard 1.4x factor. Long corporates are at about 7.2%, so the spread is about 230bp – still hanging in there!

I did update the October 21 performance; and updated the post regarding the new Fixed-Reset Royal Bank issue with not entirely surprising news of what comparison of coupons has done for the prices of extant issues. My guess is that tomorrow will be worse … but I’ll have a better idea at about 4pm…

Update, 2008-10-24: The subindices have been updated:

Stocks got clobbered again:

U.S. stocks sank and the Standard & Poor’s 500 Index dropped to the lowest level since April 2003 on concern a worsening global economic slump will damp profits.

…
The S&P 500 lost 58.27 points, or 6.1 percent, to 896.78. The Dow Jones Industrial Average plunged 514.45, or 5.7 percent, to 8,519.21 as all 30 of its companies dropped. The Nasdaq Composite Index lost 80.93, or 4.8 percent, 1,615.75. About 24 stocks fell for each that rose on the New York Stock Exchange.
…
The S&P 500 has moved more than 1 percent on 13 of the 16 trading days this month, making it the most volatile by that measure since September 1932, according to S&P analyst Howard Silverblatt.

… Canada was not immune:

Canadian stocks fell, pushing the main index toward its worst monthly drop in 21 years, as energy shares including Canadian Natural Resources Ltd. slumped along with oil prices on signs that fuel consumption is dropping.
…
The Standard & Poor’s/TSX Composite Index fell 5.7 percent to 9,236.88 in Toronto. Canada’s broadest stock benchmark, which derives more than three-quarters of its value from commodity and financial shares, has lost 21 percent in October, the most since after the “Black Monday” crash in the same month in 1987.
…
The S&P/TSX has dropped 39 percent from its June 18 record as debt markets froze after more than $660 billion in credit losses at global institutions.

Barney Frank wants Financial Services bonuses frozen:

House Financial Services Committee Chairman Barney Frank said there should be a freeze on Wall Street bonuses until companies find a way to keep the year-end payouts from encouraging excessive risk-taking.

“There should be a moratorium on bonuses,” Frank, a Massachusetts Democrat, told reporters yesterday in Washington. “They have a negative incentive effect because they are the ones that say if you take a risk and it pays off you get a big bonus,” and if it causes losses “you don’t lose anything.”

He’s right as far as this particular time ’round goes, but most of the time, if it causes losses you’re looking for work. It’s another variation of ‘Lose a million, you’ve got a problem. Lose a billion, THEY’VE got a problem.” Which, ultimately, comes down to risk management which, from all appearances, has for the past few years been largely a regulatory box-ticking exercise, as opposed to a job that somebody actually wanted done. The pro-Street Dealbreaker leads the charge:

I mean, yeah, it was really only higher ups who perpetrated the monumental fuck ups we’re currently paying for, including but not limited to the barbershop quartet of, say, Dick Fuld, Stan O’Neal, Chuck Prince, and Jimmy Cayne (with back up dancers Angelo Mozilo, Alan Greenspan et al.), but surely something will come of cutting the annual take-home of low-level plebes who were minding their own business placing Seamless Web orders while their boss’s boss’s boss’s boss’s boss was investing in that can’t miss asset class, subprime.

I was once offered a job running a small piece of a large company – they wanted to pay me bonus based on how well the other 99.9% of the company did, rather than how well my little feifdom did. There were other problems, and the conversation didn’t last long.

There will be no market reporting AGAIN, due to the same technical difficulties that caused yesterday‘s report to be cut short. However, I have now determined, isolated and neutralized the problem; it only remains to determing that I am doing so in the best manner.

I’ll explain in another post, because it’s kind of funny, but basically there’s a little loop used in the process of curve approximation that calculates a yield; in the case of YLD.PR.B, quoted at 1.60 with a stated annual dividend of $1.05 (currently suspended) until maturity 2012-2-1 at $15 [dubious], the little loop ran ’round 5,709,833 times [in the run where the problem was unequivocally isolated] before the WebService timed out and blew up the whole programme.

So, all is well, basically, but I’M TIRED.

More later.

Update, 2008-10-24: The subindices have been updated:

The situation in the States just keeps getting more bizarre … there are major problems in the commercial paper market:

The Federal Reserve will provide up to $540 billion in loans to help relieve pressure on money- market mutual funds beset by redemptions.

“Short-term debt markets have been under considerable strain in recent weeks” as it got tougher for funds to meet withdrawal requests, the Fed said in a statement in Washington. About $500 billion has flowed out of prime money-market funds since August, a Fed official said.

Assiduous Readers will remember my proposal to have banks consolidate their branded MMFs for capital purposes … I thought that was pretty radical, but I’m beginning to wonder if it’s enough. If MMFs are sensitive to runs AND these runs have a major economic effect … perhaps its time to start regulating them as banks.

Whack-a-Mole financial problems continue … this time with Australian mortgage funds:

The East Coast Mortgage Trust, Northern Investment Trust Fund and the Richmond Mortgage Fund — holding a combined $660 million — all froze redemptions yesterday as spooked investors attempted to liquidate holdings.

The latest freezes followed an announcement yesterday by the giant Challenger Howard Mortgage Fund that it had frozen $2.8 billion of funds, claiming the federal Government’s pledge to guarantee bank deposits had exacerbated a run on redemptions.

There has been a lot of chatter lately alleging Fannie & Freddie caused the sub-prime argument. Menzie Chinn of Econbrowser rebuts the charge and provides an interesting graph:

The graph is taken from the IMF Global Financial Stability Report, October 2008 … which I may get around to reading soon!

Accrued Interest continues his push for exchange traded CDSs in a post titled CDS could be fair and simple, but implicitly supports a decoupling of the CDS and cash markets:

Third, in the event of default, the seller of the contract pays the buyer 60 cents on the dollar. No actual bonds change hands.

This type of CDS is known as a “recovery lock” and have been discussed on PrefBlog. The instrument has caused huge problems in connection with the Fannie/Freddie technical default. I cannot support any plan that allows – not just allows, idealizes! – the decoupling of cash and derivative markets.

Meanwhile, there’s a turf-war going on about who gets to regulate CDSs (hat tip: Naked Capitalism): the Fed, the CFTC or the SEC? More jobs for more regulators to tick off more boxes on more forms! Yay!

On the other hand (hat tip: Dealbreaker), Sen. Tom Harkin (D-Iowa) just wants to ban them:

Sen. Tom Harkin (D., Iowa), chairman of the Senate Agriculture Committee, which regulates derivatives and so has a claim to authority over credit default swaps, has repeatedly questioned whether the $60 trillion industry should be outlawed.
…
“They’ve been touted as reducing risk, but as we have seen, it has actually increased the risk, the systemic risk, of the whole society,” Harkin said during an Oct. 14 hearing exploring the need for greater regulation of the derivatives.

On a brighter note, there is speculation that settlement of CDSs on Lehman has had no effect.

Technical difficulties prevent me from publishing the three regular tables today. I will update this post tomorrow.

Update, 2008-10-23: Tomorrow, indeed! And only one of the tables! Boy, the things you have to put up with in a free blog, eh?

Bloomberg has some interesting colour on the US TIPS market:

Treasury Inflation-Protected Securities fell 8 percent since June as investors shunned all but the most easily traded debt amid the seizure in credit markets. TIPS were the only part of the U.S. government bond market to lose money in that time as Treasuries of all maturities gained 2.12 percent, according to Merrill Lynch & Co. indexes.

BlackRock Inc., Brown Brothers Harriman & Co., DWS Investment GmbH and New Century Advisors are buying the securities because inflation will likely increase at a faster pace over the next decade than the 1 percent annual rate TIPS yields suggest. Consumer prices, unchanged in September, may increase 4.5 percent this year and 2.65 percent in 2009, according to the median estimate of 69 forecasters surveyed by Bloomberg.

The Cleveland Fed’s liquidity adjusted inflation expectations estimator shows a ten year expectation of 1.48% as of 10/16, vs. the unadjusted figure of 0.95%.

A very good day for markets in general, credit markets particularly and especially prefs! PerpetualDiscounts now yield 6.77% dividend, equivalent to 9.48% interest at the standard factor of 1.4x, while long corporates are now at 7.25% for a pre-tax interest-equivalent spread of 223bp.

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