PrefBlog

The Fed has announced:

a new section of its website expanding the information provided about the policy tools the Federal Reserve has employed to address the financial crisis and simplifying access to that information.

The website section–“Credit and Liquidity Programs and the Balance Sheet”–presents a wide range of material, including a detailed explanation of the Federal Reserve’s balance sheet; descriptions of all of the Federal Reserve’s liquidity and credit facilities; discussion of the Federal Reserve’s risk-management practices; information on the types and amounts of collateral being pledged at the various lending facilities; and an extensive set of links to congressional reports and other resources.
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The new section of the Board’s website can be accessed at: http://www.federalreserve.gov/monetarypolicy/bst.htm.

There has also been a Treasury, FDIC, OCC, OTS & the Fed regarding yet another iteration of TARP:

“We announced on February 10, 2009, a Capital Assistance Program to ensure that our banking institutions are appropriately capitalized, with high-quality capital. Under this program, which will be initiated on February 25, the capital needs of the major U.S. banking institutions will be evaluated under a more challenging economic environment. Should that assessment indicate that an additional capital buffer is warranted, institutions will have an opportunity to turn first to private sources of capital. Otherwise, the temporary capital buffer will be made available from the government. This additional capital does not imply a new capital standard and it is not expected to be maintained on an ongoing basis. Instead, it is available to provide a cushion against larger than expected future losses, should they occur due to a more severe economic environment, and to support lending to creditworthy borrowers. Any government capital will be in the form of mandatory convertible preferred shares, which would be converted into common equity shares only as needed over time to keep banks in a well-capitalized position and can be retired under improved financial conditions before the conversion becomes mandatory. Previous capital injections under the Troubled Asset Relief Program will also be eligible to be exchanged for the mandatory convertible preferred shares. The conversion feature will enable institutions to maintain or enhance the quality of their capital.

Rather than the either/or choice envisaged in the release, I would rather see a system whereby Treasury backstopped a public offering of the securites. There’s a lot of private capital that would love to get involved if it could invest on the same terms as the government.

Yet another proposal for resolution of the credit crisis has come forward … but I don’t think it will find a lot of political support!

Creating a “bad bank” or “aggregator bank” that would use federal funds to acquire and warehouse the assets, as some have proposed, would be costly for taxpayers and require too much government interference, say two experts on distressed securities who have pitched an alternative plan to officials.

John Ryding, chief economist at RDQ Economics LLC in New York, and Matt Chasin, chief operating officer of Sorin Capital Management LLC, a Stamford, Connecticut-based hedge fund that manages about $1 billion, say the Treasury Department should provide loans at commercial rates to investors for up to 50 percent of the purchase price of securities. The financing would be for as long as the maturities of the assets being acquired.

“One of the problems the banks have been facing is that the markets have forced artificially low prices on these assets because there’s not enough financing available for buyers,” said Ryding, 51, a former Federal Reserve economist who advises hedge funds. “There’s a lot of capital looking for distressed assets, if hedge funds can get good financing.”

Along similar lines, the Bank of Canada is adding corporate bonds to the acceptable collateral list for Term PRAs. The lowest rated, longest term bonds accepted, A- & 10+ years, will be subject to a 15% haircut.

Whoosh! Prefs got hammered today – particularly PerpetualDiscounts and SplitShares – as common equity got hammered:

Canadian stocks fell, driving the Standard & Poor’s/TSX Composite Index to the lowest level since 2003, as worse-than-estimated retail sales signaled the recession is deepening while oil and metal prices retreated.
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Canadian retail sales fell 5.4 percent in December, the most since January 1991 and twice the average economist estimate, as consumers curtailed spending on cars, building supplies and clothes, Statistics Canada said today in Ottawa. Bank of Canada Senior Deputy Governor Paul Jenkins said 2009 will be a difficult year for the Canadian economy, reiterating the central bank’s forecast that the economy will shrink 1.2 percent.

Bernanke gave a speech to the National Press Club dismissing concerns about the Fed’s credit risk:

for the great bulk of Fed lending, the credit risks are extremely low. The provision of short-term credit to financial institutions–our traditional function–exposes the Federal Reserve to minimal credit risk, as the loans we make to financial institutions are generally short-term, overcollateralized, and made with recourse to the borrowing firm. In the case of the liquidity swaps, the foreign central banks are responsible for repaying the Federal Reserve, not the financial institutions that ultimately receive the funds, and the Fed receives an equivalent amount of foreign currency in exchange for the dollars it provides foreign central banks. The Treasury stands behind the debt and other securities issued by the GSEs.

Our special lending programs have also been set up to minimize our credit risk. The largest program, the commercial paper funding facility, accepts only the most highly rated paper. It also charges borrowers a premium, which is set aside against possible losses. And the TALF, the facility that will lend against securities backed by consumer and small business loans, is a joint Federal Reserve-Treasury program, as I mentioned, and capital provided by the Treasury will help insulate the Federal Reserve from credit losses.

The transactions we undertook to prevent the systemically destabilizing failures of Bear Stearns and AIG, which, as I noted, make up about 5 percent of our balance sheet, carry more risk than our traditional activities. But we intend, over time, to sell the assets acquired in those transactions in a way that maximizes the return to taxpayers, and we expect to recover the credit we have extended.

Not much meat on those bones, but at least he’s putting his name on the claims!

Biovail’s lawsuit against short sellers has been dismissed:

A federal judge threw out a Biovail Corp. shareholder lawsuit against a group of hedge funds including SAC Capital Advisors LP in which investors in the Canadian drugmaker accused them of driving down its share price.
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The Biovail shareholders had accused SAC of helping “ghostwrite” negative and false analyst reports in 2003 and 2004 to lower the share price after the Stamford, Connecticut- based hedge fund manager took short positions in the stock. Short sellers borrow shares in anticipation of making a profit by paying for them after the price drops.
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In March 2008 the company agreed to pay $10 million to settle Securities and Exchange Commission charges that it lied to investors to boost its share price in 2003 and 2004. In January the drugmaker agreed to pay $5.4 million to settle the same charges with the Ontario Securities Commission.

Biovail also pleaded guilty to criminal charges of paying doctors in 2002 and 2003 to buy Cardizem. It was fined $24.6 million.

Strong companies respond to criticism with a sigh and a press release. Adults too, for that matter.

Easy come, easy go:

As recently as October 2007, Barron’s magazine ranked Highland CDO Opportunity third among the top 50 hedge funds, with an average annual return of 44.12 percent during the three-year period ended that June. Its fortunes reversed last year, as the securities it invests in, known as collateralized debt obligations, plunged in value amid the credit crunch and downgrades by ratings firms.

The fund became insolvent after assets values were eroded by “the unprecedented market volatility and disruption to the financial system, and the market for structured products assets in particular,” Highland Capital said in the letter, a copy of which was provided by an investor to Bloomberg News. Assets were valued at $361.6 million, according to a June 2008 regulatory filing.

OSFI is increasing required derivatives disclosures:

Banks, authorized foreign banks in respect of their business in Canada – foreign bank branches (FBBs), bank holding companies, trust and loan companies, life insurance companies and insurance holding companies should disclose the positive replacement cost, credit equivalent amount and the risk-weighted equivalent by class of derivative instrument.

An improvement, but basically cosmetic. I consider disclosure by class of counterparty (credit strength, degree of collateralization) to be much more important.

I’m of two minds about the Olympics. On the one hand, they’re egregiously expensive and nowadays should be awarded for two successive events; so that at least the velodrome and bobsled track get used more than once. On the other had, the one in Vancouver is countercyclical with a vengeance:

DBRS has today downgraded the Long-Term Debt rating of the City of Vancouver (the City or Vancouver) to AA from AA (high). The trend is now Negative.
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On February 18, 2009, the City announced it had secured a $400 million revolving line of credit, $90 million of which has so far been used to buy out the original lender to the project along with $240 million from reserves. Additionally, $134 million in construction advances have been made to the developer by the City since September 2008. This brings Vancouver’s total investment in the project to $464 million, leaving more than $400 million in additional funding required to complete the project by the November 2009 deadline.

Trouble is, it’s just dumb luck that we actually need stimulus right now – they made the committment in 2003 – five years after becoming the official Canadian contender.

HSBC Bank Canada has announced financials for the year ended 2008-12-31 that look pretty good:

The bank’s Tier 1 and overall capital ratios calculated in accordance with the new framework were 10.1 per cent and 12.5 per cent respectively
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The total allowance for credit losses, as a percentage of loans and acceptances outstanding, was 1.24 per cent at 31 December 2008 compared with 1.09 per cent at 30 September 2008 and 1.03 per cent at 31 December 2007.

Full financials are not yet available.

Everybody sold preferreds to buy gold today:

Gold futures for April delivery rose $25.70, or 2.6 percent, to $1,002.20 an ounce on the New York Mercantile Exchange’s Comex division. Earlier the price touched $1,007.70, the highest since March 18. Gold, the only metal to advance in 2008, has rallied annually since 2000 and is up 13 percent this year.

Global stocks extended an eight-session slide, erasing 54 percent of their market value since the start of last year on concern that the economic slump may worsen and wipe out corporate earnings.

Splits got hit especially hard, not surprising because many of them now have direct downside exposure to the underlying equities and many others are getting close. It will be most interesting to check back in a few years and see what this episode has done to the split-share market.