PrefBlog

CIT has hired a bankruptcy specialist:

CIT Group Inc., the century-old lender to 950,000 businesses that has been unable to persuade the Federal Deposit Insurance Corp. to guarantee its debt sales, hired bankruptcy specialist Skadden, Arps, Slate, Meagher & Flom LLP as an adviser amid a plunge in its stock and bonds.

CIT has stated:

in response to recent media reports regarding its pending Temporary Liquidity Guarantee Program (TLGP) application with the FDIC, confirmed that its application to participate in the TLGP remains outstanding. CIT continues to be in active dialogue with the government. There can be no assurance that CIT’s application will be approved by the FDIC, nor as to the timing or terms of any such determination.

and

today confirmed that it remains in active discussions with its principal regulators on a series of measures to improve the company’s near-term liquidity position.

Among the matters being discussed are the Company’s application to participate in the FDIC’s Temporary Liquidity Guarantee Program. The Company is also actively discussing liquidity solutions that do not involve access to the TLGP program, such as the near-term transfer of assets into CIT Bank through Section 23A waivers and the transfer of its Vendor Finance and Trade Finance businesses into CIT Bank; these transfers if approved would enhance CIT’s liquidity position

After the bell, it was reported that:

The U.S. government is in advanced discussions to give aid to CIT Group Inc., the Wall Street Journal reported on its Web site, without saying where it got the information.

One option would have the FDIC backing the company’s debt, according to the newspaper.

The fallout from the BofA/Merrill takeover continues to be fascinating:

Regulators contend Bank of America owes at least part of a $4 billion fee it agreed to pay in January — even without a completed legal document — because the company benefited from implied U.S. backing on about $118 billion of Merrill Lynch assets, such as mortgage-backed bonds, people familiar with the matter said. The Charlotte, North Carolina-based bank says it owes the Treasury nothing, according to the people, who declined to be identified because the negotiations are confidential.

The major subindices squeaked out another win today, amidst good volume.

Bloomberg has a little more speculation regarding the CIT death-spiral:

The Federal Deposit Insurance Corp. is unwilling to guarantee CIT Group Inc.’s bond sales because the commercial lender’s credit quality is worsening, according to people familiar with the regulator’s thinking.

The FDIC, which has backed $274 billion in bond sales under its Temporary Liquidity Guarantee Program since Nov. 25, is concerned that standing behind CIT debt would put taxpayer money at risk, said the people, who declined to be identified because the application process is private.

The federal agency, run by Chairman Sheila Bair, is in discussions with CIT about how the lender can strengthen its financial position to get approval, including raising capital, said one of the people. New York-based CIT’s measures to improve its credit quality, such as by transferring assets to its bank, have been insufficient, the person said.

Comrade Obama is proposing extraordinary powers for the SEC:

The Obama administration is seeking to give the U.S. Securities and Exchange Commission power to prohibit pay practices at brokerages and investment advisers and broader authority to bar individuals from work in the industry.

The Treasury Department today sent Congress legislation that would let the SEC ban “sales practices, conflicts of interest and compensation schemes” deemed harmful to investors. The measure authorizes the agency to remove individuals who violate rules from all aspects of the industry, rather than just a specific segment such as selling securities or managing money.
…
The measure gives the SEC authority to reward whistle blowers who give the agency tips about those violating all securities laws. The SEC currently has power to pay individuals who provide the agency with tips on insider-trading violations.

Super! Paid informers! Just the thing that’s needed to further improve society’s moral fibre!

No response or acknowledgement from MFC regarding my queries on the MLI IT1C issue. What a surprise!

Continued gains, albeit pretty small ones, for preferred shares today. Volume dropped off a bit.

Bradford & Bingley is defaulting on its sub-debt:

— Bradford & Bingley Plc’s failure to pay interest on some of its subordinated bonds will trigger settlement of credit-default swaps linked to about $414 million of the nationalized mortgage lender’s debt.

Dealers and investors agreed today that the Bingley, England-based company’s decision not to pay interest on 125 million pounds ($202 million) of 6.625 percent subordinated bonds maturing 2023 was a “credit event,” the International Swaps and Derivatives Association said on its Web site.

The ruling will prompt an auction to settle credit swap contracts even though the U.K. government changed the terms of the bank’s nationalization in February, allowing it to miss coupon payments without that constituting a default. Bradford & Bingley said in May it didn’t intend to pay interest on the notes, which form part of the bank’s so-called lower Tier 2 capital.

This shows the authorities’ determination to make holders of capital paper suffer, a major factor in the DBRS revision of its rating methodology.

The more I think about the recent MLI Tier 1 Issue, the less I understand it. I have updated my discussion of the issue with some questions sent to MFC’s Investor Relations department.

S&P should be revising the TXPR index soon – but I still don’t see any announcement on their index news page. The last revision was announced 2009-1-9, while last summer’s revision was announced 2009-7-11 (which included the addition of a called issue, FAL.PR.H, which was later quietly dropped).

The Credit Crunch isn’t over yet, as evidenced by Fun ‘n’ Games regarding the pricing of senior debt of CIT, a TARP beneficiary. CIT has, for all intents and purposes, been locked out of the bond market for well over a year and has been downgraded to just above, or below, junk status by the ratings agencies (depending on which ones you listen to; Fitch has them at single B). They were able to issue a short-term TALF-eligible securitization in early June; 2Q09 results will be announced on July 23.

The Boston Fed has released another Policy Briefing (they’ve been busy this week!), this one regarding A Proposal to Help Distressed Homeowners: A Government Payment-Sharing Plan:

This public policy brief presents a proposal, originally posted on the website of the Federal Reserve Bank of Boston in January of this year, designed to help homeowners who are unable to afford mortgage payments on their principal residence because they have suffered a significant income disruption and because the balance owed on their mortgage exceeds the value of their home. These homeowners represent a subset of the population of distressed homeowners, but according to our research they face an elevated risk of default and are unlikely to be helped by current foreclosure-reduction programs. The plan is a government payment-sharing arrangement that works with the homeowner’s existing mortgage and provides a significant reduction in the homeowner’s monthly mortgage payment. The plan does not involve principal reduction. Two options are presented; both are designed to help people with negative equity and a significant income disruption, such as job loss. In one version, the assistance comes in the form of a government loan, which must be repaid when the borrower returns to financial health. The second version features government grants that do not have to be repaid. In either case, the homeowner must provide evidence of negative equity in the home and of job loss or other significant income disruption. The costs of the plan are moderate, and the benefits should help not only the participating homeowners but also the housing industry, the financial markets, and the economy more broadly.

Another strong day for preferreds, with FixedResets outperforming yet again. I’m finding the yields on those things increasingly difficult to believe! When will it end?

PerpetualDiscounts closed to yield 6.30%, equivalent to 8.82% interest at the standard equivalency factor of 1.4x. Long corporates now yield 6.4%, so the pre-tax interest-equivalent spread is now 242bp, tightening in a little from the 250bp they recorded June 30.

The New York Fed has announced:

RBC Capital Markets Corporation has been added to the list of primary dealers, effective July 8, 2009.

… and note …

Primary dealers are banks and securities broker-dealers that trade in U.S. Government securities with the Federal Reserve Bank of New York.

.
Bloomberg reports:

RBC is the first Canadian firm to join the Fed’s network since CIBC Wood Gundy in 1996. The first Canadian primary dealer was Nesbitt Burns, which was given the designation in 1995. Nesbitt Burns was renamed BMO Nesbitt Burns in 2000 and abandoned its dealership in 2002. CIBC left in February 2007, before the start of the financial crisis which led to the flight-to-quality in U.S. government securities. Royal Bank of Canada is the nation’s largest lender.

The International Monetary Fund has released its Global Financial Stability Report – Market Update, July 2009:

Financial conditions have improved, as unprecedented policy intervention has reduced the risk of systemic collapse and expectations of economic recovery have risen. Nonetheless, vulnerabilities remain and complacency must be avoided. The financial sector continues to be dependent on significant public support, resulting in an unparalleled transfer of risk from the private to the public sector. At the same time, however, work will need to begin on exit strategies from the various financial, monetary, and fiscal support policies in order to address market uncertainty. Medium-term policies need to ensure that steps taken to normalize policies and markets are consistent with establishing a lasting framework of sound financial regulation, sustainable fiscal balances, and the maintenance of price stability.

I am glad to hear that, in the opinion of the quasi-regulators at the IMF, that there is a continued need for quasi-regulators.

On July 3 I remarked on the idiocy of solemn discussions about “What Should be the World’s Reserve Currency?”. There’s a guy in China who has a better grasp of affairs than his political masters:

Huang Xinyuan, who sells mining equipment and pesticides to customers across China’s border with Vietnam, says he no longer wants payment in U.S. dollars and prefers the yuan.

Sales using the greenback at Guangxi Jinbei Group, where Huang is vice president, dropped to 30 percent of contracts in 2008 from 87 percent in 2007. The yuan, which has gained 21 percent since it was allowed to strengthen against the dollar starting in 2005, offers greater stability, he said.

That’s how reserve currency status gets decided … what people will take. Anyone who was in an Eastern Bloc country in the ’80’s, or even ’90’s, furtively exchanging greenbacks for local currency at prices bearing no relationship to the official market, knows that.

There are consultations progressing between private equity players and the FDIC regarding the failed bank buy-out rules discussed on PrefBlog on July 3.

Treasury has announced that the Legacy Securities Public-Private Investment Program and the Legacy Loan Program are moving forward. Of highest importance, of course, is making sure the lolly is distributed to appropriate parties:

Collectively, the nine pre-qualified PPIP fund managers have established 10 unique relationships with leading small-, veteran-, minority-, and women-owned financial services businesses, located in five different states, pursuant to the Legacy Securities PPIP. Moreover, as Treasury previously announced, small-, veteran-, minority-, and women-owned businesses will continue to have the opportunity to partner with selected fund managers following pre-qualification.

Continued good volume today, without much price action. FixedResets were actually down, albeit by such a marginal amount as to be meaningless. The median Yield-to-Worst on OperatingRetractibles continues to be negative.