PrefBlog

Treasury is going to avoid voting its shares in companies that received TARP funds:

On many resolutions offered by investors — from demanding pro- environment policies to allowing domestic partner benefits to reining in executive bonuses — the Treasury plans to ask that its ballots be counted in the same proportion as the votes of other stockholders so it won’t impact the results.

An investment manager could probably go to jail for that! But Dealbreaker, bless its heart, sees the truth:

As Kenny Lewis can attest to, when it comes to the stuff that really matters, backroom waterboarding is a far more compelling tool than shareholder votes.

The Lewis affair was discussed on April 24: Lewis’ BofA was basically forced by Treasury to buy Merrill, despite “staggering deterioration” of Merrill’s balance sheet.

Looks like there will be increased regulatory control over oil & gas speculation. There is, naturally, considerable doubt as to whether speculation is harmful.

California’s having a little difficulty getting its IOUs accepted:

A group of the biggest U.S. banks said they would stop accepting California’s IOUs on Friday, adding pressure on the state to close its $26.3 billion annual budget gap.
…
Amid the budget deadlock, Fitch Ratings on Monday dropped California’s bond rating to BBB, down from A minus, the latest in a series of ratings downgrades for the state.

The group of banks included Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and J.P. Morgan Chase & Co., among others. The banks had previously committed to accepting state IOUs as payment. California plans to issue more than $3 billion of IOUs in July.

BIS has released a working paper by Naohiko Baba and Frank Packer titled From turmoil to crisis: dislocations in the FX swap market before and after the failure of Lehman Brothers:

This paper investigates dislocations in the foreign exchange (FX) swap market between the US dollar and three major European currencies. After the failure of Lehman Brothers in September 2008, deviations from covered interest parity (CIP) were negatively associated with the creditworthiness of US financial institutions (as well as that of European institutions), consistent with the deepening of a dollar liquidity problem into a global phenomenon. US dollar term funding auctions by the ECB, SNB, and BoE, as well as the US Federal Reserve commitment to provide unlimited dollar swap lines are found to have ameliorated the FX swap market dislocations.

The Ontario Securities Commission has released its 2009 Annual Report. To my mind, the most interesting sentence was:

The OSC, Quebec’s Autorité des marchés financiers and the Investment Industry Regulatory Organization of Canada (IIROC) are reviewing complaints received in connection with the organization, sale or distribution of non-bank sponsored ABCP products.

Not much price action today, but the PerpetualDiscount and FixedReset sectors both posted gains, with yields on FixedResets continuing what seems like an inexorable march downwards.

Willem Buiter wants to clamp down on CDS trading:

CDS provide an example. Just as short selling equity is potentially efficiency enhancing but naked short selling is just gambling, so insuring credit default risk is potentially efficiency enhancing when the buyer has an insurable interest and the writer of the CDS is sufficiently capitalised. Current arrangements permit ‘naked’ CDS buying (buying CDS on a security in excess of the face value of your holdings of that security).

I would not follow George Soros and ban CDS outright. I would require that any writer of CDS or other forms of credit risk insurance be properly capitalised and post additional collateral immediately when his creditworthiness is adversely affected. In addition, I would stipulate that it is only possible to buy CDS when you have an insurable interest in the security it is written on, and that you cannot make good, following default on a security, any claim under a CDS written on that security unless you can present to the writer of the CDS an amount of that security with the same face value as your claim.

The reference to George Soros links to a column by Ed Hammond:

George Soros, the billionaire financier, this week called for the scrapping of CDS contracts. He used the example of the bankruptcy of General Motors as a reason for outlawing these contracts. This, he said, was because it was in the interest of some bondholders to see the company go under as they were also in possession of CDS contracts, which paid out on the carmaker’s default.

… which is just the old debt-decoupling problem that has so many people (not me!) so upset.

I fail to understand Mr. Buiter’s equation of naked-shorting (protection buying) with gambling. The exposure to the shorting party is the same; there may well be risk to the counterparty that is not disclosed in a naked short; and this potential counter-party risk may well be destabilizing and therefore Bad; but I don’t understand why it should be deprecated as gambling and thus distinguished from the price-discovery process assisted by shorting.

I do try to stay away from politics in this blog – except where they explicitly impinge on the financial world, but this Toronto Star article is too good to pass by: Green Bins: A wasted effort:

The City of Toronto boasts that its green bin program diverts a third of our garbage and turns it into “black gold” compost. But a Star investigation shows that the program – although nobly conceived – is a sham.

There are two problems. First, the city’s claim of how much waste the program diverts from landfill is inflated. Second, some of the compost that is being produced will kill your plants because of its high salt content, according to laboratory tests.

The Star’s headline is incorrect: the Green Bin programme is serving its purpose perfectly. It is enabling earnest feel-gooders to feel good about themselves. If the purpose was actually to accomplish something useful, we’d just incinerate it all. But that’s regulation for you!

UK CMBS are not feeling very happy:

Investor Simon Halabi’s real-estate companies failed to remedy a default on 1.15 billion pounds ($1.9 billion) of commercial mortgage bonds at a time when, according to Fitch Ratings, “pretty much” all such European deals would breach loan-to-value conditions if they were tested.
…
“With capital values having fallen on average by 43 percent, pretty much any loan that has a loan-to-value covenant if tested today would be in breach,” said Andrew Currie, head of Europe commercial mortgage-backed securities at Fitch Ratings in London. Most servicers of commercial mortgage bonds haven’t tested these conditions, “storing up trouble” for the future, he said before today’s announcement.

White Tower is the largest commercial mortgage bond sold by a single borrower to default this year in Britain, which is Europe’s largest market and accounts for about 50 percent of issuance, according to Fitch. Banks that financed a real-estate buying spree at the top of the market are weighed down with about 230 billion pounds of commercial property loans, data compiled by De Montford University show, making them unwilling to refinance existing deals when they come due.

FixedResets continued to roar ahead (as well as hogging up all the spots on the volume highlights table) and are now more than two points through perpetuals, a price that sounds really, really extreme. At current spreads, of course, redemption at first call looks more likely than not, but there is still a significant amount of extension risk in the structure … we will see how it turns out. My bet? It ends in tears.

The FDIC – which shut down a boatload of banks yesterday – has published draft rules for private equity buyers interested in sniffing around the assets. Very, very stringent, and at first glance, I have to agree with the statement:

“The FDIC’s proposed guidance would deter future private investments in banks that need fresh capital,” Douglas Lowenstein, president of the industry group the Private Equity Council, said in a statement yesterday.

The rules that catch my eye have to do with a 15% minimum Tier 1 Capital Ratio, three year ownership lockup and cross-guarantees from other depository institutions owned by the investor. Unfortunately, the proposals are presented in bald, finished form without discussion, so I am at a loss to determine whether there is any real purpose being served by the proposals.

There was some more some more Chinese mischief-making today:

“There should be a system to maintain the stability of the major reserve currencies,” Zeng, the head of a Chinese research center, said in Beijing today. He advocated supervision of fiscal and current-account deficits, adding that “your currency is likely to become my problem.”

Premier Wen Jiabao said in March that he was “worried” about his nation’s holdings of Treasuries as spiraling U.S. debt threatens the value of the dollar. China, the owner of the world’s biggest foreign-exchange reserves, called yesterday for a stable dollar and damped speculation that it is seeking talks on a new international reserve currency at next week’s Group of Eight meeting.

If China doesn’t like the USD as a reserve currency, that’s an easy problem to solve: don’t hold it. They can keep their reserves in gold, if they like, although copper or oil would probably be a better choice. And making their currency freely exchangeable and doing so much business with the rest of the world that the remnimbi becomes a reserve currency is another option.

And the idea of solemnly going into the G-8 meeting proposing to elect a new reserve currency is utter nonsense. It’s like having a vote to determine who’s tallest. I’m convinced that this is all just posturing to put the US on notice China won’t be pushed around at the meeting … but there’s a better way to do that, too … aircraft carriers.

Sabre-rattling aside, looks like they’re going for the asset-backed reserve currency idea:

Teck Resources Ltd., Canada’s largest diversified mining company, sold a 17 percent stake to China’s $200 billion fund sovereign wealth fund for C$1.74 billion ($1.5 billion) to reduce debt.

China Investment Corp., also known as CIC, will buy 101.3 million Class B subordinate voting shares for C$17.21 each, Vancouver-based Teck Resources said today in a statement. Teck said the deal will give CIC a 6.7 percent voting interest.

There’s some talk about an Argentinian oil deal, too.

Macroblog‘s John Robertson was kind enough to mention an old PrefBlog post in his commentary, A funny thing happened on the way to the federal funds market. While the institution of the Excess Balance Account will relieve some of the leverage-driven selling of Fed Funds, there’s yet another nuance:

Technically, the FHLBs [Federal Home Loan Banks], like other government-sponsored enterprises, are ineligible to earn interest on their own reserve balances held at the Fed, but the FHLBs were given an exemption under the interim rule published last year, which did not distinguish between an FHLB’s own reserve balances and those of their respondents. With the amended Reg. D, the pooling of reserves will no longer be allowed. Thus, the FHLBs will not be able to earn interest on their own reserve balances.

Will this change matter to them? A look at the FHLB consolidated balance sheet suggests it could. For instance, as of Sept. 30, 2008, the FHLBs were sellers of some $94 billion of fed funds and held zero on deposit at the Fed. But as of Dec. 31, 2008, after the Fed started paying interest on reserves, the FHLBs sold only $40 billion of fed funds and held $47 billion on deposit at the Fed.
…
Fed funds market nerds stay tuned.

I object! I’m not a Fed Funds nerd; I’m a Fed Funds geek!

Another strong day for preferreds – especially FixedResets! – on reduced volume; probably due to the US holiday.

Interesting news from Peru today:

IShares, the world’s biggest provider of exchange-traded funds, reached an agreement with Peru’s pension funds that will increase the assets of the first Peruvian exchange traded fund in the U.S., according to Gonzalo Presa, a pension fund manager at Lima-based AFP Horizonte.

The Peruvian pension funds, known as AFPs, will swap shares of local companies in exchange for shares in the iShares MSCI All Peru Capped Index Fund, said Presa. BlackRock Inc. agreed to buy Barclays Plc’s global fund unit, including iShares, for $13.5 billion in June.

“We’ll give Barclays shares to build up this ETF,” Presa, who helps manage $3.4 billion as head of local equities at AFP Horizonte, said in a phone interview. “The idea is to issue $300 million in new shares in two, three weeks.”

Presa said it would be “very difficult” for Barclays to acquire the shares in the local market because of the lack of liquidity.

There’s no information given as to whether the pension funds got a sweetheart deal on fees.

I hadn’t known this in advance, but to my astonishment there was no early close of the bond markets today:

“SIFMA’s Board of Directors and membership reassessed the early close policy, recognizing that additional access to the liquidity provided by our members would benefit all market participants. The interconnected, global nature of the fixed income markets and the significant–and nearly round the clock–access to liquidity that many members provide would be enhanced by this change. Since shortened trading days may limit the liquidity window and create possible market risks which could be mitigated with a full functioning fixed income market on days when liquidity could be normal, we have determined eliminating some of the early closes is a better solution,” said Randy Snook, executive vice president at SIFMA. “This step will allow firms of all sizes around the globe to have access to fixed income liquidity on an almost continuous basis on most trading days of the year.”

Early close recommendations will be eliminated for the following holidays:

· Friday before Martin Luther King, Jr. Day
· Friday before President’s Day
· Day before Independence Day
· Friday before Labor Day
· Day before Columbus Day
· Day before Veterans Day
· Day before Thanksgiving

I’ve heard a rumour that this is TARP-related, which may well be true, but I’m glad of it anyway. Ever since I got into this business, I’ve been amazed that the highest paid profession on earth has had a half-day in advance of long weekends. All the B-School Babies will be whining about having to put in a full day’s work, poor things.

The SEC may be preparing a short-selling cosmetic makeover:

Given the climate in Washington, as well as the running suspicion of Wall Street, new rules seem inevitable, analysts say. Mary L. Schapiro, chairwoman of the S.E.C., has said that considering new rules restricting short-selling is a priority. Members of Congress like Barney Frank, the Massachusetts Democrat who heads the House financial services committee, are calling for quick action.

For the moment, the most likely outcome may be for the S.E.C. to reinstate a rule that the commission itself abolished with a unanimous vote in 2007, under its previous chairman, Christopher S. Cox. Known as the uptick rule, it would bar investors from shorting a stock until its price ticks at least a penny above its previous trading price.

But current and former S.E.C. staff members appear to doubt that reinstating the uptick rule would have much of an effect on trading. Some say the change would be merely cosmetic.
…
Sally Miller, a spokesman for the A.B.A., said the member banks thought there was clear link between the market turmoil and the rule change. “All of a sudden subsequent to 2007 they can see all their stocks going haywire,” Ms. Miller said. “It’s cause and effect.”

I wonder what Ms. Miller actually said, in context. She surely can’t be claiming that the most important determinant of bank equity price volatility in the 2007-09 period was the removal of the uptick rule!

Still and all, I wonder what BIS thinks of it. Their annual report contains an argument in favour of short sales as a bubble-controller.

Continued strength in FixedResets brings the yield-to-worst down to 4.55%! Holy smokes, how low can they go?