Month: August 2009

CIT has amended its exchange offer for its debentures due August 17:

As a result of the amendment, holders of all Notes tendered prior to the expiration date at midnight, New York City time, at the end of Friday, August 14, 2009, will receive the amended purchase price of $875 in cash per $1,000 principal amount of Notes, as total consideration in the Offer. Previously, the purchase price, which included an early delivery payment, was $825 per $1,000 principal amount of Notes.

CIT announced that the amendment to the Offer also reduces the minimum tender condition to 58% of the Notes, an amount approximately equal to the number of Notes which pursuant to the Credit Facility the lenders are committed to tender and not withdraw. As of 5:00 p.m., New York City time, on Friday, July 31, 2009, CIT had received tenders for 64.97% of the Notes.

The withdrawal deadline for the Offer has been extended until midnight, New York City time, at the end of Wednesday, August 5, 2009. All other terms of the Offer remain unchanged.

They have also suspended preferred dividends:

the Company’s Board of Directors has decided to suspend dividend payments on its four series of Preferred Stock in order to improve liquidity and preserve capital while restructuring efforts are ongoing. Payments on the Company’s Equity Units (NYSE: CIT PrZ) are not affected by this decision.

China has claimed that industrial espionage by Rio Tinto has cost the country’s steel mills over $100-billion, in connection with recent arrests. I have no idea whether the charges are well-founded or not; but if true, a vigorous response should provide a hint to Canada and Germany, inter alia, that confident countries don’t just whine about it.

There has been a fascinating hiccup in BAC / SEC lawsuit over the MER bonuses:

U.S. District Judge Jed Rakoff ended the hearing saying that he needs more information on the Aug. 3 accord between the bank and the U.S. Securities and Exchange Commission, which filed the suit. The settlement won’t be final unless Rakoff approves it.

If the SEC is correct that Bank of America lied about whether to pay the bonuses, then the proposed settlement isn’t “remotely reasonable,” Rakoff said.

Not a lot of price action today, but volume continued strong.

The Credit Suisse bonus pool is doing well:

Credit Suisse Group AG, the largest Swiss bank by market value, told bankers a pool of toxic bonds and mortgages set aside as part of their compensation gained 17 percent since January, a person familiar with the matter said.

About 2,000 bankers were told of the return, based on a $5 billion fund of bad mortgages and bonds, the person said, declining to be identified because the matter is private.

When the mechanism was announced on December 18, I commented:

If I am correct – with the support of the BoE – and bank assets have, in general, been written down to far below fundamental value, this is a clever way for the executives to (a) earn brownie points, and (b) give themselves enormous bonuses.

The Globe and Mail had a host of adulatory articles about the MFC Dividend Cut today, by Tara Perkins, Steve Ladurantaye and Andrew Willis, all praising Guloien’s forthright and incisive action in repairing the battered balance sheet. None of them mentioned the pending charge of about $500-million due to changing assumptions or speculated as to whether tough times might cause a decrease to the marketting budget, but the Perkins story did add some colour regarding the hurried changing of the capital rules last fall:

On Sept. 30, the head of Canada’s regulator, the Office of the Superintendent of Financial Institutions, wrote an e-mail to various OSFI officials. “D’Alessandro just called and asked that we try to meet next week with the company to discuss capital,” Julie Dickson wrote, noting that the meeting would replace one that had been arranged for November. Mr. D’Alessandro wanted to discuss the capital requirements for the variable-annuity, or segregated funds, business, other e-mails show.

Discussions took place in October in which he laid out why he felt the rules were too onerous, and OSFI officials had a flurry of internal discussions. On Oct. 28, the rules were changed.

OSFI consulted with more than one insurer that month, but the changes were most important to Manulife.

Federal lobbyist records show that Mr. D’Alessandro also met with Prime Minister Stephen Harper on Nov. 6 to discuss “financial institutions.” It is not known what was discussed at the meeting with Mr. D’Alessandro.

On Nov. 18, Finance Minister Jim Flaherty received a memorandum from OSFI updating him on Manulife.

“In short, while Manulife’s results have been very good historically, the recent downturn in equity markets has had a significant impact on its capital levels,” the memorandum stated.

The arbitrary rule change was highlighted in my opinion piece OSFI and the Third Pillar. Lynx-eyed analysts at Credit Suisse AG and CIBC World Markets, however, noticed that dividend cuts are not a Good Thing and downgraded the common.

Citigroup is considering selling its energy trading unit:

— Citigroup Inc. may give up control of its Phibro LLC energy-trading business to outside investors, a person familiar with the matter said, as the bank faces what may be a $100 million payday for the unit’s chief, Andrew Hall.

Billionaire investor Warren Buffett also held talks with New York-based Citigroup about buying the business, and those negotiations have now ended, according to the person, who declined to be identified because the discussions are private.
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Hall’s payout, which will be determined at the end of this year based on Phibro’s profits, may raise concern among lawmakers and regulators who are scrutinizing Citigroup’s compensation practices after a $45 billion government bailout last year.

On the one hand, I think is good news because I am in favour of a separation of banking & trading – with the strict proviso that this be accomplished by transparent nudges to capital rules, so that any regulated entity may determine whether it is primarily a banker or trader and have its regulatory capital calculated in an appropriate manner.

Even the whisper of this story is bad news, however. Citigroup isn’t examining the issue based on things like risk and reward – that’s too old fashioned for the new era. It appears that the basis for the decision will be cosmetic appeal: it’s a disgrace. I am, however, please to see that they have the moral character to resist the temptation to unleash an army of lawyers and accountants on Philbro, desperately seeking an uncrossed t in the regulatory requirements so they can pretend to be shocked and cancel the contract. There is still some integrity, at least, left in the world.

Today’s fascinating question is: Are Ken Lewis & Mom Boucher related, or what?

Ken Lewis CEO Bank of America

Mom Boucher President Hells Angels, Montreal

This question came to mind during the PrefBlog Sloppy Investment Thinking Awards Ceremony, which honoured Richard X. Bove of Rochdale Securities:

Mr. Bove notes that on Dec. 29 – when the new information concerning Merrill Lynch’s losses were disclosed to Bank of America’s management – that the bank’s stock was selling at $12.94 per share, whereas today the combined banks’ stock is trading close to $17 a share.

“Thus, one cannot argue that shareholders have been harmed by the bank’s decision that this was not a material reason to put off the merger,” he said in the note to clients.

The award is made with the assumption that the published extract has not distorted the main argument, which is akin to suggesting that blowing 90% of your paycheque on beer and prostitutes doesn’t do you any financial harm, since you’ve still got 10% left.

PerpetualDiscounts continued their winning ways of the week, up almost 45bp and leaving FixedResets in the dust again. These results were aided by superb performance from POW, which announced earnings today … no disaster, but held back by sub-par results from PWF (which owns GWO). Volume continued to be quite strong.

DBRS has published a new study Canadian Private Pension Plans – Are They Losing or Cruising?.

The SEC has extended the comment period for the short-selling proposals.

The BoE is monetizing debt like there’s no tomorrow:

The Bank of England expanded its bond purchase program beyond its original limit in an effort to spur lending and fight a recession that’s deeper than previously anticipated.

Bond yields plunged after the Monetary Policy Committee, led by Governor Mervyn King, kept the key interest rate at 0.5 percent and increased its purchase program by 50 billion pounds ($84 billion) to 175 billion pounds.
…
The Bank of England’s tone on the economy was less optimistic. It said in a statement that the recession “appears to have been deeper than previously thought.”

“While some recovery in output growth is in prospect, the margin of spare capacity in the economy is likely to continue to grow for some while yet, bearing down on inflation in the medium term,” the bank said.

PerpetualDiscounts continued to roar ahead today, shrugging off the woes of the equity market sparked by the slashing of the MFC common dividend. Somewhat surprisingly, the MFC PerpetualDiscounts were little affected, although one of the two FixedReset issues and the OpRet issue made it into the unpleasant part of the price movement table; both FixedResets were in the volume table.

Goldman Sachs is making tons of money:

Goldman Sachs Group Inc. made more than $100 million in trading revenue on a record 46 separate days during the second quarter, or 71 percent of the time, breaking the previous high of 34 days in the prior three months.

Trading losses occurred on two days during the months of April, May and June, down from eight in the first quarter, the New York-based bank said today in a filing with the U.S. Securities and Exchange Commission. The company made at least $50 million on 58 of the 65 trading days during the quarter, or 89 percent of the time.
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Banks such as Goldman Sachs are benefiting from lower borrowing costs after the Federal Deposit Insurance Corp. in October started guaranteeing bank debt issues that mature within three years. Goldman Sachs said in today’s filing it had $25.1 billion of debt guaranteed by the FDIC under the agency’s Temporary Liquidity Guarantee Program. The bank sold about $30 billion of the FDIC-backed securities between November and March, according to company filings.

There will be howls of outrage when they announce their bonuses next year! How much of this is due to the skill and salesmanship of their traders and sales desks and how much is due to the fact that smiley-boy has a big whack of capital behind him? You can bet that the politics of envy will be a major political theme in the coming year.

However, we must be fair. Particularly with respect to Flash Orders. It is only fair that large, politically connected companies be protected from that horrible competition stuff. Competition, you know, leads to bonuses:

The U.S. Securities and Exchange Commission’s move to ban so-called flash orders may help NYSE Euronext take back market share of U.S. stock trading at the expense of three-year-old rival Direct Edge Holdings LLC.

The debate regarding position limits in commodity futures is getting interesting:

John Hyland, chief investment officer for the world’s largest exchange-traded fund in natural gas, said assertions his company helped drive up energy prices were “self-serving statistical gibberish.”
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Hyland’s Alameda, California-based U.S. Commodity Funds LLC owns a family of exchange-traded funds that invest in oil, gasoline, heating oil and natural gas. One of them, the United States Natural Gas Fund, has grown 11-fold since the start of the year, to 347.4 million shares outstanding.

The fund ran out of new shares on July 7 and is seeking permission from the Securities and Exchange Commission to sell a billion more.

The $4.8 billion natural gas fund has at times owned almost 20 percent of the open interest in the near-month natural gas contract on the New York Mercantile Exchange, plus hundreds of thousands of natural gas swaps on the InterContinental Exchange.

Hyland said government-imposed caps would splinter large exchange-traded funds like his into smaller funds, reducing liquidity they provide to the futures market.
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[CFTC Chairman Gary] Gensler said in the hearings last week that there is a consensus that position limits are needed in derivatives markets, leaving regulators to answer three questions: What should the limits be, who will set and monitor the rules, and who needs to be exempt?
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“Position limits on financial contracts will decrease liquidity, increase transaction costs and increase volatility associated with expiration — all without achieving any of the reforms that the commission seeks,” said [John] Arnold, the founder of $5 billion energy hedge fund Centaurus Advisors LLC in Houston.

It depends a lot on what, precisely, is meant by “Exchange Traded Fund”. If it’s a straight pass-through, with one-share being equal to one barrel of oil, or one cubic meter of natural gas, or whatever, then I have no problems with it being exempt from the position limits. However, if it is indeed a straight pass-through, than this makes a mockery of the notion that it provides liquidity. You do not provide liquidity by taking a position, you suck it up. You do not provide liquidity by holding a position. You only provide liquidity by taking discretionary market action to offset actions of other market participants … and if you do that, you’re not an exchange-traded fund, you’re just another speculator and you should be subject to position limits.

Another rip-roaring day for PerpetualDiscounts, which gained just over 84bp in total return (BMO went ex-dividend) to bring the weighted median YTW below 6% for the first time since September 12, 2008, just before Lehman’s bankruptcy. Very good volume today and FixedReset issues made it back to their accustomed (well, accustomed in the last six months, anyway) dominance of the volume highlights table.

PerpetualDiscounts now yield 5.99%, equivalent to 8.40% interest at the standard conversion factor of 1.4x. Long Corporates now yield 6.1%, so the pre-tax interest equivalent spread is now about 230bp, a widening from the 215bp estimate of July 31 and July 29.