Month: September 2009

There’s an interesting twist in emerging Credit Rating Agency law:

A U.S. judge refused to dismiss a lawsuit against Moody’s Investors Service Inc. and Standard & Poor’s, rejecting arguments that investors can’t sue over deceptive ratings of private-placement notes because those opinions are protected by free-speech rights.
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U.S. District Judge Shira Scheindlin in New York rejected the ratings firms’ arguments yesterday, forcing them and Morgan Stanley, which was also sued, to respond to fraud charges in a class-action by investors claiming the raters hid the risks of securities linked to subprime mortgages.
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Scheindlin said in her ruling that the First Amendment of the U.S. Constitution doesn’t provide a defense the case because the rating firms’ comments were distributed privately to a select group of investors and not to the general public.

Without ruling on the merits of the lawsuit, the judge said opinions by the ratings companies may be the basis for a lawsuit “if the speaker does not genuinely and reasonably believe it or if it is without basis in fact.” She said there are enough facts alleged against the two agencies and Morgan Stanley, the sixth-biggest U.S. bank by assets, for the lawsuit to go forward with evidence gathering needed for any trial.

It seems pretty strange to me, but I’m prepared to concede that Scheindlin knows American constitutional law than I do! I don’t understand, however, why the CRAs have a duty to tell the truth. So they lie. So? The only person who’s paying them is the issuer. It also seems to me to be a reasonably easy lawsuit to defend: the CRAs simply have to show that they used a reasonable model such as the one they used for everything else.

Private Equity methodology is changing:

The world’s biggest private-equity firms, shut out of the market for leveraged buyouts as banks curtail lending, are turning to bankruptcy courts to make acquisitions.

KKR & Co., the New York takeover firm co-founded by Henry Kravis, is part of a group converting loans made to Lear Corp. into a controlling stake in the bankrupt car-seat maker. Late yesterday, Hayes Lemmerz International Inc. said it reached an agreement with the lenders who financed its bankruptcy, giving them an equity stake in the maker of wheels for cars. This year, 162 companies merged or were bought out of bankruptcy, a 60 percent jump from the same period in 2008 and almost triple the amount in 2007, according to data compiled by Bloomberg.
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“It’s not a tactic that private-equity firms have historically employed, but it seems to be an idea whose time has come,” said Steven Smith, global head of leveraged finance and restructuring at UBS AG in New York. “This is clearly one of the new and most distinctive features of the current wave of restructurings.”

PerpetualDiscounts continued to give ground today, losing 31bp agains a FixedReset gain of 6bp; all this happened on relatively light volume and muted volatility: the Performance Highlights chart is pretty skimpy today.

The Boston Fed has prepared a foreclosure & house-price graphic for Massachussets:

This interactive graphic, showing changing patterns in foreclosure
rates and subprime mortgage originations across Massachusetts cities and towns since 1990 and their association with house-price changes, has been updated with 2008 data and enhanced with a new set of maps displaying the changing pattern of house-price changes from 1990 to 2008.

The slow pullback in the preferred share market continued, with PerpetualDiscounts losing 17bp and FixedResets down 7bp on the day. PerpetualDiscounts closed yielding 5.73%, equivalent to 8.02% interest at the standard equivalency factor of 1.4x. Long corporates now yield about 5.9%, so the pre-tax interest-equivalent spread is now roughly 210bp, up 10bp from August 31.

Guillermo Calvo of Columbia University writes an interesting piece for VoxEU, Dumping Russia in 1998 and Lehman ten years later: Triple time-inconsistency episodes:

This column introduces “triple time-inconsistent” episodes. First, a public institution is expected to cave in and offer a bailout to prevent a crisis. Then, in an attempt to regain credibility, it pulls back. Finally, it resumes bailing out the survivors of the wreckage caused by the policy surprise. This column characterises the 1998 Russian crisis and the current crisis as triple time-inconsistency episodes and says that a financial crisis may simply be a bad time to try to build credibility.
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It is far from me to chastise or ridicule those involved in triple time inconsistency. There are always good reasons why bright and well-intentioned public officials make serious mistakes during major crises. The two cases singled out in this note took place in arguably “unprecedented” circumstances. In situations like these, “shooting from the hip” becomes the rule, and errors are to be expected. However, I believe that there are at least two lessons that we could draw from these episodes, which could help to lower the incidence of triple time inconsistency and other inefficiencies:

• •A financial crisis is not the best time for reform or building credibility, especially if those actions go against the private sector’s expectations. Policymakers should focus their attention on putting out the fires and minimise the short-run social costs.
• •Policymakers should spend more time discussing worst-case scenarios before crises occur. These discussions should be carried out with some regularity (much like fire drills) and involve a wide spectrum of public officials that might eventually have to be involved in rescue operations during crisis. This will ensure a better understanding of the involved risks and tradeoffs, and improve the effectiveness of policies that need to be implemented in the spur of a moment.

Fat chance of the second one! When was the last time you saw a ten-year government deficit projection that included a discussion of the projected effects of a severe recession?

CIT is going to defer interest payments on its sub-debt:

Commercial lender CIT Group Inc. said in a regulatory filing Tuesday it will defer interest payments on some outstanding junior notes.

CIT was to make the next interest payment on the junior notes on Sept. 15, according to the Securities and Exchange Commission filing. The deferred interest will continue to accrue and compound until payments are made, the company said.

Interest is being deferred on junior subordinated notes due March 15, 2067.

Deferring interest payments can help CIT Group continue to reduce its near-term debt burden, furthering its efforts to remain in business after nearly collapsing earlier in the year.

The SEC filing on CIT’s site is copy-protected – idiots.

The Boston Fed has published an interesting paper by Katharine Bradbury and Jane Katz, Trends in U.S. Family Income Mobility, 1967-2004:

Using data from the Panel Study of Income Dynamics and a number of mobility concepts and measures drawn from the literature, we examine mobility levels and trends for U.S. working-age families, overall and by race, during the time span 1967–2004. By most measures, we find that mobility is lower in more recent periods (the 1990s into the early 2000s) than in earlier periods (the 1970s). Most notably, mobility of families starting near the bottom has worsened over time. However, in recent years, the down-trend in mobility is more or less pronounced (or even non-existent) depending on the measure, although a decrease in the frequency with which panel data on family incomes are gathered makes it difficult to draw firm conclusions. Measured relative to the overall distribution or in absolute terms, black families exhibit substantially less mobility than whites in all periods; their mobility decreased between the 1970s and the 1990s, but no more than that of white families, although they lost ground in terms of relative income.

Taken together, this evidence suggests that over the 1967-to-2004 time span, a low-income family’s probability of moving up decreased, families’ later year incomes increasingly depended on their starting place, and the distribution of families’ lifetime incomes became less equal.

It should be noted, however, that:

We do not address shorter‐term “volatility”—shocks to family incomes from year to year—or longer‐term “intergenerational mobility”—how much a person’s adult family income level (or position) depends on the level (position) of his/her parents during childhood.

This is a shame, because it the latter measure that I find to be of most interest. The authors conclude, in part:

What are the implications for policy? Because we find no evidence to suggest that the typical poor family is more likely to move up and out of poverty within several years than it was 40 years ago, policy remedies for those at the bottom should aim beyond short‐term help, as the poor at any point in time are likely to have low long‐term incomes. Beyond short‐term relief, the choice of policy presumably hinges, at least in part, on the reasons for the decline in mobility, for example, whether it reflects rising barriers to opportunity or rising returns to highstakes labor market promotion practices, including tournament‐style regimes common in the professions.

I’m not sure how to take this report. It sees to me that the results could come from increased efficiency in determining the starting point – e.g., you get that good job right out of school instead of having to pay your dues for twenty years and waiting for your supervisor to die. As I noted, I am far more concerned by inter-generational income mobility.

Volume picked up a little today, but the market didn’t, really, with PerpetualDiscounts down 19bp and FixedResets up 5bp. Just to make things more confusing, PerpetualPremiums were up 11bp … geez, it’s nice to see a healthy population in that slot!