PrefBlog

Econbrowser has a guest-post touting the Wisconsin Foreclosure and Unemployment Relief Plan:

The WI-FUR plan (here for details) specifies that all unemployed receiving UI benefits also receive a housing voucher that can be used to pay the mortgage. The housing voucher would be computed such that, on average in each state, homeowners pay 30% of their UI benefits on their mortgage — the voucher would cover the balance. In Wisconsin, for example, we advocate for an average voucher of about $764. This would make up for the shortfall in a $1,200 mortgage payment if households pay 30% of their UI benefit ($436 = 0.30 × $1,452) towards their mortgage.

The supporting argument is good, but I would be more inclined to support the idea if the government was getting something for its largesse: say, a chunk of equity in the house – maybe even computed against the price of the house when the mortgage was taken out. So, for instance, if Joe Unemployed uses twelve vouchers for $1,000 each in order to maintain ownership of his $400,000 house, the government then owns 3% of the house as equity, to be recovered when the house is next sold, at latest.

In another part of the post, they reference Lehman’s ‘Housing Meltdown Scenario’ which has been … er … somewhat overtaken by events and has been discussed on PrefBlog.

Accrued Interest writes an interesting post that is almost evenly divided between debt monetization via Fed Agency buy-backs and the low level of American political debate:

I don’t have a problem with claims that the Fed is conducting de facto monetization through its QE efforts. I don’t agree. I think Quantitative Easing is a legitimate monetary policy tool. But I readily admit that the distance between QE and monetization is no more than three meters wide. I think the Fed is still on the correct side of that line, but it is a perfectly legitimate and important public policy debate. I’m open minded to the possibility that the Fed could cross that line at some point. I welcome rational and objective discussion aimed at convincing me and others that the line has already been crossed.

To be fair, I don’t read Zero Hedge, so I am loathe to generalize about the opinions held on that site. However its obvious that the author is of the opinion that the Fed has crossed the line. Fine. Let’s hear the case. But instead, Zero Hedge tries to link this particular buy back with debt monetization, when I’ve clearly shown above that this particular buy back doesn’t indicate anything either way. Zero Hedge is presenting non-evidence as evidence.

So one of two things must be going on. Either Zero Hedge is ignorant of all the above facts, or he’s intentionally ignoring the facts to make his argument more sensationalist.

He has a follow-up today answering complaints from those who feel quantitative easing is the same thing as monetization. And it is; it’s simply a question of the environment. Right now the former appellation is appropriate because there is a demonstrable risk of disinflation, if not full deflation. If they keep it up for long enough, then yes, it will be monetization.

Looks like Central Bankers are are moving towards a new world reserve currency:

Policy makers boosted foreign currency holdings by $413 billion last quarter, the most since at least 2003, to $7.3 trillion, according to data compiled by Bloomberg. Nations reporting currency breakdowns put 63 percent of the new cash into euros and yen in April, May and June, the latest Barclays Capital data show. That’s the highest percentage in any quarter with more than an $80 billion increase.

Reuters claims that the CIT restructuring is in trouble:

CIT Group Inc is seeing little interest from bondholders in a debt exchange offer aimed at repairing its fragile balance sheet, making bankruptcy increasingly likely, sources familiar with the matter said.
…
CIT is now more likely to try a prepackaged bankruptcy, two people familiar with the matter said. They declined to be identified because the exchange offer is ongoing and information about its progress is private.

… and they’re losing their CEO:

Jeffrey M. Peek has informed the Board of Directors that he plans to resign as Chairman and Chief Executive Officer from CIT effective December 31, 2009. The Board is forming a Search Committee to oversee the recruitment process and ensure a smooth leadership transition at the Company.

“CIT’s recently launched restructuring plan is designed to enhance its capital levels, bolster liquidity and return the Company to profitability,” said Mr. Peek. “By strengthening CIT’s financial position, the Company will advance its bank-centric model and invigorate its market-leading franchises which support the small business and middle market sectors of the economy. Now is the appropriate time to focus on a transition of leadership, and I look forward to working closely with our Board during that process.”

Another down-day for PerpetualDiscounts, which lost 11bp on the day, in distinction to FixedResets, which gained 5bp. The day was enlivened by a new issue from EPP, which was downgraded by DBRS, thus simultaneously confirming three trends and predictions:

• New FixedResets from relatively low-quality companies
• New FixedResets following the jump in Canadian 5-year yields last Friday
• Downgrade of EPP

RBC did some nice crosses on the day, dominating the board.

The transfer of wealth from the banking to the shadow-banking sector got a boost today when Citigroup sold Philbro to Occidental:

Oil producer Occidental Petrol Corp., based in Los Angeles, will pay “net asset value” for the unit, the companies said today. Occidental’s net investment in Phibro will be about $250 million. The sale won’t be material to Citigroup earnings, the New York-based bank said.

Phibro had become a flashpoint for critics of excessive compensation at banks receiving federal aid because its chief, 58-year-old Andrew J. Hall, was paid more than $100 million in 2008 and is set to earn about the same this year. Citigroup, the third-biggest U.S. bank by assets, received a $45 billion taxpayer-funded bailout last year.
…
Vikram Pandit, 52, Citigroup’s chief executive officer, is parting with one of his most consistently profitable businesses.

Phibro, based in Westport, Connecticut, has been profitable each fiscal year since 1997, with pretax earnings averaging $371 million during the past five years, Occidental said in its statement. Citigroup had a record $27.7 billion net loss last year as the financial crisis brought mortgage-trading losses and higher loan charge-offs.

Hall, who has a degree in chemistry from the University of Oxford, is paid under a contract that gave him a portion of the unit’s trading results, and he may be owed $100 million this year under the terms of his contract with Citigroup, according to people familiar with the matter.

In Canada, of course, we solve such problems by putting an army of accountants and lawyers on the case, finding a few minor transgressions and firing the bum who made the mistake of being too good at his job. I am glad to see that Citigroup executives have more personal integrity.

Government bonds got hammered today. Across the Curve articulates my thoughts on the matter:

I was in the insomniac zone last night and was up late writing. I wrote about the Bernanke speech. I thought that he broke no new ground. Absolutely none. But some of the headline writers have focused on the fact that he mentioned that the Federal Reserve will raise rates when the economy recovers. Well, I wonder who would have been so obtuse as to think otherwise?

Aided by the Canadian jobs number, the Canadian five-year got smacked for 23bp today, closing at 2.75%. It is interesting to speculate whether the implied narrowing in required reset spreads will bring a flood of FixedReset issuance next week … I trust all the newly indentured investment bankers will be working their telephones from their call-centres.

There could be an interesting ‘cram-down’ battle going on with Energy Future:

— Energy Future Holdings Corp.bondholders are forming a group to block the electricity provider’s offer to swap $6 billion of debt for $4 billion of new secured notes with less protection for investors, according to two people familiar with the matter.

Lenders owning as much as 50 percent of Energy Future’s bonds maturing in 2017 oppose the terms of the exchange, said an attorney familiar with the matter who declined to be identified because the discussions are private.

Dallas-based Energy Future, formerly TXU Corp., needs to reduce debt after KKR & Co. and TPG Inc. paid $43 billion for the company using a combination of high-yield, high-risk loans and bonds in October 2007. That was before gas prices fell, credit markets seized up and equity markets tumbled.
…
Energy Future has $44.5 billion of loans and bonds, including $22.5 billion coming due in 2014, according to data compiled by Bloomberg.

The company “is suffering under the weight of an untenable debt load created by an ill-timed leveraged buyout at the top of the market,” Carl Blake, a Washington-based analyst at Gimme Credit LLC, wrote in an Oct. 6 report.

We will see more of this as the smoke clears – we saw some yesterday with the BAM acquisition of BBI.

I mentioned the controversy regarding the Federal Housing Authority yesterday. Here’s a defense of their business practices from the chair of the House Subcommittee on Housing and Community Opportunity, Maxine Waters:

It is a myth that FHA is the new subprime and has adopted lower underwriting standards and the other worst abuses of the subprime market. In fact, just the opposite is true. A recent Federal Reserve report indicates that over 60 percent of the increase in FHA purchase activity between 2007 and 2008 was to borrowers with prime-quality FICO scores. Additionally, the percentage of loans in FHA’s portfolio with loan-to-value ratios above 95 percent has fallen from 72 percent in 2007 to 67 percent in 2008. And unlike the subprime market, all of FHA’s mortgages require full documentation and verification of the borrower’s income and assets.

The preferred share market was down again today, with PerpetualDiscounts down 24bp and FixedResets giving up 7bp; as always, figures are given in terms of total return. The S&P/TSX Preferred Share Index was down 41bp, as opposed to no change yesterday; I have been asked about such differences and suspect that S&P uses the Close to price the index, rather than the Closing Bid used by HIMIPref™, although their published methodology does not make this absolutely explicit. Volume was good.