October 30, 2007

US Consumer confidence was reported to be way down today, while housing prices declined at an accellerating rate. Geez, this is sounding a lot like my September 25 post! Perhaps I should just keep a template full of gloomy news and copy-paste!

There was some very interesting news regarding the overall credit crunch today: it seems that Federal Home Loan Banks in the states are making massive loans to the marketplace, financing them by issuing their own paper:

Countrywide Financial Corp., Washington Mutual Inc., Hudson City Bancorp Inc. and hundreds of other lenders borrowed a record $163 billion from the 12 Federal Home Loan Banks in August and September as interest rates on asset-backed commercial paper rose as high as 5.6 percent. The government-sponsored companies were able to make loans at about 4.9 percent, saving the private banks about $1 billion in annual interest.

FHLBanks are kind of interesting. They are regulated not by the Fed, but by the Federal Housing Finance Board,

an independent agency within the executive branch of the federal government.

The Finance Board consists of a five-director board—one of whom is the Secretary of Housing & Urban Development (HUD) or the Secretary’s designee. The other four directors are appointed by the President and subject to Senate confirmation. 

In other words, it’s all political. They trumpet their 4.41% Capital to Asset ratio, but there is no indication that I can find – even in the Annual Report for FHLB Atlanta – of how this may be expressed in standard Basel Agreement terms, like “Tier 1 Capital Ratio”. I don’t know. I don’t know very much about this aspect of the US Financial system … and I’m willing to listen carefully to those who do … but this seems to me to be another grossly under-capitalized source of moral hazard, in addition to the GSEs.

A summary article in Voxeu led me to a CEPR Policy Insight which in turn was based on a lecture given 2007-10-1. Recycling of all kinds is very fashionable nowadays! At any rate, Axel Leijonhufvud has joined the debate regarding whether the Fed (and central banks in general) should target inflation alone, or should also pay attention to (potential / perceived) asset bubbles. He argues that the absence of US inflation in the early part of this decade was due not so much to the availability of cheap Chinese labour as it was to the willingness of the Chinese (and others) to accumulate dollar reserves.

So the trouble with inflation targeting in present circumstances is that a constant inflation rate gives you absolutely no information about whether your monetary policy is right.

It is a simple observation that the experience of Japan shows that inflation targeting will not by itself protect you against financial instability. The present criticism goes a step further. Inflation targeting might mislead you into pursuing a policy that is actively damaging to financial stability.

He criticizes SIVs, but I find his arguments a little facile. He does not distinguish between liquidity risk and credit risk (he’s not alone there!) and claims that they circumvent the Basel rules. The well-informed readers of this blog will know that while they used to circumvent Basel in the States, liquidity guarantees are now charged against capital. There is, of course, continuing controversy over whether the liquidity guarantees are expensive enough; I suspect that they’re not; and I have good reason to believe that the issue is currently under intense scrutiny by regulators world-wide. But he doesn’t actually say this.

He also claims that the “SIVs were, like hedge funds, highly-leveraged” … I don’t know exactly what he means by this; he may be considering only the very bottom tranche as equity and ignoring the tranching effects of mezzanine notes; it’s not clear. He speaks very highly of NN Taleb and the Black Swan phenomenon, feeling that the concept is not adequately reflected in risk management at large financial institutions. His final conclusion is that the fact that no big exogenous shock caused the current crunch shows that the world financial system is not well understood … which is comforting indeed to those of us employed by it!

In Canada, the most economically illiterate government since Trudeau elected to cut the GST to 5% and reduce the national debt by a mere $22-billion over the next five years while reducing other taxes as well. Perhaps the boomers will all die off without having ever paid for their government services! Interest on public debt is forecast to remain in excess of $30-billion annually; it’s currently 14% of federal revenue.

I have not yet seen any indication on whether there are any implications for interest-equivalency of dividends in the tax changes. Probably not, since it hasn’t been trumpetted.

It was a good day for preferreds today – good volume and the PerpetualDiscount index was actually up 0.1759% on the day, its third up day this month. Before breaking out the champagne, note that today’s gain is less than yesterday’s loss, so the index is still down on the week.

The spread between BAM.PR.M and BAM.PR.N widened some more, on good volume.

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 4.95% 4.89% 420,804 15.55 1 0.0000% 1,049.2
Fixed-Floater 4.91% 4.81% 98,670 15.85 7 +0.2466% 1,041.6
Floater 4.51% 3.87% 67,223 10.68 3 -0.0547% 1,040.7
Op. Retract 4.88% 3.74% 78,975 3.55 15 +0.0060% 1,025.6
Split-Share 5.19% 5.06% 85,959 3.86 15 +0.1884% 1,039.8
Interest Bearing 6.22% 4.96% 61,424 2.17 4 +0.5346% 1,063.6
Perpetual-Premium 5.72% 5.61% 103,634 9.30 17 +0.3911% 1,004.8
Perpetual-Discount 5.59% 5.64% 321,035 14.45 47 +0.1759% 902.58
Major Price Changes
Issue Index Change Notes
W.PR.J PerpetualDiscount -2.2941% Now with a pre-tax bid-YTW of 5.91% based on a bid of 23.85 and a limitMaturity.
FTU.PR.A SplitShare -1.2795% Asset coverage of just under 2.0:1 as of October 15 according to the company. Now with a pre-tax bid-YTW of 5.20% based on a bid of 10.03 and a hardMaturity 2012-12-1 at 10.00.
BAM.PR.M PerpetualDiscount +1.0960% Now with a pre-tax bid-YTW of 6.22% based on a bid of 19.37 and a limitMaturity. Closed at 19.37-48, 1×5 on volume of 37,230, while its pair, BAM.PR.N, was down on the day, closing at 18.18-29, 1×1, on volume of 50,670. Such silliness.
BCE.PR.A FixFloat +1.1712%  
CM.PR.I PerpetualDiscount +1.2048% Now with a pre-tax bid-YTW of 5.63% based on a bid of 21.00 and a limitMaturity.
BMO.PR.J PerpetualDiscount +1.2048% Now with a pre-tax bid-YTW of 5.46% based on a bid of 21.00 and a limitMaturity.
DFN.PR.A SplitShare +1.2859% Asset coverage of just over 2.7:1 according to Quadravest. Now with a pre-tax bid-YTW of 4.87% based on a bid of 10.24 and a hardMaturity 2014-12-1 at 10.00.
CM.PR.D PerpetualPremium +1.4056% Now with a pre-tax bid-YTW of 5.54% based on a bid of 25.25 and a call 2012-5-30 at 25.00.
RY.PR.G PerpetualDiscount +1.4286% Now with a pre-tax bid-YTW of 5.48% based on a bid of 20.59 and a limitMaturity.
FIG.PR.A InterestBearing +1.6113% Asset coverage of 2.3+:1 according to Faircourt. Now with a pre-tax bid-YTW of 1.33% (mostly as interest) based on a bid of 10.09 and a call 2007-11-29 at 10.00.
BNS.PR.J PerpetualPremium (for now!) +1.9389% Now with a pre-tax bid-YTW of 5.25% based on a bid of 24.71 and a limitMaturity.
GWO.PR.G PerpetualDiscount +2.2065% Now with a pre-tax bid-YTW of 5.68% based on a bid of 23.16 and a limitMaturity.
GWO.PR.I PerpetualDiscount +2.4653% Now with a pre-tax bid-YTW of 5.71% based on a bid of 19.95 (still distressed!) and a limitMaturity.
ELF.PR.G PerpetualDiscount +2.8792% Now with a pre-tax bid-YTW of 5.99% based on a bid of 20.01 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
CM.PR.J PerpetualDiscount 75,800 Now with a pre-tax bid-YTW of 5.56% based on a bid of 20.37 and a limitMaturity.
SLF.PR.D PerpetualDiscount 75,404 Now with a pre-tax bid-YTW of 5.47% based on a bid of 20.60 and a limitMaturity.
BNS.PR.L PerpetualDiscount 71,450 Now with a pre-tax bid-YTW of 5.42% based on a bid of 20.88 and a limitMaturity.
RY.PR.G PerpetualDiscount 64,747 Now with a pre-tax bid-YTW of 5.48% based on a bid of 20.59 and a limitMaturity.
BNS.PR.J PerpetualPremium (for now!) 54,000 Now with a pre-tax bid-YTW of 5.25% based on a bid of 24.71 and a limitMaturity.

There were thirty-two other index-included $25.00-equivalent issues trading over 10,000 shares today.


2 Responses to “October 30, 2007”

  1. […] PrefBlog Canadian Preferred Shares – Data and Discussion « October 30, 2007 […]

  2. […] Naked Capitalism also takes issue with Countrywide funding its operations with Certificates of Deposit, but I can’t see any problem with that … provided that FDIC and Fed is supervising the bank properly and it’s solvent. Otherwise, of course, it would be a Bad Thing. I’m much more concerned about the back-door guarantees via the Federal Home Loan Banks, as I noted on October 30. […]

Leave a Reply

You must be logged in to post a comment.