PrefBlog

Here’s a switch! US ABCP outstanding actually increased last week, from USD 747.6-billion to USD 773.8-billion. It has been suggested that the market is stabilizing … but I’ll wait for a little more data, not taken at year-end in the midst of an enormous liquidity injection, before celebrating.

An article on the collapse of the Bear Stearns hedge funds provides some food for thought:

Some 90 percent of the face value of the CDOs was loaned to Bear by Merrill, as is normal in such transactions. When the prices of the funds’ CDO holdings started to fall in June, Merrill demanded that the firm increase collateral in what’s known in the debt markets as a margin call.

Bear Stearns executives pleaded for time, arguing that the forced sale of their assets would push down all CDO prices. Merrill Lynch officials brushed off the entreaty, according to people involved in the discussions.

In June, the hedge funds, run by Ralph Cioffi, sold $3.8 billion of CDOs to meet margin calls by Merrill and other lenders that were following its lead. The fire sale led to a further drop in CDO prices.

Whenever this sort of thing has happened in the past, regulators have responded by tightening margin requirements. Perhaps derivative debt should be eligible for only 15% margin; perhaps 20%. I suspect we will be hearing a lot more about this over the next while. There will be definitional problems, to be sure!

In what may well turn out to be a sign of the times, there was a US junk bond default today:

Buffets, a closely held company based in Eagan, Minnesota, failed to make the coupon payment yesterday on its 12.5 percent notes maturing in 2014, according to Matthew Lee, a customer service representative at U.S. Bank National Association in St. Paul, Minnesota, the trustee for the debt.

Buffets is at least the second company to miss an interest payment in the past week as the worst home sales market since 1981 stokes concern about a slowing economy. Tousa Inc., the Florida homebuilder that lost 99 percent of its market value in the past year, also missed interest payments on $485 million in debt, the company said in a regulatory filing yesterday.
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The 12 month dollar-weighted high-yield default rate will rise to 2.25 percent by the end of this year from 0.34 percent in December, JPMorgan Chase & Co. high-yield strategist Peter Acciavatti in New York predicted in a report dated yesterday. The rate will climb to 4 percent by year-end 2009, he forecast.

And finally, Accrued Interest reminds us of what “crisis” really means:

In my mind, a marriage in crisis is one where divorce is an imminent possibility. Not one where the couple just had a big ugly fight.
…
So back to the “crisis” question. It is these speculators who are insolvent. So what we have are people who speculated in houses and lost. We have are banks who lent to the afore mentioned speculators and have lost too. Bear in mind, these banks are the ones who agreed to limited documentation of income (perhaps so the speculator could claim this would be his/her primary residence?) or minimal down payments.
…
All this isn’t a crisis. Its how the credit cycle works. When credit becomes too easy, bad loans get made. People get hurt. But that’s the way of the world. You move on.

Where a crisis could develop is when the innocent are hurt just because capital becomes tight. Where a good borrower can’t get a mortgage loan. Where a solid commercial real estate project can’t roll over its bridge loan because banks are short on capital. That’s where the real crisis can get going. Foreclosures happen that didn’t need to happen, driving the price of assets lower. Lenders start taking losses on good loans, and suddenly are unwilling to lend to anyone. Investors struggle to value assets, not because of unknown losses, but because of unknown liquidity. Bids dissappear.

That’s a crisis.

Meanwhile, President Bush is contemplating fiscal stimulus. Some might say there is far too much fiscal stimulus already.

Another day of light volume and strong returns for preferreds. It should be most interesting to see whether the returns stand up next week when I assume volume will return … particularly with stocks looking sick in Japan and the US.

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

This entry was posted on Thursday, January 3rd, 2008 at 10:21 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.