April 14, 2008

On March 31 I indicated my approval of the idea that the Fed should have discretion over the conduct of monetary policy; in Econbrowser, Prof. James Hamilton has pointed out that discretion should have boundaries:

And this is where I feel that Robert Reich raises an excellent point:

the Fed can expose taxpayers to hundreds of billions of dollars of potential losses without a single appropriation hearing, as it did recently when it allowed Wall Street’s major investment banks to exchange tainted mortgage-backed securities for nice clean loans from the Treasury. And the Fed can do amazing things– like decide one big bank, JP Morgan, is going to take over another, Bear Stearns, backed by $29 billion of taxpayer money.

Reich is exactly correct– the Fed’s recent behavior does expose U.S. taxpayers to a risk of default on these assets. While some may argue that the Treasury is exposed to risks in the current situation no matter what the Fed does, it seems to me that this decision is ultimately a matter for fiscal policy. And just as I don’t want Congress deciding how much money to print, I don’t want the Fed deciding how much taxpayer money is appropriate to pledge for purposes of promoting financial stability.

I agree very much that Congress has a quite proper role in determining the magnitude of the fiscal risk that the Fed opts to assume. Congress’s statutory limit on the quantity of debt that the Treasury can issue is something I have previously derided as political circus. But a statutory limit on the non-Treasury assets that the Fed is allowed to hold might make sense. Perhaps the outcome of a public debate on this issue would be a decision that the Fed needs the power to lend to private borrowers even more than the $800 billion or so limit that it would run into from completely swapping out its entire portfolio. Indeed, Greg Ip speculates on the possibility that the Fed could “ask Treasury to issue more debt than it needs to fund government operations.” Surely that would be something that should require congressional approval. Or perhaps after deliberations, Congress would decide that the business of swapping Treasury debt for private sector loans is one that is better run by the Treasury rather than the Federal Reserve.

Another bank, Wachovia, is cutting its dividend and raising capital, while Deutsche is flogging its LBO debt in an effort to delever … in competition with Citigroup’s efforts, mentioned April 11 to unload $12-billion worth.

A very quiet day for preferreds.

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 5.14% 5.18% 28,002 15.20 2 +0.1428% 1,088.4
Fixed-Floater 4.79% 5.23% 61,964 15.22 8 +0.0694% 1,044.2
Floater 5.06% 5.10% 68,483 15.34 2 +0.3607% 823.0
Op. Retract 4.85% 4.07% 82,547 3.27 15 -0.1465% 1,047.3
Split-Share 5.38% 6.01% 87,290 4.08 14 -0.1779% 1,029.1
Interest Bearing 6.18% 6.21% 65,707 3.89 3 +0.0005% 1,096.8
Perpetual-Premium 5.91% 5.51% 206,484 4.81 7 -0.1835% 1,018.3
Perpetual-Discount 5.65% 5.67% 288,611 13.66 63 -0.0090% 922.7
Major Price Changes
Issue Index Change Notes
PWF.PR.F PerpetualDiscount -2.4665% Now with a pre-tax bid-YTW of 5.83% based on a bid of 22.54 and a limitMaturity.
BNA.PR.B SplitShare -1.4634% Asset coverage of just under 2.7:1 as of March 31, according to the company. Now with a pre-tax bid-YTW of 8.46% based on a bid of 20.20 and a hardMaturity 2016-3-25 at 25.00. Compare with BNA.PR.A (6.57% to 2010-9-30) and BNA.PR.C (7.38% to 2019-1-10).
PWF.PR.I PerpetualPremium -1.1792% Now with a pre-tax bid-YTW of 5.82% based on a bid of 25.14 and a call 2012-5-30 at 25.00.
SLF.PR.C PerpetualDiscount -1.0140% Now with a pre-tax bid-YTW of 5.48% based on a bid of 20.50 and a limitMaturity.
RY.PR.A PerpetualDiscount +1.1170% Now with a pre-tax bid-YTW of 5.43% based on a bid of 20.82 and a limitMaturity.
SLF.PR.A PerpetualDiscount +1.1463% Now with a pre-tax bid-YTW of 5.43% based on a bid of 22.06 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
PWF.PR.H PerpetualDiscount (for now!) 107,910 Nesbitt crossed 15,000 at 25.05, then 40,000 at the same price. Now with a pre-tax bid-YTW of 5.71% based on a bid of 25.01 and a call 2012-1-9 at 25.00.
TD.PR.Q PerpetualPremium 73,300 TD crossed 70,000 at 25.10. Now with a pre-tax bid-YTW of 5.59% based on a bid of 25.03 and a call 2017-3-2 at 25.00.
BMO.PR.H PerpetualDiscount 29,125 Now with a pre-tax bid-YTW of 5.72% based on a bid of 23.36 and a limitMaturity.
CU.PR.B PerpetualPremium 21,400 Three trades! CIBC crossed 10,000, then sold 2,000 to Nesbitt, then crossed 9,400, all at 25.40. Now with a pre-tax bid-YTW of 5.79% based on a bid of 25.41 and a call 2012-7-1 at 25.00.
TD.PR.R PerpetualDiscount 18,480 Now with a pre-tax bid-YTW of 5.67% based on a bid of 24.97 and a limitMaturity.

There were five other index-included $25-pv-equivalent issues trading over 10,000 shares today.

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