PrefBlog

This is about as far as one can get from preferred shares … but it’s interesting! There has been a lot of kerfuffle lately about the seeming randomness of the commodity futures basis in the States. Econbrowser has a guest-poster, Professor Scott Irwin, who explains what this means and why it’s important.

My suspicion is that it will have something to do with unsettled credit conditions. If you’re going to buy spot grain and sell a futures contract about it, you have a storage and financing problem that needs to be solved. First you need storage, then you need a price on your storage, then you need financing, then you need a price on your financing. It’s not just the spot and future price! I suspect that the financing requirements are injecting a little randomness into the process … I was once speaking to a bank rep, who very seriously intoned “The Bank [the capital “B” was audible] does not finance arbitrage.” Now, he was a very junior bank employee, but those were good times! I’m no expert, but I’ll bet on the financing aspect.

Prof. Irwin points out that there is an official hearing April 22 … we’ll see what comes of that. The post has some good comments.

Calculated Risk references a Times article that indicates:

It is understood that the Treasury about to finalise a scheme under which the Bank would allow lenders to swap their mortgage-backed assets for government bonds rather than cash. Lenders would be able to use the gilts as collateral for loans from other banks. It is hoped that the move will ease the seizure in the credit markets and lead to a drop in mortgage rates for homeowners.

It is not clear to me whether the word “swap” means “collateralize a loan with”, as in the Fed’s TSLF, or “trade”, as in Willem Buiter’s idea mentioned yesterday. I think the former is a great idea, provided that the loan is at a penalty rate; I have yet to be convinced that desperate measures such as the latter are necessary.

However, there is no doubt that excesses in the UK were just as spectacular as those in the US:

Richard Lee spent 5.3 million pounds ($10 million) buying 20 rental homes across the U.K. with just 150,000 pounds of his own money. Today, the properties are worth about 60 percent less and owned by the banks that financed the purchases.

The idea of outright government purchases of debt is hardly unique to the UK. There are plans afoot to have the US purchase student loans:

The U.S. House of Representatives, trying to avert a looming shortage in available student loans, approved allowing the Department of Education to buy federally guaranteed loans that lenders are unable to sell to private investors.
…
The global credit crunch has raised student-loan makers’ financing costs, and they’re unable to raise the rates they charge for federally guaranteed loans because the rates are locked in by the government.

SLM Corp., known as Sallie Mae, has stopped offering consolidation loans, which allow borrowers to combine several loans into a single one charging a lower rate. The company said today that new student loans are being made only at a loss.

Agencies in several states including Massachusetts, Michigan and Pennsylvania have announced plans to stop providing federally guaranteed student loans.
…
The legislation passed by the House today would let lenders sell their debt to the Department of Education at a premium. The move is designed to give investors more confidence in securities backed by the loans.
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A similar bill has been introduced in the Senate. A Bush administration statement yesterday backed most provisions of the House measure while recommending some changes to ensure that the secretary of education has “the necessary authority and flexibility needed to respond to the unfolding situation.” The legislation is H.R. 5715

What tangled webs are a surprise, when first we seek to subsidize!

Volume dropped off to light levels, but the market edged up with low price volatility.

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

This entry was posted on Thursday, April 17th, 2008 at 11:23 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.