PrefBlog

Accrued Interest seems to have sparked a controversy, as his post from yesterday on the influence of recession timing on corporate spreads attracted some comment. He notes that his estimate of fair value (for spread due to default risk) of 34bp has been countered with an estimate of 140bp, and defends his figures while asking for backup from his interlocuter.

Fannie Mae lost a lot of money and has to return to the well:

it will raise $6 billion in capital as the worst housing slump since the Great Depression deepens.

The first-quarter net loss was $2.19 billion, or $2.57 a share, Washington-based Fannie Mae said in a statement. Analysts were expecting a loss of 64 cents a share, the average of 12 estimates from a Bloomberg survey.
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The government-chartered company, which sold $7 billion of preferred stock in December, may need as much as $15 billion to cope with delinquencies and foreclosures, analysts including Paul Miller of Friedman, Billings, Ramsey & Co. in Arlington, Virginia, said.

Naked Capitalism has republished extracts from a NYT article on Fannie and Freddie. There are concerns that their accounting is insufficiently conservative:

Both companies have also recently changed their policies on delinquent loans, which they previously recorded as impaired when borrowers were 120 days late. Now, some overdue loans can go two years before the companies record a loss.

Fannie Mae declined to discuss the accounting of impaired loans. A representative of Freddie Mac said marking loans as permanently impaired at 120 days does not reflect that many of them avoid foreclosure. But the biggest risk, analysts say, is that both companies are betting that the housing market will rebound by 2010. If the housing malaise lasts longer, unexpected losses could overwhelm their reserves, starting a chain of events that could result in a federal bailout.

Meanwhile, the level of Level 3 assets held by the major brokerages has been rising dramatically:

Merrill Lynch & Co. said so-called Level 3 assets climbed 70 percent in the first quarter, as the largest U.S. brokerage reclassified commercial mortgages and other assets as hard to value.

Merrill’s Level 3 assets, the firm’s most difficult to value, rose to $82.4 billion as of March 28 from $48.6 billion at the end of December, according to a regulatory filing today. The New York-based company’s ratio of Level 3 to total assets rose to 8 percent from 5 percent.
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Merrill’s Level 3 assets include mortgage-related holdings which sit within trading assets of $9.3 billion, according to the filing. Derivative assets accounted for $20.6 billion, loans measured at fair value for $12.5 billion, credit derivatives for $18 billion and private equity and principal investments for $4.3 billion, it said.

Other New York-based securities firms have also had a rise in Level 3 assets. Goldman Sachs Group Inc.’s holdings of the assets surged 39 percent to $96.4 billion in the fiscal quarter ending in February. Morgan Stanley reported a 6.1 percent increase to $78.2 billion.

Citigroup Inc., the biggest U.S. bank, yesterday said Level 3 assets rose by 20 percent in the first quarter to $160.3 billion.

Countrywide is cutting off some HELOC lines:

Countrywide Financial Corp. has suspended the home equity credit lines of almost all its Las Vegas customers
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Since January, Countrywide, Bank of America Corp., Washington Mutual Inc. and IndyMac Bancorp Inc. have frozen about 600,000 equity credit lines nationwide, said Michael Kratzer, president of a Bankrate Inc.-owned Web site that’s fielding consumer complaints. The lenders are targeting borrowers in cities where property values are falling, including Las Vegas, Chicago and Los Angeles, he said.

There was a monster bond deal announced today:

GlaxoSmithKline Plc, Europe’s biggest drugmaker, increased the size of its bond offering by 50 percent to $9 billion, which would make it the largest U.S. corporate bond offering in six years.

The sale, scheduled to occur as soon as today, will be split between $2.5 billion of 5-year notes, $2.75 billion each of 10- and 30-year bonds, and $1 billion of two-year floating-rate notes, according to a person familiar with the transaction who declined to be identified because terms aren’t set.

GlaxoSmithKline also lowered the yields at which it is offering the debt. The fixed-rate notes are now all expected to yield 173 basis points more than similar-maturity Treasuries and the two-year debt is expected to pay interest of 62.5 basis points more than the three-month London interbank offered rate, according to the person.

The fixed-rate notes were earlier marketed at a spread of about 175 basis points to Treasuries and the floating-rate securities were expected to pay interest of 65 basis points more than Libor. A basis point is 0.01 percentage point. Libor, a borrowing benchmark, is currently set at 2.76 percent.

The offering is the biggest since General Electric Co.’s finance arm sold $11 billion of bonds in 2002 in the fourth- largest corporate offering ever, according to data compiled by Bloomberg.

Volume picked up in a down day enlivened by a Fortis new issue announcement.

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

This entry was posted on Tuesday, May 6th, 2008 at 8:15 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.