May 16, 2008

Not much today, folks!

Naked Capitalism republishes some of a piece by Gillian Tett of the Financial Times regarding the advisability of managers talking to each other; her recommendations echo those of the International Report on Risk Management Supervision and provide a little bit of psychological colour.

Iceland is in trouble! Their Central Bank has had to borrow EUR 1.5-billion to prop up the currency:

The krona has dropped as much as 26 percent against the euro this year on concern Iceland’s commercial banks have taken on too much foreign debt, prompting speculation the central bank may have to step in.

The offer of aid from neighbors “will help stabilize the financial markets, but not the basic imbalances of the Icelandic economy,” said Lars Christensen, senior emerging markets strategist at Danske Bank A/S in Copenhagen.

The country’s three biggest banks have combined assets of 11.4 trillion kronur, or nine times the size of the economy. At the biggest lender, Kaupthing Bank Hf, foreign currency holdings make up 87 percent of assets.

Meanwhile, the lines between “private equity funds” and “vulture funds” seem to be getting a little blurred:

McGoldrick, 49, was co-head of the Goldman group that buys corporate debt that is near default, lends to financially struggling businesses and trades shares of companies emerging from bankruptcy. His new firm, Mount Kellett Capital Management LP, will do transactions around the globe, said the people, who asked not to be identified because the venture is private.

Private-equity firms raised $163.5 billion in the first three months of 2008, the second-biggest quarter since London- based Private Equity Intelligence Ltd. started tracking the data in 2003. The money is coming from pension funds, endowments and sovereign wealth funds even as a shortage of credit has stopped most deal-making.

“There’s an appetite for serious distressed investors and he has a track record of having done a good job on those deals, so there will be some receptivity,” said Steven Kaplan, a finance professor at the University of Chicago’s business school.

“Private Equity” has a much nicer ring to it, doesn’t it?

Bloomberg has a good piece on the collapse of the Auction Rate Securities Markets. Amusingly – in a sick sort of way – is that the front-page link is “Auction-Rate Market Loses $1.7 Billion for Taxpayers Misled by Governments”, while the actual story headline is “Auction-Rate Collapse Costs Taxpayers $1.65 Billion”. There’s nothing that I can see in the story that would justify a charge that taxpayers were misled by governments … but in these days of heroic investor advocacy, it’s very fashionable to claim that anything not to one’s liking is unethical.

The story suggests:

Many issuers are getting out of auction-rate debt and say they will never use it again. State and local governments have already replaced or announced plans to replace at least $66 billion of the securities, according to Bloomberg data. Many are switching to variable-rate demand bonds, whose 2.25 percent average in the past month is about half the 4.56 percent for auction-rate bonds. Others are stuck, unable to issue new debt. Some investment banks, including Citigroup, say the market will never come back.

“It’s a damaged product, and I can’t imagine issuers using it again,” said Wisconsin’s Hoadley. “A lot of people will have to die and institutional memory go away before people will come back to it.”

Gallatin, the father of auction-rate securities, doesn’t hold out much hope. He expects auction-rate bonds will be replaced by other debt because too many investors and issuers lack confidence.

“The back of the market is broken,” he said. “I think the market’s problem started with credit, but now credit isn’t the problem.”

Who knows? The doomsayers may well be right, and I must be very cautious when questioning Citigroup’s opinion regarding what they can sell … but it seems to me that the market could be resurrected in the same manner as Canadian (Bank Sponsored) ABCP … slap a global liquidity guarantee on the stuff and away you go! In other words, Citigroup could underwrite such an issue, with a guarantee that it will put in a permanent bid for the entire issue at, say BAs + 500 (guaranteeing a fixed rate for 40 years might be a little dicey!).

Again, who knows? Let’s wait for things to calm down and revisit the issue in, say, five years. The basic issuers’ Holy Grail of financing long term assets at short term rates, and the basic investors’ Holy Grail of getting an extra 20bp on pretend-short-term paper will never go out of style!

The drive to get authority for the Fed to pay interest on reserve balances (discussed on May 7 and April 29) continues with Bernanke writing Pelosi:

Federal Reserve Chairman Ben S. Bernanke asked Congress to immediately give the central bank authority to pay interest on commercial-bank reserves, according to a letter from the Fed chief to House Speaker Nancy Pelosi.

“Congress recognized that payment of interest on reserves would contribute to the efficiency of the financial system,” Bernanke, 54, said in a letter sent to Pelosi, a California Democrat. The central bank isn’t authorized by Congress to begin making such payments until October 2011.

“We recommend that the date be changed to make the legislation effective immediately,” Bernanke wrote in a letter dated May 13.

Performance was again nicely positive today, but volume was awful.

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 4.78% 4.81% 48,108 15.90 1 +0.1614% 1,083.7
Fixed-Floater 4.65% 4.56% 63,598 16.15 7 +0.6011% 1,076.0
Floater 4.10% 4.15% 61,758 17.08 2 +0.8720% 919.6
Op. Retract 4.82% 2.49% 88,473 2.40 15 +0.1049% 1,056.8
Split-Share 5.25% 5.50% 70,409 4.16 13 +0.3483% 1,056.7
Interest Bearing 6.12% 6.12% 53,109 3.82 3 +0.1686% 1,107.4
Perpetual-Premium 5.89% 5.71% 135,944 4.51 9 -0.1700% 1,021.2
Perpetual-Discount 5.65% 5.69% 300,213 14.10 63 +0.1146% 927.1
Major Price Changes
Issue Index Change Notes
RY.PR.A PerpetualDiscount -1.6409% Now with a pre-tax bid-YTW of 5.49% based on a bid of 20.38 and a limitMaturity.
POW.PR.C PerpetualDiscount (for now!) -1.1444% Now with a pre-tax bid-YTW of 5.85% based on a bid of 25.05 and a limitMaturity.
IAG.PR.A PerpetualDiscount +1.0165% Now with a pre-tax bid-YTW of 5.60% based on a bid of 20.87 and a limitMaturity.
CM.PR.E PerpetualDiscount +1.0526% Now with a pre-tax bid-YTW of 5.89% based on a bid of 24.00 and a limitMaturity.
BAM.PR.B Floater +1.0951%  
BNS.PR.L PerpetualDiscount +1.2077% Now with a pre-tax bid-YTW of 5.42% based on a bid of 20.95 and a limitMaturity.
SLF.PR.C PerpetualDiscount +1.2585% Now with a pre-tax bid-YTW of 5.42% based on a bid of 20.49 and a limitMaturity.
FFN.PR.A SplitShare +1.4851% Asset coverage of 2.0+:1 as of April 30, according to the company. Now with a pre-tax bid-YTW of 4.87% based on a bid of 10.25 and a hardMaturity 2014-12-1 at 10.00.
BCE.PR.A FixFloat +1.8025%  
Volume Highlights
Issue Index Volume Notes
POW.PR.D PerpetualDiscount 133,020 Now with a pre-tax bid-YTW of 5.76% based on a bid of 21.97 and a limitMaturity.
BMO.PR.L PerpetualDiscount (for now!) 61,850 RBC crossed 10,000 at 25.10. Now with a pre-tax bid-YTW of 5.86% based on a bid of 25.10 and a limitMaturity.
TD.PR.R PerpetualDiscount (for now!) 53,100 Nesbitt crossed 50,000 at 25.08. Now with a pre-tax bid-YTW of 5.68% based on a bid of 25.08 and a limitMaturity.
BMO.PR.H PerpetualDiscount 38,140 Now with a pre-tax bid-YTW of 5.45% based on a bid of 24.12 and a limitMaturity.
RY.PR.H PerpetualDiscount 17,800 Now with a pre-tax bid-YTW of 5.70% based on a bid of 25.00 and a limitMaturity.

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

One Response to “May 16, 2008”

  1. […] Fed’s ambition to pay interest on reserve deposits has been discussed on PrefBlog on May 16, May 7, April 29 and January […]

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