PrefBlog

Wachovia and Thornberg prefs were mentioned yesterday and as it happens both are in the news today.

Wachovia announced horrible results:

reported a record quarterly loss of $8.9 billion, slashed the dividend and announced 6,350 job cuts. The stock slumped as much as 10 percent in New York trading.
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The stock fell $1.18, or 9 percent, to $12 at 9:55 a.m. The cost of protecting the bank’s debt rose 10 basis points to 315, according to broker Phoenix Partners Group. Fitch Ratings cut Wachovia one level to A+ from AA-, citing its mortgage business, and Moody’s downgraded the bank to A1 from Aa3.

Wachovia, whose job cuts amount to about 5 percent of the bank’s workforce, lowered the dividend to 5 cents a share from 37.5 cents and will leave 4,440 positions open, according to a presentation to analysts today.

As of noon, the prefs at issue (WBPRC – NYSE) were actually up over 5%, to $16.49. Their dividend didn’t get cut!

And there is an offer for the Thornburg prefs:

Preferred shareholders will receive $5 in cash and 3.5 common shares if two-thirds of holders tender their stakes by Sept. 30. Were the deal to close today, holders would receive cash and stock totaling $6.09 for each preferred share, which closed yesterday between $4.46 and $4.62.
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In the question-and-answer session that followed, investors expressed their dismay. Those who bought preferred shares at $25 and expected a dividend must sell for $5 in cash plus stock that today is worth $1.09.

“I don’t ever think I have ever seen in my years on the Street, a $25 par being called in at $5,” said Shelley Bergman, of New York-based Morgan Stanley, who said he owned shares for himself and clients.

WaMu has announced horrible results:

Washington Mutual Inc., the biggest U.S. savings and loan, reported a $3.3 billion second-quarter loss as tumbling home prices left a record number of borrowers unable to keep up with mortgage payments. The shares surged 10 percent as the company announced it would cut costs.

The loss of $6.58 a share compared with net income of $830 million, or 92 cents a share, a year earlier, the Seattle-based company said today in a statement. The cost of uncollectible loans jumped 58 percent to $2.2 billion from the first quarter.

… and their earnings release notes:

On July 15, WaMu’s Board of Directors declared a cash dividend of $0.01 per share on the company’s common stock. Dividends on the common stock are payable on Aug. 15, 2008 to shareholders of record as of Jul. 31, 2008. In addition to declaring a dividend on the company’s common stock, the company will pay a dividend of $0.2528 per depository share of Series K Preferred Stock to be payable on Sept. 15, 2008 to holders of record on Sept. 1, 2008, a dividend of $19.8056 per share of Series R Preferred Stock to be payable on Sept. 15, 2008 to holders of record on Sept. 1, 2008.

So … as mentioned yesterday, Accrued Interest propounded the “worst of both worlds” argument … as these events show, it is also possible to propound the “best of both worlds” argument (although Thornburg pref holders might quibble at the use of the word “best”, at least they’re getting some pickings off the carcass).

Prefs are oval pegs; no attempt should be made to fit them neatly into either square or circular holes. Investors should look at prefs for what they are, and not overweight any particular scenario for future developments.

Catching up on a little miscellaneous banking system stuff … Charles Wyplosz reviews the bank-bailout question on VoxEU; not much substance, frankly, but he did point out:

Bagehot principles can be applied when one or two banks fail, but when the whole system is under threat, this is no longer an option.

Also, it looks like the HBOS rights issue has flopped:

HBOS was facing a further period of uncertainty last night, with underwriters holding more than 60 per cent of the bank’s rights issue shares and the City waiting anxiously for the bank’s interim results next week.
As a result of the banking giant’s £4 billion rights issue flop, underwriters Morgan Stanley and Dresdner Kleinwort are likely to have the stake – worth more than £2.4bn – after this evening’s 4:30pm deadline for them to sell the shares on.

That gives them a substantial share in the Edinburgh-based company which has an estimated overall stock market value after the rights issue of about £15bn.

Accrued Interest points out that negative convexity on Agency paper is more negative than usual:

There is a large number of homeowners currently underwater on their mortgage, and an even larger number with less than 20% equity. Given that getting a mortgage with less than 20% down payment is difficult and very expensive right now, homeowners who currently have less than 20% equity would have to come up with a lot of cash in order to move to another home.

So the housing turnover element of mortgage principal payments is set to plummet. In addition, the same factors will prevent many refinancings. A borrower underwater on his current mortgage will not be able to refinance his loan just because rates fall 50bps.

This means that the average life of a mortgage is longer than is currently being assumed.
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As investors come to terms with the extending average lives, prices are likely to fall rather than yield spreads contract. Holding the 271bps yield spread constant but extending the average life to 9 years causes the price to drop by over 3%.

The OSC is attempting to ensure that self-regulatory-organizations have jurisdiction over individuals’ conduct within the industry even after they have quit:

On July 15, 2008, the Ontario Superior Court of Justice, Divisional Court, allowed an appeal by Stephen Taub on the basis that the Securities Act does not authorize self-regulatory organizations (SROs) that have been recognized by the OSC to discipline former members. The Commission’s recognition of an SRO is designed to provide protection to investors from unfair, improper or fraudulent practices and to foster fair and efficient capital markets.

“The Commission is concerned that investor protection would be weakened if a registered representative could avoid the consequences of breaching SRO rules by resigning from his or her SRO member firm,” said OSC Executive Director Peggy Dowdall-Logie. “An SRO’s ability to take disciplinary action against former members, and former representatives of its member firms, is fundamental to effective investor protection and the functioning of an effective SRO.”

This has implications for the David Berry saga … RS ruled that it has jurisdiction over him (and could therefore judge whether he violated UMIR) – this ruling was, presumably, jeopardized by the Taub ruling.

Another good strong day for PerpetualDiscounts, but volume was light. Have all the sportin’ gents placed their bets? Despite the gains, the index has not yet recovered to where it was July 11 … we’re still trying to recover from the awful, awful July 14, as Louis XVI used to say. The PerpetualDiscount weighted-mean-average pre-tax yield-to-worst is now 6.46%, or 9.04% pre-tax interest-equivalent at the standard 1.4x equivalency factor. Long Corporates now yield 6.20%, so the PTIE spread now stands at 284bp, still way through the old, recently smashed, record of 250bp.

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

This entry was posted on Tuesday, July 22nd, 2008 at 8:02 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.