PrefBlog

Fannie and Freddie continue to be the focus of attention; Accrued Interest reminds us of an important point:

FRE and FNM preferreds are down another 20% or so today, threatening the $10 area on FRE Z. One trader told me he’s started to see bottom fishing here, which seems incredibly stupid to me. Bottom fishing can work as a strategy, but no one can put odds on whether the impending GSE nationalization will make preferred shareholders whole or not. This isn’t about financial analysis anymore.

Lacker just wants the damn things privatized:

Richmond Federal Reserve Bank President Jeffrey Lacker called for “demonstrably” privatizing Fannie Mae and Freddie Mac, becoming the first Fed official to publicly clash with the Bush administration’s strategy of keeping them as federally backed firms.

“I would prefer to see them credibly and demonstrably privatized,” Lacker said today in an interview with Bloomberg Television. He agreed with former Fed Chairman Alan Greenspan’s view that the two largest U.S. mortgage finance firms ought to be nationalized, then split up and sold off.

Amidst all this, there is speculation that Lehman will write off $4-billion this quarter and Naked Capitalism passes on reports that the Lehman delevering process continues:

From the New York Times

There has been widespread speculation that Lehman was contemplating a sale of Neuberger Berman, whose value is estimated by analysts to vary from less than $7 billion to as high as $13 billion (Lehman’s entire market capitalization is about $10.5 billion).

And here’s a report from the front lines:

“I’ve been at National City for 30 years and a month and for 29 of those we’ve seen nothing like it,” Thomas Richlovsky, National City’s 57-year-old treasurer, said in a telephone interview. “In past cycles certainly lending, or credit, has gotten more difficult. The cost of credit would go up. In this particular phenomenon of the last year it’s not like you can borrow money and the price went up. No, the market’s closed.”

National City on July 24 reported a $1.76 billion second- quarter loss and increased its 2008 forecast for uncollectible debt to as much as $2.9 billion. The Cleveland-based bank raised $7 billion of capital in April, which Richlovsky said is more than enough to weather the seizure in the credit markets.

The stock sale wasn’t enough to stop National City’s bonds from tumbling. Its $700 million of 6.875 percent notes due in 2019 traded last week at 61 cents on the dollar, down from 77.5 cents in June and 99 cents at the beginning of the year, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The Ontario judgement on non-bank ABCP will be challenged by Ivanhoe, perhaps with others.

Amidst all this certainty, we can be glad that one thing in life is constant – there’s a lot of regulatory posturing on the US Auction rate market:

U.S. Securities and Exchange Commission Chairman Christopher Cox said investigations into the collapse of the auction-rate bond market extend beyond the banks that created the debt and settled with regulators to include brokerages that sold the investments.

“Nobody is getting a pass,” Cox said at a news conference in Washington today.
…
Regulators should force Wall Street banks to buy back all the auction-rate securities they created instead of investigating brokers that sold the debt, the Washington-based Regional Bond Dealers Association said in a letter to the SEC and other regulators last week.
…
Regulators focused first on the biggest underwriters, claiming they pitched securities as safe alternatives to money- market investments, even as the risk grew that the market would freeze.

Safe? What does “safe” mean? Are they talking about credit risk, liquidity risk, term risk, taxation risk, inflation risk, or one of the other million things that can go wrong? My view is that it should be treated in the same way as Canadian non-Bank ABCP should have been treated: brokers should be held liable for recommending overexposure to the asset class, but not for reasonable exposure. The credit was fine – and, as far as I know, remains fine (there are two exceptions to this generalization, I think). Liquidity … not so good.

However, consideration of more than one kind of risk – and genuine acceptance of the fact that black swans happen and all you can hope for is loss limitation by diversification – will make news reports longer than 500 words and involve a little judgement, so it won’t happen.

Amazingly, PerpetualDiscounts were weak today, losing 0.14% in their second down-day since July 16. From the close July 16 to the close today, they’ve gained 8.60%, with yields dropping from 6.63% to 6.13%. So … er … let me see … one month at 6.63% is about 0.55%, call it, so capital gain is 8.60-0.55 = call it 8% on a yield drop of 0.5% … the effective modified duration was about 16 years. Give or take. Remember, HIMIPref™ under-calculates modified duration (which is precisely 1/YTM) as a matter of computational and reporting convenience.

Today’s closing yield of 6.13% is equivalent to 8.58% interest at the standard conversion factor of 1.4x. Long Corporates currently yield a little under 6.1% … I think we can say the spread is maintaining itself around 250bp without anybody fussing too much. That used to be a long-term record!

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

This entry was posted on Tuesday, August 19th, 2008 at 8:35 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.