PrefBlog

Covered bonds were mentioned in a speech Trichet delivered in Nice:

Another aspect I would underline in this context relates to the issuance of covered bonds. Indeed, the performance of covered bonds proved up to now to be relatively resilient to the financial market correction compared to asset-backed securities. Covered bonds are already the most important privately issued bond segment in Europe’s capital markets with over EUR 2 trillion outstanding at the end of 2007. From a financial stability perspective, they have a number of attractive features, not least the fact that the credit risk stays with the originator, which strengthens the incentives for prudent risk management; generally they are also more transparently accounted for in banks’ published accounts than securitisation transactions.

There was a story on Bloomberg about a massive JPMorgan advance to Lehman:

Lehman Brothers Holdings Inc., the securities firm that filed the biggest bankruptcy in history yesterday, was advanced $138 billion this week by JPMorgan Chase & Co. to settle Lehman trades and keep financial markets stable, according to a court filing.

One advance of $87 billion was made on Sept. 15 after the bankruptcy filing, and another of “a comparable amount” was made the following day — both to settle securities transactions with customers of Lehman and its clearance parties, a bankruptcy court filing today said. Lehman said in a statement today that the second amount was $51 billion.

My guess is that these advances were “overcerts” rather than day-loans (or longer!) … often necessary to get the settlement cycle working. Consider a trade in which you buy $100-million bonds and sell them ten minutes later and make $100,000. When settlement day comes, you have to deliver money to the guy you bought them from (and receive the securities) before you can receive money from the guy you sold them to (and deliver the securities). In order to do this you need a bank facility whereby you can certify a cheque without having actually having the funds in your account. Hence, “overcert”.

Back in the day, there was considerable thought expended on minimizing overcert charges on a minute by minute basis, particularly on settlement days for Treasury bill auctions when money flies around like crazy. Nowadays, electronics and net-settlement sessions has taken over … but I’m guessing the need for overcerts is still there and still with Lehman.

The nascent CDS ClearingHouse has been previously discussed on PrefBlog. Lehman’s bankruptcy has heightened the anticipation, but apparent bureaucratic games-playing by the Fed has lengthened the wait:

In July the 17 dealers agreed to form a clearinghouse, create a system to better manage the collateral that protects trading partners from losses and tear up offsetting contracts to reduce the number of positions that banks have to oversee.

The clearinghouse may fall behind schedule, delaying completion until next year, said a person familiar with the process who asked not to be identified last week because the discussions weren’t made public. The development was postponed after the Fed pushed Chicago-based Clearing Corp. to obtain a banking license, which would place it under the central bank’s watch, the person said.

In the Interesting Factoids Department is news from Across the Curve that non-financial commercial paper is trading way through LIBOR:

Here are a couple of examples. BMW one month CP trades libor less 65 at 2.10percent.

John Deere trades libor less 55 at 2.20 percent in the one month sector.

One month Pfizer CP trades at libor less 65 at 2.10

Must be some kind of record!

Defying the skeptics, Goldman Sachs has vowed independence:

Goldman Sachs Group Inc.’s success avoiding losses during the global credit crisis shows the firm doesn’t need to combine with a bank, Chief Financial Officer David Viniar said today.

“We think our business model works because our business works,” Viniar, 53, said in an interview after the New York- based firm disclosed a 70 percent drop in third-quarter profit. “I don’t think this is a model question. I think this is a performance question. Performance speaks for itself and will continue to speak for itself.”

I suspect that all this will change; in ten years, says I, all the global Large Complex Financial Institutions will be banks with access to multiple discount windows. Another long-back alma mater of mine was saying the same thing as Goldman some time ago and look what happened:

A decade back, after Royal Bank bought investment dealer Richardson Greenshields, CEO Chuck Winograd was asked if clients were leaving now the big bad bank had snapped up the feisty independent.

Mr. Winograd, who took justified pride in how close his Rich Green advisors were to clients, gave a funny smile and explained the opposite was true.

He said long-time customers, including a great many rural investors, were cracking open the vaults to hand their Rich Green stockbrokers even more of their savings, now the dealer enjoyed the backing of familiar, safe Royal Bank. It was a little humbling, admitted Mr. Winograd, now the head of Royal Bank’s investment dealer arm.

Reserve Primary Fund has a long history:

• The Primary Fund is the world’s first and longest running money fund
• The Primary Fund is the fourth largest rated money fund in the nation according to Crane Data as of December 2007

And now it has broken the buck:

Reserve Primary Fund, a money-market mutual fund with $64.8 billion in assets as of Aug. 31, fell below $1 a share in net asset value because of losses on debt issued by Lehman Brothers Holdings Inc.

Investor redemptions will be delayed as long as seven days, the fund’s owner, New York-based Reserve Management Corp., said today in a statement. Withdrawals requested before 3 p.m. New York time today will be paid at $1 a share.
…
The fund held $785 million in Lehman Brothers commercial paper and medium-term notes. The fund’s board revalued the Lehman holdings as worthless effective at 4 p.m. New York time. Lehman filed for bankruptcy protection yesterday.

The Lehman paper constituted about 1.2% of their holdings; by no means an extraordinarily aggressive amount, although there will be many who say otherwise. At the very least, it can’t have broken the buck by much! I was a bit puzzled by the “Medium Term Notes” reference, but their Annual Report dated 2008-5-31 discloses:

250,000,000 Lehman Brothers, 3.11%, 3/20/09

Which is an entirely reasonable thing for them to hold term-wise, however one might second-guess the decision credit-wise.

On a cheerier note, Morgan Stanley’s earnings were well above estimate:

Morgan Stanley, the second-largest U.S. securities firm, said third-quarter profit fell 3 percent, less than estimated, as revenue from investment banking and fixed-income trading declined.

We can look forward to the possibility of a McCain victory in the US Presidential race! If he wins, it will be illegal to lose money on the markets:

“Too many people on Wall Street have been recklessly wagering instead of making the sound investments we expected of them,” McCain told a crowd today in Tampa, Florida. “If I am president, we are not going to tolerate that anymore.”

In other news, it looks … likely? possible? … that Barclays will impose its own good bank/bad bank solution on Lehman by buying just the good bits:

Barclays Plc, the U.K.’s third- biggest bank, struck a deal to acquire the U.S. trading and investment banking business of bankrupt Lehman Brothers Holdings Inc., a person with knowledge of the matter said.

Trading in Lehman shares was halted by the New York Stock Exchange at 3:04 p.m. Barclays’s agreement to buy the Lehman units may be announced as soon as this evening, the person said, declining to be identified because the talks were private. The Wall Street Journal reported that Barclays would seek bankruptcy court approval for the deal at 5 p.m.

Flash!: As I go to press, the deal is done:

Barclays Plc, the U.K.’s third- biggest bank, will acquire the North American investment-banking business of bankrupt Lehman Brothers Holdings Inc. for $1.75 billion, two days after abandoning plans to buy the entire firm.

Barclays is paying $250 million in cash for the Lehman businesses and $1.5 billion for the securities firm’s New York headquarters and two data centers, the London-based bank said in a statement on its Web site today. The operations employ about 10,000 people.

And AIG might get its money:

American International Group Inc., the biggest U.S. insurer by assets, may get an $85 billion bridge loan from the Federal Reserve and cede an 80 percent stake, the New York Times reported, citing unnamed people briefed on the negotiations.

Banks led by Goldman Sachs Group Inc. and JPMorgan Chase & Co. couldn’t arrange emergency funding by today, resulting in the planned U.S. intervention, the Times said.

Flash! Just as I go to press, the “might” has become a fact.

Wham BAM! Scare stories about Brookfield crushed their prefs – and their dependent structures:

Commercial real estate could be next on the economic hit list because of Wall Street’s falling fortunes.

U.S. and Canadian property firms, such as Brookfield Asset Management Inc., own many of the buildings in Manhattan and across the United States where the investment firms are housed.

Lehman’s bankruptcy, for example, could result in more offices on the rental market in a time when the U.S. economy is demonstrably slowing.

That situation will hurt property management firms, [BMO Financial Group Inc. chief economist Sherry] Cooper said.

As I have pointed out before, on several occasions, most of Brookfields scary-looking debt is non-recourse. I have not yet seen an analysis done of the Doomsday Scenario in which Brookfield just mails the keys to all its New York property to the bond-holders, walking away from its current investment … but I’ll bet the company survives! Anybody who feels like doing that work, let me know!

The BCE Crush looks a bit more reasonable … Lehman cancelled its fire sale:

Lehman Brothers Holdings Inc., the securities firm that filed for bankruptcy yesterday, canceled an auction of $852 million of high-yield, high-risk loans, according to investors who considered bidding on the debt.

Bids for the loans, some of which helped finance leveraged buyouts for First Data Corp. and TXU Corp., were due by 2 p.m. today in New York, said the investors, who declined to be identified because the auction was private.

The sale was scrapped as Barclays Plc moved closer to a bid for the bankrupt firm’s broker-dealer unit. Leveraged loan prices tumbled near record lows in the past week as New York-based Lehman collapsed, stoking concern that other financial companies may fail. The firm has $7.1 billion of high-yield loans and bonds on its books, the bank said Sept. 10.

“Lehman is probably growing close to a sale of its brokerage business, which prompted the bank to cancel today’s auction,” said Louis Gargour, chief investment officer of LNG Capital, a London-based hedge fund. “Lehman’s leveraged loan book could prove integral to other parts of the business the bank is looking to sell, particularly the brokerage unit.”

… which may indicate that the LBO book is integral to the busines … or it may indicate that LBO debt is impossible to sell at the moment. Place yer bets, gents, place yer bets! Some BCE holders have decided not to chance it (hat tip: Financial Webring Forum).

It was a pretty crummy day all ’round, with generally poor performance and average volume. There are no winners on today’s big price moves table. Equities were down only 20bp, which is practically a win considering this morning and yesterday.

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

This entry was posted on Tuesday, September 16th, 2008 at 9:49 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.