PrefBlog

The FDIC is working a bit of overtime sorting out the situation with bank holdings of FannieFreddie prefs:

The Federal Deposit Insurance Corporation (FDIC) will work with the limited number of institutions that have significant holdings of common or perpetual preferred shares in Fannie Mae and Freddie Mac to develop Capital Restoration Plans pursuant to federal regulations. These equity investments should be reported as available-for-sale equity securities, if not held for trading purposes, and any net unrealized losses should be deducted from regulatory capital. Attached is the FDIC’s “Statement on Investments in Fannie Mae and Freddie Mac Equity Securities.”

There’s rather a disturbing quote from John McCain:

LAUER: So if we get to the point middle of the week as we heard in that report where AIG might have to file for bankruptcy, they’re on their own?
McCAIN: Well…quote, “on their own”…we have to – we cannot have the taxpayers bail out AIG or anybody else…this is something we’re gonna have to work through — there’s too much corruption, there’s too much access, we can fix it, I believe in America – we can have a 9/11 commission such as we had after 9/11, ’cause this is a huge crisis and we can come up with fixes and we can make sure that every American has a safer future and that is to make them know that their bank deposits are safe and insured.

The disturbing part is “corruption”. “Corruption” implies criminality. There is a huge difference between ‘investments that didn’t work out’ and ‘incompetence and recklessness’ and ‘corruption’. If the next President approaches the issue of regulation of the financial sector with the idea that it was – somewhere, perhaps unprovable, but somewhere – widescale criminality that caused the current crunch, the economy’s in trouble. Sarbanes-Oxley has had a bad enough effect; a reprise will simply accellerate the slow erosion of New York as the world’s premier financial centre.

Reserve Primary Fund broke the buck on September 16; related events and reverberations are wild. State Street & BONY Mellon got hammered:

State Street Corp. fell as much as 55 percent and Federated Investors Inc. and Bank of New York Mellon Corp. declined in New York trading on concerns that money-market funds will be hit by a wave of losses.

The stocks plunged after BNY Mellon said a $22 billion institutional fund suffered losses on debt issued by bankrupt Lehman Brothers Holdings Inc. While not a money-market fund, BNY Mellon’s $22 billion Institutional Cash Reserves was designed to work like one.

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Dealbreaker is amused.

And Putnam is closing down a huge fund:

Putnam Investments LLC closed its $12.3 billion institutional Putnam Prime Money Market Fund yesterday and plans to return all cash to investors.

The fund, which was valued yesterday at $1 a share, experienced “significant redemption pressure,” the Boston- based company said in a statement. A drop below $1 a share, known as breaking the buck, would have exposed investors to losses.

I discussed this issue – a bit – in my essay A Collateral Proposal, but I’m still having some trouble understanding it. Money market funds invest in commercial paper, not just T-Bills. This is because Commercial Paper pays more. It pays more due to both liquidity concerns and credit concerns. Credit Concerns! Occasionally, there will be a loss. If the Portfolio Manager is doing his job right, these losses will be few and far between; but there will be losses. That’s why you get paid extra!

So a loss of 1-2% on a money market fund is unpleasant, sure, but I’m afraid I just don’t understand why it’s the end of the world.

Another crummy day for prefs, and we can no longer talk about a yield curve. It’s more of a yield smudge, a yield Rorschach (pronounced “Raw-Shock”). Today’s closing average bid-YTW of 6.22% was seen on August 8 (moving down) and July 7 (moving up). The peak, remember, was 6.63%.

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

This entry was posted on Friday, September 19th, 2008 at 12:33 am 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.