September 22, 2008

Morgan Stanley and Goldman Sachs are turning into banks; on September 16 I said:

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.

Sometimes things move faster than you think! The Bank of England published a list of their selected LCFIs … all banks now, or bust, every one. Although some of those players might no longer qualify as sufficiently large for the A list!

Accrued Interest calls for more regulation of CDSs, repeating his call for exchange trading, standardizing contracts and increasing margin requirements. While I agree that margin requirements are in order – with the regulators demanding that such-and-such margin be put up, or the equivalent is deducted from capital – I’m not entirely sure he’s right about the implications:

Increasing collateral requirements would force protection buyers to be more judicious about which names they short.

Now, it seems to me that if I buy protection with a five-year CDS at 500bp, my maximum loss is 25% of notional, and that’s in gross dollars, not present value. If I sell protection, my maximum loss is 100% of notional. It seems to me that any rational margining requirement is going to force protection sellers to be more judicious about which names they go long; the same will also work out relative to current reality, since a large part of the problem is that protection buyers have been relatively powerless hedge funds, while sellers have been insurers – who were enabled to put on massive leverage due the their policy of not doing the deal if they had to put up collateral.

Naked Capitalism reprints a report that New York State is moving into CDS regulation, presumably in an effort to drive all the business to London or Dubai.

A quiet day, although there were a few violent price moves. PerpetualDiscounts eked out a small gain.

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.
The Fixed-Reset index was added effective 2008-9-5 at that day’s closing value of 1,119.4 for the Fixed-Floater index.
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet N/A N/A N/A N/A 0 N/A N/A
Fixed-Floater 4.69% 4.75% 76,525 15.79 6 +0.4252% 1,092.4
Floater 4.93% 4.93% 47,936 15.62 2 -0.1479% 812.4
Op. Retract 4.99% 4.74% 121,316 3.42 14 -0.1266% 1,046.7
Split-Share 5.50% 6.64% 51,489 4.33 14 -0.6815% 1,018.2
Interest Bearing 6.52% 7.35% 54,023 5.20 2 -0.3172% 1,092.8
Perpetual-Premium 6.24% 6.15% 57,941 2.18 1 +0.0000% 995.0
Perpetual-Discount 6.10% 6.17% 181,364 13.63 70 +0.0474% 875.2
Fixed-Reset 5.07% 4.93% 1,392,623 14.26 9 +0.0402% 1,118.3
Major Price Changes
Issue Index Change Notes
ELF.PR.F PerpetualDiscount -3.5676% Now with a pre-tax bid-YTW of 7.50% based on a bid of 18.11 and a limitMaturity.
BMO.PR.H PerpetualDiscount -2.7778% Now with a pre-tax bid-YTW of 6.29% based on a bid of 21.35 and a limitMaturity.
FFN.PR.A SplitShare -2.3109% Asset coverage of just under 1.8:1 as of September 15, according to the company. Now with a pre-tax bid-YTW of 6.76% based on a bid of 9.30 and a hardMaturity 2014-12-1 at 10.00.
WFS.PR.A SplitShare -2.1164% Asset coverage of just under 1.6:1 as of September 11 according to Mulvihill. Now with a pre-tax bid-YTW of 8.36% based on a bid of 9.25 and a hardMaturity 2011-6-30 at 10.00.
LBS.PR.A SplitShare -1.5000% Asset coverage of just under 2.0:1 as of September 18, according to Brompton Group. Now with a pre-tax bid-YTW of 5.85% based on a bid of 9.85 and a hardMaturity 2013-11-29 at 10.00.
ELF.PR.G PerpetualDiscount -1.4793% Now with a pre-tax bid-YTW of 7.30% based on a bid of 16.95 and a limitMaturity.
LFE.PR.A SplitShare -1.1964% Asset coverage of 2.3+:1 as of September 15 according to the company. Now with a pre-tax bid-YTW of 5.60% based on a bid of 9.91 and a hardMaturity 2012-12-1 at 10.00.
BAM.PR.J OpRet -1.0526% Now with a pre-tax bid-YTW of 6.27% based on a bid of 23.50 and a softMaturity 2018-3-30 at 25.00. Compare with BAM.PR.H (6.73% to 2012-3-30), BAM.PR.I (5.89% to 2013-12-30) and BAM.PR.O (8.49% to 2013-6-30).
DFN.PR.A SplitShare -1.0030% Asset coverage of just under 2.3:1 as of September 15, according to the company. Now with a pre-tax bid-YTW of 5.60% based on a bid of 9.87 and a hardMaturity 2014-12-1 at 10.00.
PWF.PR.E PerpetualDiscount +1.1739% Now with a pre-tax bid-YTW of 5.97% based on a bid of 23.27 and a limitMaturity.
HSB.PR.C PerpetualDiscount +1.4349% Now with a pre-tax bid-YTW of 6.26% based on a bid of 20.50 and a limitMaturity.
CIU.PR.A PerpetualDiscount +2.3684% Now with a pre-tax bid-YTW of 5.98% based on a bid of 19.45 and a limitMaturity.
BCE.PR.Z FixFloat +2.8266%  
IAG.PR.A PerpetualDiscount +5.0704% Now with a pre-tax bid-YTW of 6.20% based on a bid of 18.65 and a limitMaturity. You know, in HIMIPref™ I calculate a value named flatBidPriceVolatility. This issue has the highest such value of any index-included issue, second only to HPF.PR.B in the universe. I’d love to know who the market maker is, but the TSX keeps this information secret.
Volume Highlights
Issue Index Volume Notes
BNS.PR.M PerpetualDiscount 55,800 National Bank crossed 50,000 at 19.77. Now with a pre-tax bid-YTW of 5.79% based on a bid of 19.76 and a limitMaturity.
NA.PR.L PerpetualDiscount 39,500 National Bank crossed 20,000 at 20.10, then another 15,000 at 20.12. Now with a pre-tax bid-YTW of 6.14% based on a bid of 20.06 and a limitMaturity.
RY.PR.I FixedReset 34,218  
BNS.PR.R FixedReset 29,660  
BCE.PR.A FixedFloater 22,655 CIBC crossed 20,400 at 24.76.

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

3 Responses to “September 22, 2008”

  1. lystgl says:

    Don’t worry about it – be happy!
    The whole thing is about to unravel anyway. Democrats don’t think it goes far enough, Republicans think it goes too far. Between them, they are going to screw it up – market foresaw just that happening today and lost ground accordingly – tomorrow will probably see panic selling like you “never seen before”. Dollar is finally doing what it is supposed to do when you start taking on humungous debt and printing coin of the realm willy nilly – tanking big time. It’s broke (the system) and we will be too shortly. It’s Wal-Mart greeter for me, I’m afraid.

  2. jiHymas says:

    I think you’re being too gloomy. The US makes a lot of mistakes, they have taken a real hit on the housing bubble, the effective and in progress bail-outs will bring them a lot closer to the debt-wall; but they remain the operators of the world’s most dynamic economy.

    It has been a long time since a long term bet against the American economy made any money. I’m not prepared to write them off just yet.

  3. […] major review of the clearinghouse on PrefBlog was my reaction to Accrued Interest’s plan. On September 22 I deprecated his idea of trading only CDSs with a recovery […]

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