November 5, 2008

Willem Buiter & Anne Sibert write a review of The collapse of Iceland’s banks: the predictable end of a non-viable business model. As an aside, they note:

In addition, outrageous bullying behaviour by the UK authorities (who invoked the 2001 Anti-Terrorism, Crime and Security Act, passed after the September 11, 2001 terrorist attacks in the USA, to justify the freezing of the UK assets of the of Landsbanki and Kaupthing) probably precipitated the collapse of Kaupthing – the last Icelandic bank still standing at the time. The official excuse of the British government for its thuggish behaviour was that the Icelandic authorities had informed it that they would not honour Iceland’s deposit guarantees for the UK subsidiaries of its banks. Transcripts of the key conversation on the issue between British and Icelandic authorities suggest that, if the story of Pinocchio is anything to go by, a lot of people in HM Treasury today have noses that are rather longer than they used to be.

This is the real danger of counter-terrorism laws … they will be twisted to justify anything the bosses want to justify. And be re-elected in a landslide by frightened sheep. Anyway, back to economics … the authors claim that Iceland’s business model was not viable due to:

the “vulnerable quartet” of (1) a small country with (2) a large banking sector, (3) its own currency and (4) limited fiscal capacity

With this in mind, they warn:

Iceland’s circumstances were extreme, but there are other countries suffering from milder versions of the same fundamental inconsistent – or at least vulnerable – quartet:

Countries that come to mind are:

and even to some extent the UK, although it is significantly larger than the others and has a minor-league legacy reserve currency.

Ireland, Belgium, the Netherland and Luxembourg possess the advantage of having the euro, a global reserve currency, as their national currency. Illiquidity alone should therefore not become a fatal problem for their banking sectors. But with limited fiscal spare capacity, their ability to address serious fundamental banking sector insolvency issues may well be in doubt.

Coincidentally, I’m sure, Dennis P. Quinn & Hans-Joachim Voth argue that benefits of international diversification are declining:

After Bretton Woods, it took half a century to restore the full openness of capital accounts in advanced countries. Many Eurozone countries only revoked the last restriction in the 1990s, in the run-up to the euro’s introduction.

We argue that it is no accident that the age of restrictive capital accounts also saw remarkably low equity market correlations. Cross-border diversification opportunities identified by early papers (Grubel 1968) were indeed “too good to be true.” Once investors can take advantage of low correlations elsewhere, they will rise. Initial investors may benefit since liberalisations tend to be followed by capital gains (Henry 2000). Yet risks will not fall anywhere near as much as initially hoped, as the covariance with other stock markets inevitably increases.

How tight is the bond market? The credit card companies have maxed-out:

Credit card companies were shut out of the market for bonds backed by customer payments in October for the first time in more than 15 years, as investors shunned the debt amid the global credit freeze.

It’s the first month since April 1993 that there have been no sales, according to Wachovia Corp. data. Issuers sold $17.1 billion of the debt in October 2007, the data show.

Top-rated credit card-backed securities maturing in three years traded at a gap, or spread, of 475 basis points over the London interbank offered rate, or Libor, during the week ended Oct. 30, JPMorgan Chase & Co. data show, 25 basis points higher than the previous week. The debt was trading at 50 basis points more than Libor in January.

PerpetualDiscounts eased off today, but volume was strong. There are many very strange yield relationships between issuers in the market; its hard to tell whether the degree of credit stratification is more or less surprising than the degree of credit inversion!

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 5.32% 5.37% 69,368 15.13 6 +0.0602% 983.0
Floater 6.91% 7.02% 52,437 12.47 2 +1.7909% 504.7
Op. Retract 5.29% 6.08% 132,612 3.99 15 +0.0618% 999.0
Split-Share 6.25% 10.48% 58,404 3.96 12 -0.1177% 943.6
Interest Bearing 8.06% 14.12% 60,114 3.23 3 -1.4615% 880.0
Perpetual-Premium N/A N/A N/A N/A N/A N/A N/A
Perpetual-Discount 6.72% 6.79% 179,536 12.85 71 -0.2755% 811.1
Fixed-Reset 5.36% 5.13% 1,041,096 15.14 12 +0.2111% 1,086.1
Major Price Changes
Issue Index Change Notes

InterestBearing -4.4000% Asset coverage of 1.4-:1 as of November 4, based on capital unit NAV of 5.50 and 0.71 capital units per preferred. Now with a pre-tax bid-YTW of 13.40% based on a bid of 7.17 and a hardMaturity 2014-12-31 at 10.00. Closing quote of 7.17-25, 5×17. Day’s ragne of 7.29-55.
BCE.PR.G FixFloat -3.4926%  
BNA.PR.C SplitShare -3.1783% Asset coverage of just under 2.8:1 as of September 30 according to the company. Coverage now of 2.0+:1 based on BAM.A at 21.00 and 2.4 BAM.A held per preferred. Now with a pre-tax bid-YTW of 13.88% based on a bid of 12.49 and a hardMaturity 2019-1-10 at 25.00. Compare with BNA.PR.A (17.26% to 2010-9-30) and BNA.PR.B (9.70% to 2016-3-25). Closing quote 12.49-85, 7×7. Day’s range 12.30-13.40.
LBS.PR.A SplitShare -2.7429% Asset coverage of 1.7+:1 as of October 30 according to Brompton Group. Now with a pre-tax bid-YTW of 9.12% based on a bid of 8.51 and a hardMaturity 2013-11-29 at 10.00. Closing quote of 8.51-00, 5×2. No trading.
HSB.PR.D PerpetualDiscount -2.7174% Now with a pre-tax bid-YTW of 7.10% based on a bid of 17.90 and a limitMaturity. Closing quote 17.90-29. Day’s range 17.86-69.
BNS.PR.O PerpetualDiscount -2.5991% Now with a pre-tax bid-YTW of 6.39% based on a bid of 22.11 and a limitMaturity. Closing Quote 22.11-60, 5X1. Day’s range of 22.07-89.
BAM.PR.J OpRet -2.4390% Now with a pre-tax bid-YTW of 9.94% based on a bid of 18.40 and a softMaturity 2018-3-30 at 25.00. Compare with BAM.PR.H (9.63% to 2012-3-30), BAM.PR.I (10.42% to 2013-12-30) and BAM.PR.O (10.53% to 2013-6-30). Closing quote of 18.40-50, 3×2. Day’s range of 18.42-85.
MFC.PR.C PerpetualDiscount -2.1396% Now with a pre-tax bid-YTW of 6.59% based on a bid of 17.38 and a limitMaturity. Closing Quote 17.38-84, 1×1. Day’s range of 17.36-85.
WFS.PR.A SplitShare +2.1492% Asset coverage of 1.4-:1 as of October 31 according to Mulvihill. Now with a pre-tax bid-YTW of 14.60% based on a bid of 8.08 and a hardMaturity 2011-6-30 at 10.00. Closing quote of 8.08-34, 14×15. Day’s range of 8.01-40.
BCE.PR.C FixFloat +3.5697%  
SBN.PR.A SplitShare +4.0416% Asset coverage of 1.9+:1 as of October 31 according to Mulvihill. Now with a pre-tax bid-YTW of 7.40% based on a bid of 9.01 and a hardMaturity 2014-12-1 at 10.00. Closing quote of 9.01-49, 3×10. Day’s range of 9.15-30.
Volume Highlights
Issue Index Volume Notes
TD.PR.C FixedReset 593,115 National Bank crossed 150,000 at 24.87; there were five other blocks totalling 50,900 shares. New issue settled today.
TD.PR.M OpRet 220,712 CIBC crossed three blocks of 25,000 each; Nesbitt crossed blocks totalling 100,000; all at 25.10. Now with a pre-tax bid-YTW of 4.73% based on a bid of 25.01 and a softMaturity 2013-10-30 at 25.00.
RY.PR.L FixedReset 103,925 RBC crossed 12,700 at 24.91. New issue settled Monday.
WFS.PR.A SplitShare 191,800 RBC crossed 155,500 at 8.03, then another 14,400 at 8.40. See above
BMO.PR.I OpRet 75,100 Nesbitt crossed 75,000 at 24.99. Called for redemption.

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

3 Responses to “November 5, 2008”

  1. […] This builds upon his analysis of the Icelandic situation, which was discussed on November 5. […]

  2. […] Their other announcement is a joint paper with the International Association of Deposit Insurers. The consultative document is open for comments – hear that, OSFI? Comments from affected parties! How revolutionary! – until May 15. I suspect that debate between Iceland and the UK will be highly entertaining, as briefly review on Guy Fawkes’ Day. […]

  3. […] The collapse of Iceland’s banks: the predictable end of a non-viable business model (discussed on November 5, 2008): Iceland’s circumstances were extreme, but there are other countries suffering from milder […]

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