Not much news, in light of the holiday in the US and preparations for tomorrow’s Obama-rama.
Willem Buiter writes a piece with a rather startling message: Time to Take the Banks Into Full Public Ownership.
He points out the Bagehot prescription of readily available expensive liquidity can have an unfortunate side-effect:
But if the state’s financial assistance is priced punitively or has other painful conditionality attached to it, existing shareholders and management will do everything to avoid making use of these government facilities. If a bank has no option but to take the government’s money, it will try to repay it as soon as possible – to get the government out of its hair. Such a bank will therefore be reluctant to take any risk, including the risk of lending to the non-financial private sector. Such a bank will hoard liquidity (sometimes in the form of deposits/reserves with the central bank) to regain its independence from the government. Still independent banks will hoard liquidity to stay out of the clutches of the government.
I believe that this mechanism is at work in a powerful way both in the UK, the US and in continental Europe. Hans Werner Sinn in a recent Financial Times OpED piece pointed out that the German rescue package for banks was fatally flawed for precisely this reason: the acceptance by banks of an injection of public sector capital brings with it a cap on managerial salaries. Rather than accepting a cap on their salaries, managers would prefer to totter along with an under-capitalised bank and restrict the scope and scale of their lending operations.
However, I am unconvinced that the alternatives he suggests are really any better:
By throwing cheap money with little conditionality at the banks, the Fed and the US Treasury may get bank lending going again. By subsidizing new capital injections, they reward bad porfolio choices by the existing shareholders. By letting the executive leadership and the board stay on, they further increase moral hazard, by rewarding failed managers and boards that have failed in their fiduciary duties. All this strengthens the incentives for future excessive risk taking.
There is a better alternative. The alternative is to inject additional capital into the banks by taking all the banks into full public ownership. With the state as sole owner, the existing top executives and the existing board members can be fired without any golden handshakes. That takes care of one important form of moral hazard. Although publicly owned, the banks would be mandated to operate on ordinary commercial principles.
The implicit presumption is that government will be able to do it better. I’m not so convinced; political control over the lending process will – inevitably – mean a relaxation of lending standards to handicapped black lesbians and other disadvantaged groups, on the basis of their disadvantage and political advantage, not ability to pay. We are seeing movement towards of this conditionality in the States already, a by-product of TARP’s cheap money:
House Financial Services Committee chairman Barney Frank, D-Mass., on Friday released proposed legislation to reform the TARP and increase program accountability. Under Frank’s proposed makeover of the TARP, the second half of the $700 billion funds will be “conditioned on the use of a minimum of $50 billion for foreclosure mitigation.” His language would require Paulson to develop a comprehensive plan to prevent and mitigate residential mortgage foreclosures by March 15, 2009. The required elements of the plan include a guarantee program for qualifying loan modifications under a systematic plan and bringing down the costs of Hope for Homeowner loans “either through coverage of fees, purchasing H4H mortgages to ensure affordable rates, or both.” The plan would also need to establish a program for loans to pay down second lien mortgages that are impeding a loan modification, grant servicer incentives and assistance to stimulate modifications, and include the purchase of whole loans for the purpose of modifying or refinancing them.
I suggest that a better alternative to full nationalization that addresses Mr. Buiter’s concerns is to give the funding government a fair bit of call protection on its capital injection, while allowing the subject banks to operate on a business-like basis. The current terms do not allow this:
Our current understanding is that that the preference shares to be acquired by the government will rank pari passu with existing Tier 1 instruments in payment and in liquidation. The new preference shares will carry a 12% coupon and will be callable after five years. Banks selling preference shares to the government may not pay dividends on common equity while any of those preference shares remain outstanding. This clearly gives the banks an incentive to repay the government preference shares as soon as possible.
The five year call-protection makes sense; the restriction on common dividends does not. And, what’s more, these should be public issues, with a prospectus, stock-exchange listing and government guarantee of successful issuance.
Floaters did poorly today, perhaps in a last minute panic about tomorrow’s BoC rate announcement amidst speculation that there will be a 50bp cut to 1.00%. I will be interested not so much as to what happens to the Bank Rate as what happens to prime – I can’t see a cut of more than 25bp in prime whatever happens, but … I’ve been wrong before!
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
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| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 6.88 % | 7.47 % | 41,355 | 13.60 | 2 | 0.2427 % | 871.3 |
| FixedFloater | 7.24 % | 6.94 % | 160,001 | 13.82 | 8 | 0.9253 % | 1,415.0 |
| Floater | 5.98 % | 5.60 % | 34,374 | 14.51 | 4 | -2.8924 % | 1,020.0 |
| OpRet | 5.34 % | 4.78 % | 150,156 | 4.06 | 15 | -0.0981 % | 2,009.8 |
| SplitShare | 6.03 % | 8.09 % | 87,065 | 4.18 | 15 | 0.8890 % | 1,844.0 |
| Interest-Bearing | 7.11 % | 9.32 % | 38,655 | 0.91 | 2 | -0.1160 % | 1,988.5 |
| Perpetual-Premium | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.2928 % | 1,565.7 |
| Perpetual-Discount | 6.83 % | 6.83 % | 230,698 | 12.78 | 71 | 0.2928 % | 1,442.0 |
| FixedReset | 5.91 % | 4.77 % | 876,406 | 15.29 | 21 | -0.3108 % | 1,829.6 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| BAM.PR.K | Floater | -5.47 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-19 Maturity Price : 8.13 Evaluated at bid price : 8.13 Bid-YTW : 7.64 % |
| PWF.PR.A | Floater | -5.38 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-19 Maturity Price : 13.01 Evaluated at bid price : 13.01 Bid-YTW : 4.78 % |
| NA.PR.N | FixedReset | -4.05 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-19 Maturity Price : 21.11 Evaluated at bid price : 21.11 Bid-YTW : 4.80 % |
| BNS.PR.S | FixedReset | -2.88 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-19 Maturity Price : 25.20 Evaluated at bid price : 25.25 Bid-YTW : 5.67 % |
| BAM.PR.J | OpRet | -2.24 % | YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2018-03-30 Maturity Price : 25.00 Evaluated at bid price : 16.62 Bid-YTW : 11.54 % |
| PPL.PR.A | SplitShare | -1.95 % | Asset coverage of 1.4+:1 as of January 15, according to the company. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2012-12-01 Maturity Price : 10.00 Evaluated at bid price : 9.07 Bid-YTW : 7.89 % |
| BAM.PR.I | OpRet | -1.66 % | YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2013-12-30 Maturity Price : 25.00 Evaluated at bid price : 20.75 Bid-YTW : 10.10 % |
| NA.PR.K | Perpetual-Discount | -1.65 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-19 Maturity Price : 20.31 Evaluated at bid price : 20.31 Bid-YTW : 7.23 % |
| BAM.PR.N | Perpetual-Discount | -1.55 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-19 Maturity Price : 12.06 Evaluated at bid price : 12.06 Bid-YTW : 10.03 % |
| BNS.PR.R | FixedReset | -1.35 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-19 Maturity Price : 21.96 Evaluated at bid price : 22.00 Bid-YTW : 4.39 % |
| BMO.PR.L | Perpetual-Discount | -1.29 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-19 Maturity Price : 21.47 Evaluated at bid price : 21.47 Bid-YTW : 6.89 % |
| HSB.PR.D | Perpetual-Discount | -1.14 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-19 Maturity Price : 17.35 Evaluated at bid price : 17.35 Bid-YTW : 7.30 % |
| POW.PR.C | Perpetual-Discount | -1.12 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-19 Maturity Price : 21.11 Evaluated at bid price : 21.11 Bid-YTW : 6.94 % |
| TD.PR.A | FixedReset | -1.08 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-19 Maturity Price : 22.96 Evaluated at bid price : 23.00 Bid-YTW : 4.26 % |
| HSB.PR.C | Perpetual-Discount | -1.07 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-19 Maturity Price : 17.51 Evaluated at bid price : 17.51 Bid-YTW : 7.38 % |
| CM.PR.H | Perpetual-Discount | 1.02 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-19 Maturity Price : 16.82 Evaluated at bid price : 16.82 Bid-YTW : 7.18 % |
| RY.PR.C | Perpetual-Discount | 1.12 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-19 Maturity Price : 18.10 Evaluated at bid price : 18.10 Bid-YTW : 6.48 % |
| SLF.PR.B | Perpetual-Discount | 1.15 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-19 Maturity Price : 16.69 Evaluated at bid price : 16.69 Bid-YTW : 7.29 % |
| BNS.PR.L | Perpetual-Discount | 1.21 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-19 Maturity Price : 17.57 Evaluated at bid price : 17.57 Bid-YTW : 6.44 % |
| BNA.PR.B | SplitShare | 1.25 % | Asset coverage of 1.8+:1 as of December 31 according to the company. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2016-03-25 Maturity Price : 25.00 Evaluated at bid price : 21.01 Bid-YTW : 8.09 % |
| W.PR.H | Perpetual-Discount | 1.27 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-19 Maturity Price : 18.32 Evaluated at bid price : 18.32 Bid-YTW : 7.59 % |
| RY.PR.E | Perpetual-Discount | 1.29 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-19 Maturity Price : 18.01 Evaluated at bid price : 18.01 Bid-YTW : 6.37 % |
| ALB.PR.A | SplitShare | 1.50 % | Asset coverage of 1.2-:1 as of January 15 according to the company. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2011-02-28 Maturity Price : 25.00 Evaluated at bid price : 20.30 Bid-YTW : 15.44 % |
| DF.PR.A | SplitShare | 1.60 % | Asset coverage of 1.4-:1 as of January 15, according to the company. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2014-12-01 Maturity Price : 10.00 Evaluated at bid price : 8.91 Bid-YTW : 7.71 % |
| BNS.PR.J | Perpetual-Discount | 1.66 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-19 Maturity Price : 20.25 Evaluated at bid price : 20.25 Bid-YTW : 6.52 % |
| POW.PR.D | Perpetual-Discount | 1.70 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-19 Maturity Price : 18.56 Evaluated at bid price : 18.56 Bid-YTW : 6.80 % |
| GWO.PR.G | Perpetual-Discount | 1.79 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-19 Maturity Price : 18.73 Evaluated at bid price : 18.73 Bid-YTW : 7.03 % |
| FBS.PR.B | SplitShare | 1.85 % | Asset coverage of 1.1-:1 as of January 15 according to TD Securities. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2011-12-15 Maturity Price : 10.00 Evaluated at bid price : 8.25 Bid-YTW : 12.38 % |
| PWF.PR.K | Perpetual-Discount | 1.85 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-19 Maturity Price : 18.13 Evaluated at bid price : 18.13 Bid-YTW : 6.87 % |
| PWF.PR.G | Perpetual-Discount | 1.97 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-19 Maturity Price : 21.27 Evaluated at bid price : 21.27 Bid-YTW : 6.98 % |
| DFN.PR.A | SplitShare | 2.00 % | Asset coverage of 1.7-:1 as of January 15 according to the company. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2014-12-01 Maturity Price : 10.00 Evaluated at bid price : 9.19 Bid-YTW : 7.07 % |
| BCE.PR.C | FixedFloater | 2.18 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-19 Maturity Price : 25.00 Evaluated at bid price : 16.40 Bid-YTW : 7.01 % |
| LBS.PR.A | SplitShare | 2.35 % | Asset coverage of 1.4-:1 as of January 15 according to Brompton Group. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2013-11-29 Maturity Price : 10.00 Evaluated at bid price : 8.70 Bid-YTW : 8.66 % |
| WFS.PR.A | SplitShare | 2.36 % | Asset coverage of 1.2+:1 as of January 8, according to the company. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2011-06-30 Maturity Price : 10.00 Evaluated at bid price : 9.56 Bid-YTW : 7.43 % |
| BNA.PR.A | SplitShare | 2.37 % | Asset coverage of 1.8+:1 as of December 31 according to the company. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2010-09-30 Maturity Price : 25.00 Evaluated at bid price : 23.75 Bid-YTW : 10.10 % |
| CM.PR.K | FixedReset | 2.60 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-19 Maturity Price : 22.59 Evaluated at bid price : 23.65 Bid-YTW : 4.41 % |
| BNS.PR.O | Perpetual-Discount | 2.69 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-19 Maturity Price : 21.41 Evaluated at bid price : 21.41 Bid-YTW : 6.58 % |
| BCE.PR.R | FixedFloater | 3.13 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-19 Maturity Price : 25.00 Evaluated at bid price : 16.50 Bid-YTW : 6.81 % |
| GWO.PR.F | Perpetual-Discount | 3.19 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-19 Maturity Price : 21.70 Evaluated at bid price : 22.00 Bid-YTW : 6.77 % |
| PWF.PR.H | Perpetual-Discount | 3.59 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-19 Maturity Price : 21.05 Evaluated at bid price : 21.05 Bid-YTW : 6.87 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| RY.PR.P | FixedReset | 85,739 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-19 Maturity Price : 25.35 Evaluated at bid price : 25.40 Bid-YTW : 5.86 % |
| TD.PR.E | FixedReset | 64,895 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-19 Maturity Price : 25.24 Evaluated at bid price : 25.29 Bid-YTW : 6.02 % |
| BMO.PR.J | Perpetual-Discount | 43,509 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-19 Maturity Price : 16.96 Evaluated at bid price : 16.96 Bid-YTW : 6.77 % |
| NA.PR.O | FixedReset | 43,362 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-19 Maturity Price : 24.96 Evaluated at bid price : 25.01 Bid-YTW : 6.38 % |
| SLF.PR.C | Perpetual-Discount | 43,325 | Nesbitt crossed 33,000 at 15.70. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-19 Maturity Price : 15.63 Evaluated at bid price : 15.63 Bid-YTW : 7.21 % |
| CM.PR.I | Perpetual-Discount | 42,440 | Nesbitt crossed 27,300 at 16.55. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-19 Maturity Price : 16.54 Evaluated at bid price : 16.54 Bid-YTW : 7.15 % |
| There were 39 other index-included issues trading in excess of 10,000 shares. | |||
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