The Fed has announced that the alphabet soup of liquidity support will be with us for some time yet:
The Board of Governors approved the extension through October 30 of the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), the Commercial Paper Funding Facility (CPFF), the Money Market Investor Funding Facility (MMIFF), the Primary Dealer Credit Facility (PDCF), and the Term Securities Lending Facility (TSLF). The FOMC also took action to extend the TSLF, which is established under the joint authority of the Board and the FOMC.
These are tough times for Tier 1 Capital at the banks in the eye of the storm:
The market for securities with characteristics of both debt and equity that Citigroup Inc., Bank of America Corp. and other financial companies used to bolster their capital is in freefall on concern governments will stop banks that took public cash from paying interest. The hybrids, which typically count as regulatory capital to cushion against losses, fell 11 percent last month in the U.S., more than they did in all of 2008, according to Merrill Lynch & Co. index data. Citigroup and Bank of America bonds lost as much as 34 percent of their value.
…
Only $694 million of preferred securities were sold in the U.S. since September, when the government closed the market by seizing Fannie Mae and Freddie Mac. That compares with about $44 billion in the first three quarters of last year, according to data compiled by Bloomberg.
$694-million preferreds [and in the States, remember, this figure will include what we call Innovative Tier 1 Capital] in 4Q08? Hell, up here in Canada we do that in a week!
It’s not often Canadians have the opportunity to lord it over the global titans, so let’s enjoy it while we can!
Econbrowser‘s Menzie Chinn writes a piece on multipliers that I can only hope Pussycat and What-Debt? will read:
For some people, the answer to every question is…a tax cut!
…
I think the “wrong” kind of interventions include a slavish devotion to tax cuts — especially when the [Marginal Propensity to Consume] [3] could be argued to be low in the aggregate (although I still believe it would be relative high for liquidity constrained households).
Accrued Interest likes the “Bad Bank” idea but I continue to believe:
- All previous efforts to entice banks into selling “toxic assets” have failed
- Caballero’s idea of ‘tail-insurance’ is the best way forward.
Donato Masciantdaro and Marc Quintyn write a piece on VoxEU introducing their formal paper on bank supervision:
Our CEPR Policy Insight No. 30, released today, summarises the answers provided so far. One of the interesting features of the current supervisory landscape is the emerging dichotomy between the role of the central bank in supervision and the trend toward supervisory unification. In a majority of countries that have opted for a unified supervisor, the central bank has been given no role in supervision. On the other side of the spectrum, in those countries that stayed close to the “silo” approach to supervision, the central bank is the main (or sole) bank supervisor in a majority of cases. This phenomenon – that the degree of supervision unification seems to be inversely correlated with central bank involvement – has been labelled the “central bank fragmentation effect”
Similarly, Patrick Bajari, Chenguan Sean Chu and Minjung Park introduce their NBER Paper An Empirical Model of Subprime Mortgage Default from 2000 to 2007 in a VoxEU piece Quantifying the triggers of subprime mortgage defaults:
A decomposition using our estimation results indicates that the nationwide decrease in home prices accounts for roughly half the increase in default propensity of loans originated in 2006 compared to 2004-vintage loans. With home prices down by more than 20% from their peaks in many US cities, borrowers whose outstanding mortgage liabilities now exceed their home values can in effect increase their wealth by walking away from their loans. Our estimates indicate that, for a borrower who purchased a home one year earlier with a 30-year fixed-rate mortgage and no down payment, a 20% decline in home price makes the borrower 15.4% more likely to default than an otherwise identical borrower whose home price remained stable.
However, we also find that household illiquidity is an equally important factor behind the increasing propensity of borrowers to default. Our parameter estimates indicate that roughly half the increase in default probability for 2006-vintage loans relative to 2004-vintage loans can be attributed to deterioration over time in observed characteristics of the borrower pool. In particular, later borrowers tend to have lower credit scores and a higher probability of having undocumented loans or additional liens on their properties—indicators of a greater risk of illiquidity due to insufficient income or lack of access to other forms of credit. We also see an increase over time in the proportion of adjustable-rate mortgages among new originations. Adjustable-rate mortgages are generally chosen by more liquidity-constrained borrowers, and often come with large, periodic increases to monthly payments, forcing liquidity-constrained borrowers to default.
…
Because we find empirical importance for both illiquidity and net equity as drivers of default, this suggests that effectively mitigating foreclosures would require either some combination of policies targeting each cause, or a single instrument that targets both. For example, loan modifications that merely increase payment affordability by extending loan lengths would not be very effective as a standalone measure, as they would leave borrowers’ equity positions unchanged. On the other hand, write-downs on loan principal amounts would address both causes simultaneously, with the reduction in loan size serving both to increase the borrower’s net equity as well as reduce monthly payments.
But today’s prize-winning essay – give that man a kewpie doll! – is from Thomas Philippon, who eschews slogan-shouting while asking the question Are bankers paid too much?:
Evidence from a new century-long dataset suggests that the key factors driving relative wages in the financial sector have been regulation and corporate finance activity, followed by financial innovation. Over the past decade, however, “rents” account for 30% to 50% of the sector’s wage differential. In this sense, financiers are overpaid.
Our investigation reveals a very tight link between deregulation and human capital in the financial sector. Highly skilled labour left the financial sector in the wake of Depression era regulations, and started flowing back precisely when these regulations were removed. This link holds both for finance as a whole, as well as for subsectors within finance. Along with our relative complexity indices, this suggests that regulation inhibits the ability to exploit the creativity and innovation of educated and skilled workers. Deregulation unleashes creativity and innovation and increases demand for skilled workers.
The second set of forces that appear to have a large influence on the demand for skills in finance are non-financial corporate activities: in particular, IPOs and credit risk. New firms are difficult to value because they are often associated with new technologies or new business models, and also for the obvious reason that they do not have a track record. Similarly, pricing and hedging risky debt is an order of magnitude harder than pricing and hedging government debt. Indeed, we find that increases in aggregate IPO activities and credit risk predict increases in human capital intensity in the financial industry. Computers and information technology also play a role, albeit a more limited one. Contrary to common wisdom, computers cannot account for the evolution of the financial industry. The financial industry of the 1920s appears remarkably similar to the financial industry of the 1990s despite the lack of computers in the early part of the sample.
Not a great day for prefs.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 5.36 % | 3.86 % | 25,795 | 17.62 | 2 | 0.9269 % | 859.5 |
| FixedFloater | 7.30 % | 7.04 % | 64,798 | 13.86 | 7 | -0.3582 % | 1,375.5 |
| Floater | 5.40 % | 4.48 % | 31,194 | 16.45 | 4 | 0.1546 % | 972.2 |
| OpRet | 5.30 % | 4.69 % | 161,658 | 4.02 | 15 | 0.1505 % | 2,026.0 |
| SplitShare | 6.22 % | 9.39 % | 73,235 | 4.09 | 15 | 0.3496 % | 1,791.3 |
| Interest-Bearing | 7.07 % | 8.31 % | 35,860 | 0.87 | 2 | 0.1155 % | 2,001.3 |
| Perpetual-Premium | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.2587 % | 1,557.8 |
| Perpetual-Discount | 6.89 % | 6.93 % | 217,265 | 12.63 | 71 | -0.2587 % | 1,434.7 |
| FixedReset | 6.12 % | 5.62 % | 724,727 | 14.13 | 26 | -0.4391 % | 1,792.3 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| BCE.PR.F | FixedFloater | -3.16 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-03 Maturity Price : 25.00 Evaluated at bid price : 15.01 Bid-YTW : 7.13 % |
| CIU.PR.A | Perpetual-Discount | -2.42 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-03 Maturity Price : 16.50 Evaluated at bid price : 16.50 Bid-YTW : 7.13 % |
| RY.PR.G | Perpetual-Discount | -2.42 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-03 Maturity Price : 17.32 Evaluated at bid price : 17.32 Bid-YTW : 6.53 % |
| GWO.PR.H | Perpetual-Discount | -2.26 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-03 Maturity Price : 16.86 Evaluated at bid price : 16.86 Bid-YTW : 7.31 % |
| BNS.PR.R | FixedReset | -2.23 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-03 Maturity Price : 21.51 Evaluated at bid price : 21.51 Bid-YTW : 4.97 % |
| ALB.PR.A | SplitShare | -2.01 % | Asset coverage of 1.1+:1 as of January 29 according to Scotia. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2011-02-28 Maturity Price : 25.00 Evaluated at bid price : 19.50 Bid-YTW : 18.00 % |
| PWF.PR.H | Perpetual-Discount | -1.92 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-03 Maturity Price : 20.40 Evaluated at bid price : 20.40 Bid-YTW : 7.12 % |
| SLF.PR.C | Perpetual-Discount | -1.88 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-03 Maturity Price : 15.16 Evaluated at bid price : 15.16 Bid-YTW : 7.47 % |
| PWF.PR.I | Perpetual-Discount | -1.76 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-03 Maturity Price : 21.76 Evaluated at bid price : 21.76 Bid-YTW : 6.96 % |
| NA.PR.K | Perpetual-Discount | -1.64 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-03 Maturity Price : 20.40 Evaluated at bid price : 20.40 Bid-YTW : 7.22 % |
| RY.PR.B | Perpetual-Discount | -1.50 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-03 Maturity Price : 17.74 Evaluated at bid price : 17.74 Bid-YTW : 6.65 % |
| BAM.PR.K | Floater | -1.44 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-03 Maturity Price : 7.54 Evaluated at bid price : 7.54 Bid-YTW : 7.07 % |
| SLF.PR.E | Perpetual-Discount | -1.40 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-03 Maturity Price : 15.48 Evaluated at bid price : 15.48 Bid-YTW : 7.39 % |
| BNS.PR.K | Perpetual-Discount | -1.40 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-03 Maturity Price : 18.35 Evaluated at bid price : 18.35 Bid-YTW : 6.60 % |
| CM.PR.K | FixedReset | -1.35 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-03 Maturity Price : 21.62 Evaluated at bid price : 22.00 Bid-YTW : 5.25 % |
| TD.PR.Q | Perpetual-Discount | -1.34 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-03 Maturity Price : 20.62 Evaluated at bid price : 20.62 Bid-YTW : 6.85 % |
| TD.PR.R | Perpetual-Discount | -1.34 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-03 Maturity Price : 20.62 Evaluated at bid price : 20.62 Bid-YTW : 6.85 % |
| MFC.PR.C | Perpetual-Discount | -1.34 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-03 Maturity Price : 16.94 Evaluated at bid price : 16.94 Bid-YTW : 6.76 % |
| IAG.PR.C | FixedReset | -1.30 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-03 Maturity Price : 22.02 Evaluated at bid price : 22.06 Bid-YTW : 6.60 % |
| FTN.PR.A | SplitShare | -1.16 % | Asset coverage of 1.3+:1 as of January 15 according to the company. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2015-12-01 Maturity Price : 10.00 Evaluated at bid price : 7.68 Bid-YTW : 10.14 % |
| POW.PR.A | Perpetual-Discount | -1.12 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-03 Maturity Price : 21.10 Evaluated at bid price : 21.10 Bid-YTW : 6.72 % |
| NA.PR.L | Perpetual-Discount | -1.12 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-03 Maturity Price : 17.66 Evaluated at bid price : 17.66 Bid-YTW : 6.91 % |
| TD.PR.Y | FixedReset | -1.09 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-03 Maturity Price : 21.73 Evaluated at bid price : 21.77 Bid-YTW : 4.73 % |
| BMO.PR.M | FixedReset | -1.08 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-03 Maturity Price : 21.86 Evaluated at bid price : 21.91 Bid-YTW : 4.70 % |
| PWF.PR.A | Floater | -1.01 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-03 Maturity Price : 11.73 Evaluated at bid price : 11.73 Bid-YTW : 4.48 % |
| BAM.PR.H | OpRet | 1.04 % | YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2012-03-30 Maturity Price : 25.00 Evaluated at bid price : 22.33 Bid-YTW : 10.06 % |
| BNA.PR.A | SplitShare | 1.22 % | 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 : 24.10 Bid-YTW : 9.39 % |
| BCE.PR.Y | Ratchet | 1.36 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-03 Maturity Price : 25.00 Evaluated at bid price : 14.20 Bid-YTW : 7.49 % |
| HSB.PR.D | Perpetual-Discount | 1.50 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-03 Maturity Price : 17.56 Evaluated at bid price : 17.56 Bid-YTW : 7.24 % |
| ACO.PR.A | OpRet | 1.56 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2009-12-31 Maturity Price : 25.50 Evaluated at bid price : 26.00 Bid-YTW : 4.57 % |
| LFE.PR.A | SplitShare | 1.74 % | Asset coverage of 1.5-: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 : 9.34 Bid-YTW : 7.31 % |
| ELF.PR.G | Perpetual-Discount | 1.75 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-03 Maturity Price : 14.50 Evaluated at bid price : 14.50 Bid-YTW : 8.31 % |
| WFS.PR.A | SplitShare | 1.88 % | Asset coverage of 1.1+:1 as of January 22 according to Mulvihill. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2011-06-30 Maturity Price : 10.00 Evaluated at bid price : 8.66 Bid-YTW : 12.18 % |
| PWF.PR.E | Perpetual-Discount | 2.10 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-03 Maturity Price : 19.91 Evaluated at bid price : 19.91 Bid-YTW : 6.97 % |
| GWO.PR.G | Perpetual-Discount | 2.31 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-03 Maturity Price : 18.15 Evaluated at bid price : 18.15 Bid-YTW : 7.28 % |
| BAM.PR.B | Floater | 2.51 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-03 Maturity Price : 7.75 Evaluated at bid price : 7.75 Bid-YTW : 6.88 % |
| BNA.PR.C | SplitShare | 3.20 % | Asset coverage of 1.8+:1 as of December 31 according to the company. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2019-01-10 Maturity Price : 25.00 Evaluated at bid price : 11.60 Bid-YTW : 15.20 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| BNS.PR.X | FixedReset | 125,407 | Recent new issue. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-05-25 Maturity Price : 25.00 Evaluated at bid price : 24.90 Bid-YTW : 6.42 % |
| RY.PR.R | FixedReset | 95,476 | Recent new issue. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-26 Maturity Price : 25.00 Evaluated at bid price : 24.95 Bid-YTW : 6.37 % |
| TD.PR.G | FixedReset | 77,994 | Recent new issue. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-05-30 Maturity Price : 25.00 Evaluated at bid price : 24.85 Bid-YTW : 6.46 % |
| TD.PR.E | FixedReset | 73,337 | Recent new issue. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-05-30 Maturity Price : 25.00 Evaluated at bid price : 25.05 Bid-YTW : 6.34 % |
| SLF.PR.E | Perpetual-Discount | 59,400 | RBC crossed 47,500 at 15.45. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-03 Maturity Price : 15.48 Evaluated at bid price : 15.48 Bid-YTW : 7.39 % |
| SLF.PR.B | Perpetual-Discount | 45,051 | Nesbitt crossed 37,100 at 16.88. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-03 Maturity Price : 16.78 Evaluated at bid price : 16.78 Bid-YTW : 7.27 % |
| There were 37 other index-included issues trading in excess of 10,000 shares. | |||
I recall hearing some time ago that banks who took money from the first tranche of 350 billion TARP $ (sale of preferred shares to the US gov’t) would no longer be able to pay dividends to shareholders until they had repurchased all the shares and made the taxpayers whole. Why Bloomberg thinks this is news now is kind of baffling or is this something entirely different? My greatest fear is, and has been, that we’re next.
With respect to TARP, what brings this to mind? The only Bloomberg article I’m linking is with respect to the collapse of issuance.
According to the Standard TARP termsheet:
My mistake though collapse of issuance would be inextricably linked to lack of dividend no? Was watching CNBC early this AM and they were talking about perhaps “sharing the pain” and forcing bondholders to take equity and I now know this wasn’t just “speculative banter”. Never dreamed it could come to this. So, first the shareholders no longer get dividends and now the bondholders are going to have to take almost worthless shares instead of coupon payments and return of capital? Wonderful! Wasn’t it Lenin who said Americans would sell you the rope with which to hang them? They’ve sold us the rope, I’d say.
Unless the U.S government is prepared to pay for and think it is smarter and more capable of running banks than bankers, I don’t see them (especially not Americans) nationalising Banks.
On the other hand, the U.S. government wants their bank to lend more money while those very same banks must maintain minimal capital requirements to do so. If they cannot raise tier 1 capital one way or the other, I don’t see how they can do so except for the “Bad Bank” buying toxic assets (a Swedish solution if I understand correctly).
Do you have or have you read any actual ideas as to how they could resolve the problem of promptly pricing the purchase price for toxic assets?
I’ve seen some stories about debt-equity swaps. CIT Group did one as part of their conversion to a bank.
I don’t think it will come to forced conversion; but if it does, believe me, I’d rather have doubtful equity than nothing!
If they cannot raise tier 1 capital one way or the other
The very best way of raising Tier 1 capital is retained earnings. The Fed is currently BEGGING the banks to pick up free money by putting excess reserves to work instead of being lent to the Fed for a pittance.
This was the way the Fed recapitalized the banking system in the early nineties – except that was a term spread (steep yield curve) rather than a credit spread. The party ended in 1994 with a vicious bond bear market; we’ll probably seem a similar kind of unwind once we get wound up again.
Do you have or have you read any actual ideas as to how they could resolve the problem of promptly pricing the purchase price for toxic assets?
Your key word is “promptly” and my answer is “No”. I think the Fed is handling itself remarkably well, with only one major error so far (Lehman). But the one essential ingredient is time. It takes longer to build confidence than to lose it.