Willem Buiter wants to clamp down on CDS trading:
CDS provide an example. Just as short selling equity is potentially efficiency enhancing but naked short selling is just gambling, so insuring credit default risk is potentially efficiency enhancing when the buyer has an insurable interest and the writer of the CDS is sufficiently capitalised. Current arrangements permit ‘naked’ CDS buying (buying CDS on a security in excess of the face value of your holdings of that security).
I would not follow George Soros and ban CDS outright. I would require that any writer of CDS or other forms of credit risk insurance be properly capitalised and post additional collateral immediately when his creditworthiness is adversely affected. In addition, I would stipulate that it is only possible to buy CDS when you have an insurable interest in the security it is written on, and that you cannot make good, following default on a security, any claim under a CDS written on that security unless you can present to the writer of the CDS an amount of that security with the same face value as your claim.
The reference to George Soros links to a column by Ed Hammond:
George Soros, the billionaire financier, this week called for the scrapping of CDS contracts. He used the example of the bankruptcy of General Motors as a reason for outlawing these contracts. This, he said, was because it was in the interest of some bondholders to see the company go under as they were also in possession of CDS contracts, which paid out on the carmaker’s default.
… which is just the old debt-decoupling problem that has so many people (not me!) so upset.
I fail to understand Mr. Buiter’s equation of naked-shorting (protection buying) with gambling. The exposure to the shorting party is the same; there may well be risk to the counterparty that is not disclosed in a naked short; and this potential counter-party risk may well be destabilizing and therefore Bad; but I don’t understand why it should be deprecated as gambling and thus distinguished from the price-discovery process assisted by shorting.
I do try to stay away from politics in this blog – except where they explicitly impinge on the financial world, but this Toronto Star article is too good to pass by: Green Bins: A wasted effort:
The City of Toronto boasts that its green bin program diverts a third of our garbage and turns it into “black gold” compost. But a Star investigation shows that the program – although nobly conceived – is a sham.
There are two problems. First, the city’s claim of how much waste the program diverts from landfill is inflated. Second, some of the compost that is being produced will kill your plants because of its high salt content, according to laboratory tests.
The Star’s headline is incorrect: the Green Bin programme is serving its purpose perfectly. It is enabling earnest feel-gooders to feel good about themselves. If the purpose was actually to accomplish something useful, we’d just incinerate it all. But that’s regulation for you!
UK CMBS are not feeling very happy:
Investor Simon Halabi’s real-estate companies failed to remedy a default on 1.15 billion pounds ($1.9 billion) of commercial mortgage bonds at a time when, according to Fitch Ratings, “pretty much” all such European deals would breach loan-to-value conditions if they were tested.
…
“With capital values having fallen on average by 43 percent, pretty much any loan that has a loan-to-value covenant if tested today would be in breach,” said Andrew Currie, head of Europe commercial mortgage-backed securities at Fitch Ratings in London. Most servicers of commercial mortgage bonds haven’t tested these conditions, “storing up trouble” for the future, he said before today’s announcement.White Tower is the largest commercial mortgage bond sold by a single borrower to default this year in Britain, which is Europe’s largest market and accounts for about 50 percent of issuance, according to Fitch. Banks that financed a real-estate buying spree at the top of the market are weighed down with about 230 billion pounds of commercial property loans, data compiled by De Montford University show, making them unwilling to refinance existing deals when they come due.
FixedResets continued to roar ahead (as well as hogging up all the spots on the volume highlights table) and are now more than two points through perpetuals, a price that sounds really, really extreme. At current spreads, of course, redemption at first call looks more likely than not, but there is still a significant amount of extension risk in the structure … we will see how it turns out. My bet? It ends in tears.
| 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 | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -1.1675 % | 1,173.8 |
| FixedFloater | 7.08 % | 5.47 % | 37,463 | 16.36 | 1 | -0.0651 % | 2,129.4 |
| Floater | 3.25 % | 3.74 % | 81,288 | 18.00 | 3 | -1.1675 % | 1,466.4 |
| OpRet | 4.97 % | -3.96 % | 120,673 | 0.09 | 15 | 0.1047 % | 2,216.1 |
| SplitShare | 5.75 % | 6.51 % | 70,056 | 4.18 | 3 | 0.1208 % | 1,897.5 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1047 % | 2,026.4 |
| Perpetual-Premium | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0829 % | 1,751.5 |
| Perpetual-Discount | 6.31 % | 6.35 % | 160,007 | 13.41 | 71 | 0.0829 % | 1,613.1 |
| FixedReset | 5.59 % | 4.30 % | 475,321 | 4.30 | 40 | 0.3999 % | 2,053.2 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| BAM.PR.B | Floater | -1.97 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-06 Maturity Price : 10.43 Evaluated at bid price : 10.43 Bid-YTW : 3.80 % |
| BAM.PR.J | OpRet | -1.70 % | YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2018-03-30 Maturity Price : 25.00 Evaluated at bid price : 22.02 Bid-YTW : 7.33 % |
| BAM.PR.M | Perpetual-Discount | -1.62 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-06 Maturity Price : 15.75 Evaluated at bid price : 15.75 Bid-YTW : 7.62 % |
| NA.PR.L | Perpetual-Discount | -1.13 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-06 Maturity Price : 20.15 Evaluated at bid price : 20.15 Bid-YTW : 6.13 % |
| BAM.PR.K | Floater | -1.03 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-06 Maturity Price : 10.57 Evaluated at bid price : 10.57 Bid-YTW : 3.74 % |
| BMO.PR.N | FixedReset | 1.09 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-27 Maturity Price : 25.00 Evaluated at bid price : 27.85 Bid-YTW : 4.01 % |
| TD.PR.Y | FixedReset | 1.10 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-06 Maturity Price : 25.16 Evaluated at bid price : 25.21 Bid-YTW : 4.29 % |
| GWO.PR.I | Perpetual-Discount | 1.12 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-06 Maturity Price : 18.04 Evaluated at bid price : 18.04 Bid-YTW : 6.29 % |
| BAM.PR.H | OpRet | 1.19 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2010-10-30 Maturity Price : 25.25 Evaluated at bid price : 25.50 Bid-YTW : 5.01 % |
| PWF.PR.E | Perpetual-Discount | 1.21 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-06 Maturity Price : 21.76 Evaluated at bid price : 21.76 Bid-YTW : 6.46 % |
| POW.PR.D | Perpetual-Discount | 1.21 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-06 Maturity Price : 19.19 Evaluated at bid price : 19.19 Bid-YTW : 6.55 % |
| CL.PR.B | Perpetual-Discount | 1.31 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-06 Maturity Price : 22.98 Evaluated at bid price : 23.25 Bid-YTW : 6.77 % |
| BNS.PR.P | FixedReset | 1.31 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2013-05-25 Maturity Price : 25.00 Evaluated at bid price : 25.56 Bid-YTW : 4.27 % |
| GWO.PR.J | FixedReset | 1.32 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-01-30 Maturity Price : 25.00 Evaluated at bid price : 26.95 Bid-YTW : 4.16 % |
| TD.PR.S | FixedReset | 1.33 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-06 Maturity Price : 24.98 Evaluated at bid price : 25.03 Bid-YTW : 4.22 % |
| RY.PR.N | FixedReset | 1.44 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-26 Maturity Price : 25.00 Evaluated at bid price : 27.50 Bid-YTW : 4.10 % |
| PWF.PR.G | Perpetual-Discount | 1.47 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-06 Maturity Price : 22.56 Evaluated at bid price : 22.85 Bid-YTW : 6.58 % |
| TD.PR.R | Perpetual-Discount | 1.51 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-06 Maturity Price : 23.04 Evaluated at bid price : 23.20 Bid-YTW : 6.04 % |
| CM.PR.K | FixedReset | 1.58 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2019-08-30 Maturity Price : 25.00 Evaluated at bid price : 25.71 Bid-YTW : 4.63 % |
| TD.PR.C | FixedReset | 2.11 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-02 Maturity Price : 25.00 Evaluated at bid price : 26.28 Bid-YTW : 4.28 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| BMO.PR.P | FixedReset | 81,799 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-06 Maturity Price : 23.23 Evaluated at bid price : 25.35 Bid-YTW : 4.85 % |
| IAG.PR.C | FixedReset | 50,257 | RBC crossed 13,800 at 27.24. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-01-30 Maturity Price : 25.00 Evaluated at bid price : 26.75 Bid-YTW : 4.54 % |
| MFC.PR.D | FixedReset | 46,006 | RBC bought 10,400 from anonymous at 27.20. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-07-19 Maturity Price : 25.00 Evaluated at bid price : 27.25 Bid-YTW : 4.70 % |
| RY.PR.L | FixedReset | 44,964 | RBC crossed 17,800 at 26.24. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-26 Maturity Price : 25.00 Evaluated at bid price : 26.04 Bid-YTW : 4.80 % |
| BNS.PR.P | FixedReset | 39,079 | RBC crossed 10,000 at 25.59. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-05-25 Maturity Price : 25.00 Evaluated at bid price : 25.56 Bid-YTW : 4.27 % |
| TD.PR.C | FixedReset | 38,392 | RBC crossed 17,900 at 26.25. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-02 Maturity Price : 25.00 Evaluated at bid price : 26.28 Bid-YTW : 4.28 % |
| There were 36 other index-included issues trading in excess of 10,000 shares. | |||