December 29, 2009

The boo-hoo-hoo crowd was in full cry December 24, with Dealbook exposing the revelation that Goldman Sachs occasionally trades as principal:

Mr. Egol, a Princeton graduate, had risen to prominence inside the bank by creating mortgage-related securities, named Abacus, that were at first intended to protect Goldman from investment losses if the housing market collapsed. As the market soured, Goldman created even more of these securities, enabling it to pocket huge profits.

Goldman’s own clients who bought them, however, were less fortunate, Gretchen Morgenson and Louise Story write in The New York Times.

Pension funds and insurance companies lost billions of dollars on securities that they believed were solid investments, according to former Goldman employees with direct knowledge of the deals who asked not to be identified because they have confidentiality agreements with the firm.

While the investigations are in the early phases, authorities appear to be looking at whether securities laws or rules of fair dealing were violated by firms that created and sold these mortgage-linked debt instruments and then bet against the clients who purchased them, people briefed on the matter say.

Michael DuVally, a Goldman Sachs spokesman, declined to make Mr. Egol available for comment. But Mr. DuVally said many of the C.D.O.’s created by Wall Street were made to satisfy client demand for such products, which the clients thought would produce profits because they had an optimistic view of the housing market. In addition, he said that clients knew Goldman might be betting against mortgages linked to the securities, and that the buyers of synthetic mortgage C.D.O.’s were large, sophisticated investors, he said.

The last paragraph says it all, really, and Goldman’s response was not necessary. Who are the investors? Were they prudent? Did they do due diligence? Did they merely have the misfortune to have A SMALL PART OF THEIR PORTFOLIO caught up in the train wreck? The ever-so-diligent reporter at the New York Times doesn’t bother even to ask such questions. It’s simply boo-hoo-hoo, a client bought something and it went down, it must be the seller’s fault.

The biggest danger the capital markets now face is over-regulation (as alluded to in a speech by John Taylor). Until performance becomes a serious consideration when placing assets for management (with risk firmly in mind at all times) and Portfolio Managers as a group start taking responsibility for their performance (which they certainly don’t want to do), we will keep seeing this friction … which basically means, until human nature changes.

There are some complaints that the Financial Crisis Inquiry Commission is making it stretch. I have no doubt but that there will be a star-studded roll of witnesses and some first-rate data collected … just how objectively that data is turned into recommendations will be another thing entirely! I think it entirely likely that regulation will become so stifling that a huge wave of hedge funds forms to compete with the banks at the margins, taking the old-style merchant-banking partnerships and trading houses as their models.

There is, surprisingly, some difference of opinion on the future course of 10-Year Treasury yields:

Yields on benchmark 10-year notes will climb about 40 percent to 5.5 percent, the biggest annual increase since 1999, according to David Greenlaw, chief fixed-income economist at Morgan Stanley in New York.

Ten-year notes will end 2010 at 3.97 percent, according to the average of 60 estimates in a Bloomberg News survey that gives greater weight to the most-recent forecasts.

Edward McKelvey, senior economist in New York at Goldman Sachs Group Inc., the top-ranked U.S. economic forecasters in 2009, according to data compiled by Bloomberg, expects yields to drop to 3.25 percent.

Forecasting is a mug’s game.

A massive financial industry investment in the UK may be reconsidered:

Jamie Dimon, chief executive, made the coded warning to Alistair Darling in an angry phone call after the Government revealed its 50pc super-tax on bonuses in the pre-Budget report. Although Mr Dimon did not explicitly threaten to can the 1.9m square foot Docklands development, he pointedly used it to demonstrate the bank’s commitment to London.

When JP Morgan bought the land for £237m in November last year, it wrote into its contract with Songbird Estates, the owner of Canary Wharf, an option to pull out. A decision has to be made before the option expires by the end of 2010.

Bankers say regulatory pressure and the shifting tax regime have made Britain a far less attractive place to do business. International banks, which assess where to place their capital at the end of every financial year, now plan to scale back investment in the UK. Even Paris, which has introduced a watered-down version of the super-tax on cash bonuses alone, is stealing a march over its traditionally superior rival, London.

It was a quiet day for preferreds, with not much volume or price volatility. PerpetualDiscounts gained 7bp, while FixedResets gained just under 5bp.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
(at bid)
Mod Dur
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 -0.1440 % 1,612.4
FixedFloater 5.70 % 3.84 % 38,153 18.97 1 1.7591 % 2,734.9
Floater 2.43 % 2.82 % 111,929 20.18 3 -0.1440 % 2,014.4
OpRet 4.86 % -0.92 % 125,186 0.09 15 0.0536 % 2,322.1
SplitShare 6.44 % -4.21 % 203,292 0.08 2 -0.1996 % 2,085.2
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0536 % 2,123.4
Perpetual-Premium 5.85 % 5.73 % 76,623 2.30 7 0.1473 % 1,886.3
Perpetual-Discount 5.82 % 5.87 % 195,472 14.11 68 0.0724 % 1,794.2
FixedReset 5.40 % 3.68 % 334,233 3.84 41 0.0454 % 2,169.8
Performance Highlights
Issue Index Change Notes
TD.PR.Q Perpetual-Discount -1.74 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-12-29
Maturity Price : 24.59
Evaluated at bid price : 24.82
Bid-YTW : 5.73 %
PWF.PR.H Perpetual-Discount -1.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-12-29
Maturity Price : 23.92
Evaluated at bid price : 24.30
Bid-YTW : 6.01 %
BAM.PR.G FixedFloater 1.76 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-12-29
Maturity Price : 25.00
Evaluated at bid price : 19.09
Bid-YTW : 3.84 %
Volume Highlights
Issue Index Shares
TD.PR.C FixedReset 77,322 Scotia crossed 73,600 at 27.15.
Maturity Type : Call
Maturity Date : 2014-03-02
Maturity Price : 25.00
Evaluated at bid price : 27.02
Bid-YTW : 3.74 %
CM.PR.K FixedReset 40,950 Nesbitt crossed 29,400 at 26.65.
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 26.60
Bid-YTW : 3.73 %
TD.PR.K FixedReset 22,411 TD crossed 21,400 at 28.05.
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 28.06
Bid-YTW : 3.68 %
BNS.PR.M Perpetual-Discount 20,572 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-12-29
Maturity Price : 20.55
Evaluated at bid price : 20.55
Bid-YTW : 5.58 %
CM.PR.J Perpetual-Discount 20,273 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-12-29
Maturity Price : 19.33
Evaluated at bid price : 19.33
Bid-YTW : 5.83 %
BNS.PR.L Perpetual-Discount 18,020 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-12-29
Maturity Price : 20.57
Evaluated at bid price : 20.57
Bid-YTW : 5.57 %
There were 15 other index-included issues trading in excess of 10,000 shares.

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