PrefBlog

Willem Buiter is outraged at some aspects of the Northern Rock bail-out – specifically, the extension of deposit insurance to new money:

Why should the unsecured wholesale creditors of Northern Rock get any protection at all? There is no social justice (widows and orphans) argument to support this intervention, nor an efficiency argument – the wholesale creditors to Northern Rock should be expected to be able to pay the cost of verifying its financial viability. No public purpose is served by subsidising, through ex-post insurance, the ‘rate whores’ that are likely to make up the bulk of the wholesale creditors of Northern Rock. Municipalities, charities and professional and institutional investors that were happy to pocket the slightly above-market interest rates offered by Northern Rock should not be able to dump the default risk (whose anticipation/perception was the reason for the higher rates) on the tax payer. 

Meanwhile, the situation at Countrywide isn’t looking very pretty:

Overdue loans as a percentage of unpaid principal increased to 5.85 percent in September from 4.04 percent a year earlier, the company said in a statement. Foreclosures climbed to 1.27 percent from 0.51 percent. Mortgages funded by the Calabasas, California-based company last month declined to $21 billion.

Which appears to be a nationwide phenomenon:

U.S. home foreclosures doubled in September from a year earlier as subprime borrowers struggled to make payments on adjustable-rate mortgages, RealtyTrac Inc. said.

In related news, Moody’s downgraded a big batch of sub-prime today. From their press release:

Moody’s Investors Service today announced that it has downgraded $33.4 billion of securities issued in 2006 backed by subprime first lien mortgages, representing 7.8% of the original dollar volume of such securities rated by Moody’s. Of the $33.4 billion downgraded securities, $3.8 billion remain on review for further downgrade. Moody’s also affirmed the ratings on $258.6 billion of Aaa-rated securities and $21.3 billion of Aa-rated securities, representing 74.7% and 52.0% of the original dollar volume of such securities rated in 2006, respectively. In addition, another $23.8 billion of first-lien RMBS were placed on review for downgrade, representing 5.6% of the dollar volume of subprime first-lien securities rated in 2006, including 48 Aaa-rated and 529 Aa-rated securities.
…
The analysis driving today’s rating actions takes into account several key factors. First, Moody’s assumes that the severity of loss associated with loans that are now seriously delinquent will be 40%-50% on average. Second, based on its recent survey of subprime loan servicers, Moody’s analysis assumes that significant loan modifications that might mitigate future losses are not likely to occur in the near term.

There was continued decline in outstanding ABCP in the States; on a probably-not-entirely-unrelated note, bond issuance is massive this week.

There was good volume in the preferred share market today … and continued declines in the perpetual sector which, quite frankly, I am at a loss to understand.

I have uploaded a graph comparing the yield curves as of the June 12 trough in the PerpetualDiscount index; the September 19 peak, and today. Note that the graph shown plots AFTER-TAX SPOT YIELDS:

• After Tax: The after tax yield received by an investor for an investment
• Spot Yields: Every cash flow is discounted with its own yield. For a “30-year” perpetual (I make the approximation of “30 Years = Forever” in the analysis), there will be
  • 120 dividend payments
  • 30 tax payments
  • 1 return of principal

  making a total 151 cash flows, each of which gets its own yield in accordance with the yield curve. In traditional bond mathematics, a flat yield curve is assumed and all cash flows are discounted with the same yield

At any rate, the steepening in the past three weeks is stupendous. This is really strange!

There were twenty-four other index-included $25.00-equivalent issues trading over 10,000 shares today.

This entry was posted on Thursday, October 11th, 2007 at 9:15 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.