December 10, 2007

My quotation from the Bear Stearns Asset Backed Securities Trust prospectus on December 7 was well received, with both Econbrowser and Calculated Risk kind enough to credit me in their posts. My interest was more regarding the investor in the conduits being concerned the cash flows from the pool were being reduced; these two commenters are more interested in Treasury involvement.

It seems that the legal structure for these investments is a REMIC – real estate mortgage investment conduit, which has to be brain-dead in order to qualify for advantageous tax treatment. Without some assurance from the IRS that The Plan would not disqualify the conduit, there would be no plan – however, some such assurance is expected shortly; no great surprise since Paulson runs Treasury and Treasury runs IRS.

Calculated Risk also provides commentary on the involvement of FHA & FHASecure in The Plan.

Meanwhile, reverberations about the entire sub-prime fiasco continue, with UBSWashington Mutual and MBIA announcing major equity infusions today. Meanwhile, Bank of America is winding up an Enhanced Money Market Fund that broke the buck on SIV paper, SocGen is consolidating a SIV onto its books and good old MLEC/Super-Conduit is being ridiculed as too little, too late.

Accrued Interest thinks we’ll see more of this:

However, my view is that this won’t be the end of MBIA’s need for more capital. MBIA has about $84 billion in residential ABS and “multi-sector” CDOs, vs. about $82 billion with AMBAC. I recently estimated that AMBAC would need $2-3 billion in new capital, so I’d suspect that before this is all said and done, MBIA comes back to the market for more. Note I didn’t say that MBIA would get downgraded. I have a strong suspicion that the bond insurers have been tipped off by Moody’s and Fitch as to how the capital adequacy studies are going. I further suspect that any capital improvements you hear about in the coming days are over and above what Moody’s and Fitch will announce (supposedly next week) is needed.

David Dodge used a speech at the Empire Club to plug the Financial System Review article on the credit rating agencies. He also lends a certain amount of support to calls for repeal of the credit agencies favoured position with respect to material non-public information (in the US, this means exemption from Regulation FD; I don’t know what the legal framework is in Canada):

Let me touch briefly on the role of credit-rating agencies in all of this. There is an article in the current FSR that expands on the issues related to the possible reform of the credit-rating process. One thing that is clear is that in the future, credit-rating agencies will find it to their advantage to explain more clearly the rationale for, and limitations of, their ratings for highly structured products. There are some natural, self-correcting market forces at work that should lead the rating agencies to improve their processes. Indeed, those credit-rating agencies that do not work harder to improve their processes will likely have fewer clients willing to pay for their services. As I understand it, most agencies are working on such improvements.

But credit-rating agencies are not to blame for the lack of information about those highly structured products that were sold to highly-sophisticated investors in the so-called exempt market. In the retail market, securities regulators impose strict requirements about the information that must be provided through a prospectus or term sheet. But there are no such requirements in the exempt market. It seems to me that some very basic disclosure is needed in every market. And since securities designed for the exempt market are usually required to carry a rating from a credit-rating agency, one way to ensure that appropriate information is available could be to require issuers to publicly disclose the same information that they make available to credit-rating agencies. In this way, investors would have access to the information they need in order to make informed decisions.

I’d like to see more discussion of this issue; removal of the special privilege might mean that everybody gets to see the information; it might mean that nobody gets to see the information.

For example, it is my understanding that the guarantee of Principal Protected Notes by international banks has a two-tiered price structure: you can get the guarantee with or without using the name of the guarantor in your advertising. In the current system, the credit rating agency can (I think) look at all the information and rate the notes while taking into account the non-public nature of the guarantee. In the proposed system, not even the credit rating agency would get to see the terms of the notes and the guarantor, unless it was all public and therefore more costly.  

I spent some time today at the David Berry hearing. You know why lawyers get paid so much? It’s because they have to listen to so much mind-numbing detail, that’s why. The part I heard was an assertion by RS staff that RS does indeed have authority to make a finding of misconduct should they wish to do so. This has been challenged by Mr. Berry on a variety of grounds including – as far as I can make out – that the TSE was not timely in changing its rules to reflect the hand-off of regulatory powers to RS and that, while Mr. Berry was employed by a Member of the TSE at the time of the alleged offence, he is not so employed now.

To my great astonishment, the documents presented to the panel hearing the case have not been published on the RS website.

I’ve found a bit more information on the Coleman Stipanovich story:

Stipanovich has worked for the board since 1999. Before that he was president of an investment consulting firm in Gainesville. He has worked for Paine Webber as a consultant and investment executive. He has a master of science degree in Criminal Justice Administration from Michigan State University and a bachelor of science in criminology from Florida State University.

Democrats have questioned why Stipanovich, whose brother is lobbyist and Republican strategist J.M. “Mac” Stipanovich, was hired. “This administration is taking the friends-and-family plan to the extreme,” Democratic Party spokesman Ryan Banfill said. “A $100-billion fund — it seems to me to be a no-brainer that you would do a national search.”

And a report – how accurate I don’t know – on his salary:

After seven years of overseeing Florida’s investment portfolio, Coleman Stipanovich suddenly resigned his $182,000 job moments ago amid upheaval over a massive withdrawal of the local government investment pool.

So let me see if I have this straight … the CEO of a fund with $184-billion in assets is being paid $182,000? And was hired without a national search? Not that a national search would have found anyone well qualified, because you don’t need to be a very well established portfolio manager – not boss of investment firm, I mean portfolio manager – to make more than $182,000 anyway.

I just lost all sympathy for the Florida municipalities – regardless of how much, if any, of the blame for their mess can be laid at Mr. Stipanovich’s door, they deserve exactly what they’re getting.

Another day of good volume and good performance by the perpetuals today.

Dear Santa, I have tried very hard all year to be a good Portfolio Manager. All I want for Christmas is to keep the month-to-date relative returns for the fund. Sincerely, JH. P.S., If you have any relative returns left over, of course, I’ll take them. JH.

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 4.96% 4.95% 97,845 15.54 2 +0.0819% 1,049.4
Fixed-Floater 4.83% 4.92% 92,896 15.61 8 -0.1068% 1,030.7
Floater 5.63% 5.73% 89,503 14.19 2 -1.8102% 843.6
Op. Retract 4.87% 4.07% 80,630 3.80 16 -0.2002% 1,032.4
Split-Share 5.30% 5.97% 97,855 4.07 15 +0.0584% 1,026.5
Interest Bearing 6.27% 6.64% 69,233 3.70 4 -0.5730% 1,061.2
Perpetual-Premium 5.80% 5.34% 83,035 5.86 11 +0.1704% 1,014.4
Perpetual-Discount 5.46% 5.51% 364,562 14.61 55 +0.1104% 929.7
Major Price Changes
Issue Index Change Notes
BAM.PR.K Floater -2.5455%  
BSD.PR.A InterestBearing -1.9895% Asset coverage of 1.6+:1 as of December 7, according to Brookfield Funds. Now with a pre-tax bid-YTW of 7.18% (mostly as interest) based on a bid of 9.36 and a hardMaturity 2015-3-31 at 10.00.
BAM.PR.J OpRet -1.6981% Now with a pre-tax bid-YTW of 5.04% based on a bid of 26.05 and a softMaturity 2018-3-30 at 25.00.
CM.PR.J PerpetualDiscount -1.4833% Now with a pre-tax bid-YTW of 5.54% based on a bid of 20.59 and a limitMaturity.
CM.PR.H PerpetualDiscount -1.3514% Now with a pre-tax bid-YTW of 5.55% based on a bid of 21.90 and a limitMaturity.
BAM.PR.G FixFloat -1.2677%  
BAM.PR.M PerpetualDiscount -1.1135% Now with a pre-tax bid-YTW of 6.51% based on a bid of 28.65 and a limitMaturity.
GWO.PR.G PerpetualDiscount -1.0829% Now with a pre-tax bid-YTW of 5.48% based on a bid of 23.75 and a limitMaturity.
BAM.PR.B Floater -1.0667%  
FFN.PR.A SplitShare -1.0050% Asset coverage of just under 2.4:1 as of November 30, according to the company. Now with a pre-tax bid-YTW of 5.57% based on a bid of 9.85 and a hardMaturity 2014-12-1 at 10.00.
POW.PR.D PerpetualDiscount +1.0412% Now with a pre-tax bid-YTW of 5.45% based on a bid of 23.29 and a limitMaturity.
CU.PR.A PerpetualPremium +1.1041% Now with a pre-tax bid-YTW of 5.21% based on a bid of 25.64 and a call 2012-3-31 at 25.00.
POW.PR.A PerpetualDiscount +1.1466% Now with a pre-tax bid-YTW of 5.75% based on a bid of 24.70 and a limitMaturity.
GWO.PR.I PerpetualDiscount +1.2956% Now with a pre-tax bid-YTW of 5.34% based on a bid of 21.11 and a limitMaturity.
BAM.PR.N PerpetualDiscount +1.3572% Now with a pre-tax bid-YTW of 6.50% based on a bid of 18.67 and a limitMaturity.
PWF.PR.L PerpetualDiscount +2.2030% Now with a pre-tax bid-YTW of 5.45% based on a bid of 23.66 and a limitMaturity.
ELF.PR.G PerpetualDiscount +2.5776% Now with a pre-tax bid-YTW of 6.20% based on a bid of 19.50 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
CM.PR.I PerpetualDiscount 143,372 Now with a pre-tax bid-YTW of 5.55% based on a bid of 21.50 and a limitMaturity.
CM.PR.J PerpetualDiscount 124,829 Now with a pre-tax bid-YTW of 5.54% based on a bid of 20.59 and a limitMaturity.
BPO.PR.F Scraps (would be OpRet, but there are credit concerns) 105,244 Now with a pre-tax bid-YTW of 6.28% based on a bid of 25.02 and a softMaturity 2013-3-30 at 25.00.
SLF.PR.D PerpetualDiscount 92,464 Now with a pre-tax bid-YTW of 5.30% based on a bid of 21.05 and a limitMaturity.
BAM.PR.M PerpetualDiscount 64,085 Now with a pre-tax bid-YTW of 6.51% based on a bid of 18.65 and a limitMaturity.
CM.PR.H PerpetualDiscount 58,619 Now with a pre-tax bid-YTW of 5.55% based on a bid of 21.90 and a limitMaturity.

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

One Response to “December 10, 2007”

  1. [...] Strong performance from the PerpetualDiscounts again, but all this is on relatively light volume. Santa brought me exactly what I asked for. [...]

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