September 10, 2008

The question of whether the functions of Central Bank and Bank Regulator should be combined or not has been often discussed on PrefBlog. Elsewhere, too, like Frankfurt, with remarks by Ms. Gertrude Tumpel-Gugerell of the ECB:

The main position at that time, which remains valid today, is that there is no optimal arrangement for the organisation of supervision at the national level. All organisational models – sectoral supervision, supervision by objectives, supervision in a single authority – can in principle work well or fail depending on circumstances. However, regardless of the model, it is important that there exists a very close and smooth interplay between the central banking and the supervisory function.

Provision of Emergency Liquidity Assistance is a clear point in case where central banks need supervisory information for decision-making. In this field, I believe that an important step forward is represented by the recent MoU on financial stability arrangement signed by the EU central banks, supervisors and ministries of finance in June 2008.

Finally, referring more to the supervisory domain but still linked to the central bank interest, the turmoil has evidenced the need for strengthening the macro-prudential dimension of regulation and supervision. This means the regulatory and supervisory requirements should be able to ensure adequate capital and liquidity buffers throughout the economic cycle. In this regard, the actual impact of the new capital adequacy regime under of Basel II will have to be monitored very closely.

Very bureaucratic! There isn’t the slightest hint of a recommendation in these remarks!

Lehman reported today:

Lehman Brothers Holdings Inc., reporting the biggest loss in its 158-year history, said it will sell a majority stake in its asset-management unit, spin off commercial real-estate holdings and cut the dividend in an effort to shore up capital and regain investor confidence.

There is little risk I can see that Lehman will flame out with the frightening speed of Bear Stearns – they have access to the discount window:

The program instituted in the aftermath of the Bear Stearns debacle, the Primary Dealer Credit Facility, could be used for funding while officials, regulators and executives find alternative sources of cash, Fed watchers said.

“The PDCF could be used to keep Lehman operating until a broader solution was found,” said Brian Sack, a former Fed research manager who’s now senior economist at Macroeconomic Advisers LLC in Washington. “The challenge is figuring out what the broader solution is.”

Lehman can borrow overnight from the central bank, with escalating costs if it keeps using the program. Because it’s a stopgap, speculation may mount that the government will again intervene to prevent a large financial company from failing, after the Bear Stearns rescue and takeovers of Fannie Mae and Freddie Mac.

Speaking of Fannie & Freddie, repercussions on the US preferred share market have been severe:

Prices of fixed-rate preferred stock fell an average of 9 cents to 71.5 cents on the dollar this week, according to Merrill Lynch & Co. index data, the biggest two-day drop in more than a decade. The 11 percent decline compares with a 1.4 percent drop in the Standard & Poor’s 500 index over the same time.

Sales of preferred securities in the U.S. have risen 48 percent this year to about $44 billion from more than $30 billion in the same period of 2007, according to data compiled by Bloomberg. The average yield as measured by the Merrill index has risen to 10.1 percent from 8.8 percent on Sept. 5 and 7.9 percent at the end of last year.

Accrued Interest surveys the wreckage and recommends buying mortgage-backeds, while Fannie Mae has announced a $7-billion 2-year issue of its own debt (which, as Accrued Interest pointed out, had a lot taken up by central banks) … and at the same time, Vivendi has cancelled an offering of $846-million 7-years. And another US banking company slashed its common dividend:

Synovus Financial Corp., owner of 35 banks in the Southeastern U.S., will cut 650 jobs, or about 9 percent of its staff, and reduce the dividend by 65 percent to preserve capital depleted by mortgage losses.

The bank will record $15 million in costs for the two-year plan in 2008 and another $6 million later, and expects it will add $75 million in annual pretax earnings, the Columbus, Georgia- based Synovus said today in a statement. The quarterly payout was lowered to 6 cents a share.

All this excitement leaves little time for regulatory grandstanding, but some of them manage it:

Bank of America Corp. will buy back $4.5 billion of auction-rate securities to settle a nationwide probe led by Massachusetts Secretary of State William Galvin into its sales and marketing of the failed debt.

Bank of America, one of the largest underwriters of the securities, will offer to redeem the securities from its customers between Oct. 1 and Dec. 31, it said in a statement today. The Charlotte, North Carolina-based bank said it expects to record a pretax charge of about $275 million in connection with the buybacks.

Nothing like a little extortion to spice up a regulator’s life, eh?

“Liquidity” has often been mentioned in this blog – there was a story on Bloomberg today highlighting its importance in the day-to-day mechanics of bond trading:

Trading in the corporate bond market has fallen a third after averaging $26 billion a day in the first eight months of 2007, according to Federal Reserve data on primary dealers.

The biggest bond dealers, including JPMorgan Chase & Co., and Citigroup Inc., aren’t committing as much cash to boost corporate-bond trading. That’s because they’re shoring up their capital after the collapse of the subprime-mortgage market spurred about $511.4 billion of writedowns and losses.

While corporate-bond trading is shrinking, average daily trading in government securities has risen to about $584 billion this year from $560 billion in the same period of 2007, Fed data show.

The decline in corporate-debt trading, known in market parlance as illiquidity, is prompting fund managers to demand higher compensation to buy new bonds, driving up borrowing costs for companies, including American Express Co. and Verizon Communications Inc., and reducing returns on existing securities.

PerpetualDiscounts moved solidly upward on a moderately busy day. Royal Bank issues took the spotlight, with high volume and strong performance.

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.
The Fixed-Reset index was added effective 2008-9-5 at that day’s closing value of 1,119.4 for the Fixed-Floater index.
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet N/A N/A N/A N/A 0 N/A N/A
Fixed-Floater 4.58% 4.60% 67,661 16.02 6 +0.0542% 1,115.8
Floater 4.35% 4.41% 49,798 16.50 2 +0.3699% 906.2
Op. Retract 4.94% 4.33% 129,253 3.31 14 -0.0947% 1,053.6
Split-Share 5.34% 5.84% 50,491 4.38 14 -0.0404% 1,045.7
Interest Bearing 6.42% 7.18% 53,108 5.20 2 -0.2088% 1,099.0
Perpetual-Premium 6.16% 5.48% 57,749 2.21 1 +0.0789% 1,007.7
Perpetual-Discount 6.02% 6.09% 187,147 13.75 70 +0.1386% 884.9
Fixed-Reset 5.07% 4.89% 1,306,083 13.99 7 +0.2054% 1,120.0
Major Price Changes
Issue Index Change Notes
BNA.PR.C SplitShare -1.4697% Asset coverage of 3.2+:1 as of August 29 according to the company. Now with a pre-tax bid-YTW of 9.48% based on a bid of 16.76 and a hardMaturity 2019-1-10 at 25.00. Compare with BNA.PR.A (6.31% to 2010-9-30) and BNA.PR.B (8.81% to 2016-3-25).
BAM.PR.K Floater -1.3670%  
CIU.PR.A PerpetualDiscount -1.2468% Now with a pre-tax bid-YTW of 6.11% based on a bid of 19.01 and a limitMaturity.
BAM.PR.I OpRet -1.1417% Now with a pre-tax bid-YTW of 5.68% based on a bid of 25.11 and a softMaturity 2013-12-30 at 25.00. Compare with BAM.PR.H (6.22% to 2012-3-30), BAM.PR.J (6.32% to 2018-3-30) and BAM.PR.O (7.48% to 2013-6-30).
TCA.PR.Y PerpetualDiscount -1.0471% Now with a pre-tax bid-YTW of 5.96% based on a bid of 47.25 and a limitMaturity.
RY.PR.C PerpetualDiscount +1.2448% Now with a pre-tax bid-YTW of 5.96% based on a bid of 19.52 and a limitMaturity.
CM.PR.G PerpetualDiscount +1.5173% Now with a pre-tax bid-YTW of 6.41% based on a bid of 21.41 and a limitMaturity.
PWF.PR.E PerpetualDiscount +1.6000% Now with a pre-tax bid-YTW of 6.07% based on a bid of 22.86 and a limitMaturity.
RY.PR.D PerpetualDiscount +1.7525% Now with a pre-tax bid-YTW of 5.94% based on a bid of 19.16 and a limitMaturity.
RY.PR.W PerpetualDiscount +1.9006% Now with a pre-tax bid-YTW of 5.94% based on a bid of 20.91 and a limitMaturity.
RY.PR.E PerpetualDiscount +1.9058% Now with a pre-tax bid-YTW of 5.91% based on a bid of 19.25 and a limitMaturity.
BAM.PR.B Floater +2.0408%  
Volume Highlights
Issue Index Volume Notes
BNS.PR.R Fixed-Reset 412,550 New issue settled yesterday. Thirteen blocks were traded, with Nesbitt very active; the two biggest were Nesbitt crossed 40,000 at 25.00 and 34,300 at the same price.
CM.PR.K Fixed-Reset 390,289 New issue settled today. Nine blocks; Nesbitt crossed 50,000 at 24.87 and anonymous (not necessarily the same anonymous on each side) crossed 28,000 at 24.80.
RY.PR.D PerpetualDiscount 76,872 Four blocks; each one was anonymous bought 10,000 from Nesbitt at 18.95. Now with a pre-tax bid-YTW of 5.94% based on a bid of 19.16 and a limitMaturity.
BAM.PR.O OpRet 61,175 Nesbitt bought 12,000 from National at 22.90. Now with a pre-tax bid-YTW of 7.48% based on a bid of 22.85 and a softMaturity 2013-6-30 at 25.00. ‘Get this thing off the shelves!’ comes the cry from Treasury! See above for comparators.
RY.PR.G PerpetualDiscount 59,370 National bought 20,000 from Anonymous at 19.00. Now with a pre-tax bid-YTW of 5.98% based on a bid of 19.03 and a limitMaturity.

There were twenty-four other index-included $25-pv-equivalent issues trading over 10,000 shares today.

2 Responses to “September 10, 2008”

  1. jiHymas says:

    Well … NC quotes the same Bloomberg story I did; we just found different parts of it interesting.

    I will admit to disappointment that the preferred dividend has been suspended. I had been hoping to use a massive dilution of the common and complete escape of the preferreds as a talking point for the rest of my career.

    I do not know what – if any! – value to assign to the preferreds at this point. As I have been careful to state whenever commenting on the FNM preferreds, I haven’t looked at their financials, haven’t done any work at all – I’ve just been interested in the nonsensical reporting of the mechanics.

    Clearly, the US Preferred market has been badly hurt by contagion from this suspension – that was the whole point of the story in the first place. So far, this contagion has not spread to Canada and I don’t see any reason for it to do so; logic is not a particularly strong firewall, however.

    It should be remembered that the US market is structured differently from the Canada’s. Here, the lion’s share of issuance is done by a handful of icons; there, the market is much more fragmented, with small banks issuing preferreds that are taken up entirely by CDO rebundlers and now – thanks to the freeze-up in CDOs – not being able to issue anything.

    The lack of differential taxation on dividends – at least, differential taxation that can be relied on – makes the US market different too. Here, they are a strictly retail product; any institutional buying is done by funds on behalf of retail. In the US, it’s much more of a regular institutional fixed income product, just like Innovative Tier 1 Capital is here.

    I suspect that the current plunge in US preferred prices is temporary and that the fundamentals will reassert themselves before Christmas. But I’ve been saying that about a lot of things for a long time and the market retains an infinite ability to surprise!

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