October 15, 2008

There is some speculation that:

Flaherty is considering increasing deposit insurance beyond the current C$100,000 per person and guaranteeing short-term bank debt, the Globe and Mail reported today, citing people it didn’t name. The Bank of Canada may let mutual funds and pension funds take part in its short-term debt purchases aimed at shoring up liquidity in credit markets, the Globe also said.

The Globe story said:

The Bank of Canada also broadened the list of participants in such actions, which are normally reserved for a select group of financial institutions such as the big banks, to include “other money market participants” that sources said will likely include pension funds and mutual funds.

Well, they might be ready to make that change, to include pension and mutual funds, and they may have the intent of allowing these funds to bid indirectly, but that’s not what the Bank of Canada press release says:

Second, to enhance the distribution of liquidity, effective the 21 October auction, term PRAs will be transacted with direct participants in the Large Value Transfer System (LVTS) as well as with Primary Dealers until further notice.

LVTS participants are:

Alberta Treasury Branches
Bank of America, National Association
Bank of Montreal
The Bank of Nova Scotia
BNP Paribas (Canada)
La Caisse centrale Desjardins du Quebec
Canadian Imperial Bank of Commerce
Credit Union Central of Canada
HSBC Bank Canada
Laurentian Bank of Canada
National Bank of Canada
Royal Bank of Canada
State Street Bank and Trust Company
The Toronto-Dominion Bank

These participants may well allow their clients to bid through them on a back-to-back basis, and the Bank may well be encouraging such transactions, but pension funds and MMFs are not actually included in the list. The list has been broadened from primary dealers only to include LVTS participants.

The SEC is seeking the power to have all CDS positions reported to them:

One way to guard against misinformation and fraud is to create a mandatory system of recordkeeping and reporting of all CDS trades to the SEC.

OTC market participants generally structure their activities in CDSs to comply with the CFMA’s “swap exclusion” from the Securities Act and the Exchange Act. These CDSs are “security-based swap agreements” under the CFMA, which means that the SEC currently has authority to enforce antifraud prohibitions under the federal securities laws, including prohibitions against insider trading. If CDSs were standardized as a result of centralized clearing or exchange trading or other changes in the market, and no longer individually negotiated, the “swap exclusion” from the securities laws under the CFMA would be unavailable.

Bloomberg reports that perpetual preferred assets can be regarded as debt, allowing historical cost accounting rather than mark-to-market, although I cannot find the letter on the SEC website.

The U.S. Securities and Exchange Commission agreed to back an effort by banks that may delay writedowns on some securities tied to losses that have cost companies more than $640 billion.

Banks in certain cases may account for perpetual preferred securities as debt, allowing them to postpone writing down their value, SEC Chief Accountant Conrad Hewitt wrote in a letter yesterday to Financial Accounting Standards Board Chairman Robert Herz.

The SEC’s interpretation may help resolve a debate over accounting for the securities, which are issued without maturity dates. Auditors have determined the securities should be treated as equity and banks sought to count the assets as debt. Banks can treat them as debt “if there has been no evidence of deterioration in the credit of the issuer,” such as a decline in cash flows from the investment or a downgrade in the security’s rating below investment grade, Hewitt wrote

Fine tuning on the weekend bank rescues continues, with the UK softening its doctrinaire rhetoric:

Prime Minister Gordon Brown said the U.K. government is talking to banks about the ban on paying dividends imposed on those institutions taking taxpayer money, signaling ministers may soften the rules.

Brown said Oct. 13 that banks tapping a 37 billion-pound ($64.5 billion) bailout program won’t be allowed to pay dividends until the government redeems its investment. The banks say the rule is making it more difficult to raise cash from private investors, two people familiar with the matter said.

The comments suggest the government may drop rules Brown has said were necessary to protect taxpayer money and penalize the banks for reckless lending. That would anger rival lawmakers and unions what want to see more curbs on the industry.

Well, the sensible thing to do is “whatever works” and forget about theory and idealogy. But, says I, it seems to me that if the banks aren’t able to sell their stock without a dividend, then they can just reduce the price further and dilute their existing shareholders more. But the story does not go into details about the real-life options available to the firms.

S&P had some interesting things to say today regarding the bank rescue:

Standard & Poor’s Ratings Services believes that the bank bailout plan announced by the U.S. government on Oct. 14, 2008, will likely mark the turning point in the crisis of confidence currently afflicting credit markets, according to a report published today (“U.S. Banks: Back To Fundamentals,” available on RatingsDirect).

“We believe the recent moves by the various governments will likely have a meaningful market stabilizing influence. Although, from a rating perspective, we view the potential effects of the plan as favorable to the credit quality of U.S. financial institutions, we do not anticipate an immediate impact on participating bank ratings. We are in the process of reassessing both industry risk and individual bank and bank holding company debt ratings in light of recent events,” said Standard & Poor’s credit analyst Tanya Azarchs.

… but on the other hand:

Standard & Poor’s said it may downgrade $280.1 billion of Alt-A mortgage securities, the most that the ratings company has identified in a single announcement for bonds backed by the loans.

The debt may be cut in part because S&P has boosted estimates for losses on each foreclosure on Alt-A loans with at least five years of fixed rates to 40 percent, from 35 percent, the New York-based company said today in a statement.

Loans at least 90 days late among those underlying the securities that S&P downgraded today totaled 13.1 percent of the balances as of September, up 27.6 percent from June, S&P said. Loss severities will be higher because property prices will probably fall further amid “continued foreclosures, distressed sales, an increase in carrying costs for properties in inventory, expenses associated with foreclosures, and further declines in home sales,” the firm said.

The table of notable performers has been limited to those issues with an absolute change in bid price of over 3%. I hope to get back to 1% some day!

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 5.38% 5.63% 76,768 14.72 6 +0.0218% 959.9
Floater 6.46% 6.53% 47,893 13.15 2 -2.1758% 560.7
Op. Retract 5.40% 6.45% 127,920 3.84 14 -0.1227% 977.1
Split-Share 6.46% 11.36% 58,975 4.01 12 -2.1753% 902.6
Interest Bearing 7.58% 11.84% 48,895 3.41 3 -2.5447% 920.3
Perpetual-Premium 6.51% 6.57% 50,398 13.07 1 +2.0842% 953.2
Perpetual-Discount 6.83% 6.90% 175,396 12.71 70 -0.9579% 790.9
Fixed-Reset 5.22% 5.05% 960,276 15.31 10 +0.4558% 1,098.2
Major Price Changes
Issue Index Change Notes
FFN.PR.A SplitShare -13.0273% Asset coverage of 1.8+:1 as of September 30, according to the company. Now with a pre-tax bid-YTW of 12.54% based on a bid of 7.01 and a hardMaturity 2014-12-1 at 10.00. Closing quote of 7.01-8.00, 3×2. Day’s range of 7.50-53.
POW.PR.B PerpetualDiscount -9.4047% Now with a pre-tax bid-YTW of 7.45% based on a bid of 18.11 and a limitMaturity. Closing quote 18.11-19.98, 9X2; day’s range 18.03-20.02.
BSD.PR.A InterestBearing -9.2903% Asset coverage of just under 1.3:1 as of October 3, according to Brookfield Funds. Now with a pre-tax bid-YTW of 13.19% (interest + cap gain) based on a bid of 7.03 and a hardMaturity 2015-3-31 at 10.00. Closing quote 7.03-59, 2X2. Day’s range 7.01-22.
SBC.PR.A SplitShare -5.1103% Asset coverage of just under 1.7:1 as of October 9 according to Brompton Group. Now with a pre-tax bid-YTW of 10.95% based on a bid of 8.17 and a hardMaturity 2012-11-30. Closing quote 8.17-50, 1X10. Day’s range 8.27-94.
FTN.PR.A SplitShare -5.0529% Asset coverage of 2.2+:1 as of September 30 according to the company. Now with a pre-tax bid-YTW of 9.08% based on a bid of 8.08 and a hardMaturity 2015-12-1 at 10.00. Closing quote of 8.08-87, 5×6. Both trades at 8.35.
BAM.PR.K Floater -4.9208%  
CM.PR.P PerpetualDiscount -4.5293% Now with a pre-tax bid-YTW of 7.37% based on a bid of 18.76 and a limitMaturity. Closing Quote 18.76-39, 3X19. Day’s range 18.75-65.
TD.PR.O PerpetualDiscount -4.3522% Now with a pre-tax bid-YTW of 6.44% based on a bid of 18.90 and a limitMaturity. Closing Quote 18.90-20.00, 2X7. All board-lot trades at 20.00
WFS.PR.A SplitShare -4.3478% Asset coverage of 1.5+:1 as of September 30 according to the company. Now with a pre-tax bid-YTW of 16.32% based on a bid of 7.70 and a hardMaturity 2011-6-30 at 10.00. Closing quote, 7.70-90, 64×2. Day’s range, 7.70-07.
BNA.PR.A SplitShare -4.2857% Asset coverage of 3.2+:1 as of August 31 according to the company. Coverage now of just under 2.3:1 based on BAM.A at 23.44 and 2.4 BAM.A held per preferred. Now with a pre-tax bid-YTW of 19.31% based on a bid of 20.10 and a hardMaturity 2010-9-30 at 25.00. Compare with BNA.PR.B (9.64% to 2016-3-25) and BNA.PR.C (12.90% to 2019-1-10). Closing quote 20.10-49, 7×1. Day’s range of 20.10-20.
NA.PR.M PerpetualDiscount -4.1304% Now with a pre-tax bid-YTW of 6.81% based on a bid of 22.05 and a limitMaturity. Closing Quote 22.05-98, 10X5. All trades at 22.00
LBS.PR.A SplitShare -3.8857% Asset coverage of just under 2.0:1 as of October 2, according to Brompton Group. Now with a pre-tax bid-YTW of 9.28% based on a bid of 8.41 and a hardMaturity 2013-11-29 at 10.00. Closing quote 8.41-94, 15X1. Day’s range, 8.41-84.
IAG.PR.A PerpetualDiscount -3.7356% Now with a pre-tax bid-YTW of 6.95% based on a bid of 16.75 and a limitMaturity. Closing Quote 16.75-72, 1X11. All trades at 17.40
BAM.PR.M PerpetualDiscount -3.5636% Now with a pre-tax bid-YTW of 9.09% based on a bid of 13.26 and a limitMaturity. Closing Quote 13.26-60, 1X2. Day’s range, 13.15-85.
BNS.PR.N PerpetualDiscount -3.5062% Now with a pre-tax bid-YTW of 6.56% based on a bid of 20.09 and a limitMaturity. Closing Quote 20.09-79, 10X10. Day’s range, 20.02-85
HSB.PR.D PerpetualDiscount -3.4877% Now with a pre-tax bid-YTW of 7.14% based on a bid of 17.71 and a limitMaturity. Closing Quote 17.71-18.99, 2X24. No trades.
ENB.PR.A PerpetualDiscount -3.3708% Now with a pre-tax bid-YTW of 6.51% based on a bid of 21.50 and a limitMaturity. Closing Quote 21.50-25, 1×27. Day’s range, 21.65-25
SLF.PR.B PerpetualDiscount -3.2961% Now with a pre-tax bid-YTW of 7.02% based on a bid of 17.31 and a limitMaturity. Closing Quote 17.31-99, 20X4. Day’s range 17.50-99.
TD.PR.P PerpetualDiscount -3.2558% Now with a pre-tax bid-YTW of 6.34% based on a bid of 20.80 and a limitMaturity. Closing Quote 20.80-25, 3X5. Day’s range 20.75-50
TD.PR.R PerpetualDiscount -3.1265% Now with a pre-tax bid-YTW of 6.78% based on a bid of 20.76 and a limitMaturity. Closing Quote 20.76-without [according to other data, offer is 22.50], 11×0. No Trades.
CU.PR.B PerpetualDiscount +3.0769% Now with a pre-tax bid-YTW of 6.50% based on a bid of 23.45 and a limitMaturity. Closing Quote 23.45-80, 6X6. No Trades.
RY.PR.H PerpetualDiscount +3.4483% Now with a pre-tax bid-YTW of 6.39% based on a bid of 22.50 and a limitMaturity. Closing Quote 22.50-75, 5X6. Day’s range 22.00-75.
PWF.PR.I PerpetualDiscount +4.4980% Now with a pre-tax bid-YTW of 6.54% based on a bid of 23.00 and a limitMaturity. Closing Quote 23.00-24.00, 5X8. Day’s range 21.70-24.00 (!).
BNA.PR.B SplitShare +12.1034% See BNA.PR.A, above
Volume Highlights
Issue Index Volume Notes
IGM.PR.A OpRet 102,864 CIBC crossed 100,000 at 25.50. Now with a pre-tax bid-YTW of 5.35% based on a bid of 25.51 and a softMaturity 2013-6-29 at 25.00.
GWO.PR.G PerpetualDiscount 78,770 Nesbitt crossed 50,000 at 17.50, then another 25,000 at 17.51. Now with a pre-tax bid-YTW of 7.52% based on a bid of 17.51 and a limitMaturity.
TCA.PR.Y PerpetualDiscount 70,910 Nesbitt crossed 10,000 at 45.00, then another 60,000 at the same price. Now with a pre-tax bid-YTW of 6.37% based on a bid of 44.00 and a limitMaturity.
PWF.PR.E PerpetualDiscount 46,000 National crossed 35,000 at 21.75. Now with a pre-tax bid-YTW of 6.39% based on a bid of 21.61 and a limitMaturity.
SLF.PR.B PerpetualDiscount 37,105 National crossed 35,000 at 17.75. Now with a pre-tax bid-YTW of 7.02% based on a bid of 17.31 and a limitMaturity.

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

One Response to “October 15, 2008”

  1. […] so this must have been what the Globe was talking about on October 15. It was the third point of the October 14 […]

Leave a Reply

You must be logged in to post a comment.