James Mackintosh of the Financial Times was kind enough to link to a PrefBlog post in his discussion of Contingent Capital, CoCo farming shows the true value of government guarantees. He suggests that just about all of a banks capital market financing be contingent capital – which is, after all, what happens in bankruptcy:
Banks should be forced to turn a big chunk of existing bank debt into CoCos, with a conversion trigger based on a minimum level of capital – the worst case scenario – *or* on the bank failing. In effect, this would be a bank resolution regime which automatically converts debt to equity, avoiding the need for government rescues. Debt would cost a lot more, but bondholders would also have a far bigger incentive to keep an eye on bank management. Perhaps only 50 per cent of debt, or some other very large amount, rather than 100 per cent, would need to be convertible – but it would have to be far more than the normal belief of what might be needed in order to deal with the “black swan” events which lead to the need for government intervention.
Increased bank regulation and pay-approvals is leading to a talent drain to hedge funds:
Meredith Whitney, the analyst who cut her rating on Goldman Sachs Group Inc. last month, said the bank has lost some of its top-performing employees as executives left to start their own investment companies.
“Goldman’s lost a tremendous amount of talent going to set up their own hedge funds,” Whitney, founder of Meredith Whitney Advisory Group, said today in an interview on Bloomberg Radio. “It became a scary prospect of having the government determine what you make,” said Whitney, who also said today that bank stocks are “grossly overvalued.”
The stock plunge today was pretty tame, as plunges go, but Bloomberg says they plunged … with something even more interesting going on:
U.S. stocks extended a global drop as concern grew that the rally has outpaced the prospects for economic growth. The yen and the dollar strengthened, oil tumbled and yields on Treasury three-month bills turned negative for the first time since financial markets froze last year.
They now quote 3-month US Bills at 1bp – count ’em, one.
The preferred share market continued its recent run, with PerpetualDiscounts gaining 14bp on the day, while FixedResets were down a negligible amount. The big news was that volume fell.
PerpetualDiscounts now yield 5.92%, equivalent to 8.30% interest at the standard equivalency factor of 1.4x. Long Corporates are about 5.9%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is about 240bp. This is a shade wider than the 235bp reported on November 11, but the market seems to have found a new level … at least, until it doesn’t.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.7414 % | 1,502.1 |
| FixedFloater | 5.96 % | 4.08 % | 43,496 | 18.70 | 1 | 0.2747 % | 2,614.6 |
| Floater | 2.60 % | 3.03 % | 97,223 | 19.62 | 3 | -0.7414 % | 1,876.6 |
| OpRet | 4.81 % | -4.85 % | 121,164 | 0.09 | 14 | -0.0818 % | 2,305.9 |
| SplitShare | 6.36 % | -7.34 % | 336,155 | 0.08 | 2 | -0.1096 % | 2,111.1 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0818 % | 2,108.5 |
| Perpetual-Premium | 5.90 % | 5.53 % | 124,939 | 2.41 | 4 | 0.1592 % | 1,863.7 |
| Perpetual-Discount | 5.85 % | 5.92 % | 186,338 | 14.00 | 70 | 0.1380 % | 1,772.2 |
| FixedReset | 5.47 % | 3.97 % | 392,496 | 3.94 | 41 | -0.0045 % | 2,135.2 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| RY.PR.W | Perpetual-Discount | -1.47 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-19 Maturity Price : 21.99 Evaluated at bid price : 22.12 Bid-YTW : 5.56 % |
| BAM.PR.B | Floater | -1.43 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-19 Maturity Price : 13.12 Evaluated at bid price : 13.12 Bid-YTW : 3.03 % |
| MFC.PR.E | FixedReset | -1.26 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-10-19 Maturity Price : 25.00 Evaluated at bid price : 26.55 Bid-YTW : 4.13 % |
| BAM.PR.K | Floater | -1.14 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-19 Maturity Price : 13.00 Evaluated at bid price : 13.00 Bid-YTW : 3.05 % |
| SLF.PR.E | Perpetual-Discount | 1.16 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-19 Maturity Price : 19.21 Evaluated at bid price : 19.21 Bid-YTW : 5.96 % |
| SLF.PR.A | Perpetual-Discount | 1.29 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-19 Maturity Price : 20.38 Evaluated at bid price : 20.38 Bid-YTW : 5.93 % |
| SLF.PR.B | Perpetual-Discount | 1.44 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-19 Maturity Price : 20.49 Evaluated at bid price : 20.49 Bid-YTW : 5.96 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| RY.PR.A | Perpetual-Discount | 73,589 | RBC crossed 19,400 at 19.70, then 20,000 at 19.80. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-19 Maturity Price : 19.84 Evaluated at bid price : 19.84 Bid-YTW : 5.64 % |
| BNS.PR.O | Perpetual-Discount | 62,200 | RBC crossed three blocks of 20,000 shares each at 24.87. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-19 Maturity Price : 24.53 Evaluated at bid price : 24.75 Bid-YTW : 5.71 % |
| CM.PR.D | Perpetual-Discount | 42,350 | RBC crossed 38,200 at 24.30. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-19 Maturity Price : 23.95 Evaluated at bid price : 24.28 Bid-YTW : 5.97 % |
| GWO.PR.L | Perpetual-Discount | 40,200 | RBC crossed 34,300 at 23.75. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-19 Maturity Price : 23.51 Evaluated at bid price : 23.67 Bid-YTW : 6.06 % |
| TRP.PR.A | FixedReset | 37,125 | YTW SCENARIO Maturity Type : Call Maturity Date : 2015-01-30 Maturity Price : 25.00 Evaluated at bid price : 25.55 Bid-YTW : 4.28 % |
| RY.PR.B | Perpetual-Discount | 35,135 | RBC crossed 25,000 at 20.83. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-19 Maturity Price : 20.79 Evaluated at bid price : 20.79 Bid-YTW : 5.69 % |
| There were 26 other index-included issues trading in excess of 10,000 shares. | |||
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