Monday, March 17, 2008

Update on the Precipice...

Some updates for those who don't sit in front of Bloombergs...

5-year brokerage bonds...
Lehman Brothers: Now, +560/540. Open, 625/595. Last trade on Friday was +510.
Goldman Sachs: Now, +280/260. Open, 290/280. Friday, 260.
Merrill Lynch: Now, +415/405. Open, 470/460. Friday, 400.
Morgan Stanley: Now, +330/310. Open, 350/340. No size trades on Friday, but seemed to be about +300.

Swap spreads continue to perform very well. 10-years 8 tighter today, 2-years 9 tighter. Agency spreads improving as well, 10-year Fannie's about 3 tighter than Friday, 2-year about 6 tighter.

Lehman is of course the name to watch. Here is what I've heard. Working against them is that they had the second largest mortgage exposure on the street (after Bear of course). Working for them is that they actually have more cash than their rivals. I've heard they have cash and near-cash of $100 billion which is 5 times what Bear supposedly had as of last week. According to one trader I was talking to, Goldman doesn't even have that much cash. I'm watching Lehman's credit spread much more closely than their stock. If their credit spread holds, that would indicate that the market believes in the Fed's lender-of-last-resort role. The stock might fall regardless, as all the brokers are probably going to have to lever down and that will hurt profits.

Also, remember that the Fed isn't trying to "solve" anything. In other words, the Fed's near-term goals do not include preventing home prices (or even stock prices) from falling. The Fed's goal is to make sure that the system continues to function. If the stock market stabilizes, that would be a sign the Fed's actions are working. But a better sign would be that bank CDS spreads stabilize. That's what we need to watch now.


TH said...

I'm wondering how the takeover has affected BCS CDS spreads. Does the buyout constitute a "credit event" therby triggering a payout to the buyers of insurance? Or are they just SOL now?

Anonymous said...

Does anyone have an update as to the ARS market, especially paper insured by FSA?? Thank you.

Anonymous said...

1) How do I follow bank CDS spreads?

2) Please keep us informed. Reading your blog is like having a war correspondent on the front lines.

Mish Shedlock sees a deflationary outcome.

He also sees the dollar recovering against the euro as dolllars disappear into leverage heaven.

What do you think?

Anonymous said...

Why wouldn't bank CDS spreads be expected to stabilize ahead of bank stock prices? Isn't one part of the takeover a desire to avoid the "credit event"? $2/share isn't all that different from bankruptcy as far as equity holders are concerned, but it is a world of difference for those with a CDS position.

Anonymous said...

I think Bear is hard-to-borrow, so a lot of risk-arb types can't put it on. imho.

Anonymous said...

Do you remember once commenting that you usually shy away from JPM and Citigroup, because it seemed to you that they always get the shorter end of a deal?

Any updates on that perception?

Anonymous said...

Stupid or not so stupid question on the BCS pricing:

Don't you have to adjust the $ 2 per share price for the $ 6 billion reserve taken as part of the transaction? Much of this reserve is specific to the transaction, although it includes some balance sheet value tail risk as well.

I think this $ 6 billion reserve equals about $ 50 per share, although this is a pretax number.

Isn't it correct to argue that the effective value put on the firm going in is $ 2 per share, plus this cost?

Accrued Interest said...

Bank and brokerage CDS are MUCH tigher today. I don't think it means too much until post Fed though.

BSC CDS are in the +300 area. A merger does not constitute a credit event. Technically Bear never defaulted on anything, they just agreed to a very unusual merger.

Following CDS spreads isn't easy because they are all over the counter. You can watch the CDX (which are baskets of CDS) on

I did say I didn't used to like JPM, but they've sure as shit managed through this crisis well. Jamie Dimon is the fucking king of Wall Street right now. I bought a little JPM stock at the open yesterday.

Citi seems to still be mired in their problems.

I'd say the $2 has nothing to do with what BSC is worth. Nor does adding back any kind of reserve. JPM held all the cards. There is no way a "fair" value was established.

Anonymous said...

Since we're losing, let's change the rules.

Anonymous said...


I have been reading your blog for a while now and have never considered you to be one of those individuals who useS bad language to get your point across. However, you have proven me wrong in your previous two blog entries. This could only mean one thing, YOU GOT BURNED BY BEAR……LOL

Anonymous said...

If Bernanke's goal was to have the dollar appreciate against the euro and the Dow go up by 400 points, he succeeded.

But my mantra remains: suppose the American consumer decides to save?

It then becomes a question whether we can export our way out of eternal night? Japan kind of did it. So can America.

[Long pause]


Accrued Interest said...

Didn't get burned by Bear.

Anonymous said...

He didn't mean "were you burned by Bear Stearns", he meant "were you burned by the bear market".

I would like to know the answer too. I'm also surprised by the fuck's

Anonymous said...

oops silly me.

But still, why the fuck's?

Anonymous said...

...that would indicate that the market believes in the Fed's lender-of-last-resort role.

Uhh, why wouldn't "the market", i.e. Wall St and other pros who do most of the trading, believe in it? What choice do they have?

The question is whether it is good for the country, the dollar, and the Fed itself for the Fed to soil its balance sheet -- which is what nominally backs the dollar -- with whatever crap Wall St wants to stick there (in exchange for treasuries).

Accrued Interest said...

Sorry guys. I actually talk like that all the time. I guess I just don't let it get into my writing much.

Was I burned by this bear market? Yeah I've written several times that I grossly underestimated the contagion. I was very light on credit exposure going into this, but heavy on stuff that had historically been low-beta spread product. But this market is totally different than other credit cycles, and everything other that Treasuries has been getting killed.

Fortunately for me, my 2007 performance overall has been OK. Under bench, but better than most. My YTD 2008 performance has been significantly better than bench. So I'm not real worried about my business or my job if that what you are infering.

Can't help but feel stressed by this market. It used to be where you knew how to price things. Now you really don't. Even simple things like callable agencies are much more difficult to figure than in years past. You might say that should make my job more fun, and it does in a way. But it will be nice when the market starts to regain its liquidity footing and it becomes easier to actually trade stuff again.

Anonymous said...

Who do you work for?

Accrued Interest said...

I work for a registered investment advisory firm.

Anonymous said...

No, I actually meant Bear Stearns..

Anonymous said...

Aw, c'mon--there's nothing wrong with occasionally using "fuck."

It's in **infinitely** worse taste to "LOL"" over a person's blowing up.

Someone has fucked-up priorities!

Anonymous said...

I agree!

Chrissake, the world is falling apart, and this person is bitching about a few bad words.

In our very midst--the last pair of virgin ears in the entire financial industry.