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Sep 13, 2008 9:23 am

BG, normally I agree with you about ratings, but not in this environment.

Just speaking about bonds, here; not preferreds. Last month, Lehman, WaMU were investment grade. Bear Sterns bonds were investment grade even when they were going for $2 share and  2009 maturity was going for 30% YTM. The rating agencies simply can not keep up.

I agree that most advisors do some sort of  research, and truthfully there are a lot of good reps out there. However, I had to respond based on the poster on this thread who brought up the ratings. Yields, not ratings, tell you the story in this environment.
Sep 13, 2008 1:06 pm

LT, from where i sit the rating agencies are having no problem keeping up. More times than not they are predictors of where the mess is going to show up. The also add watches and outlooks to their rating as a warning to those who would look no further than the rating itself. It’s difficult to look past a negative credit watch and say you didn’t realize the risk.

  The bond market is in such disarray that using yield as a risk determinent is, in my view, unreliable. This is especially true in the muni market where AAA munis are trading at or above 100% of treasuries. That should not be. We use what we always use, credit analysis and research to make the buy/pass call. Our familiarity with the market enables us to act quickly. In my opinion yields don't tell the story or not the whole story.   The fixed income market is presenting us with many opportunities. From rolling the dice with Lehman bonds this weekend to buying greatly undervalued high quality muni bonds, there's a place at the table for speculators and conservative investors. However, and again, using an unpresedented government seizure as a soap box to warn everyone to stay out of the water regarding an entire securties class is uninformed.   And, as well, if the government can do it to them they can do it to you.  A review of any and all Fed govt paper, or implied obligations is in order. I'd start with FDIC insured CDs.        
Sep 14, 2008 12:09 am

Bond Guy I am with you 100%…Thanks Paulsone and the Treasury Dept for nothing!

Sep 14, 2008 1:03 am

The Bush Admin & the Treasury urged FNM to raise new capital since late 2007.  FNM raised 4.25 billion in April and May alone.  And now the Treasury comes out and tells all of the investors that put up money in investment grade, implied Govt backed FNM during April & May (4 months later) screw you; We the gov’t will get our 10% first!!!  This is all out fraud and there will be class action litigation coming up.  BTW, I always saw PFD’s as fixed income and not equities.  Look at the crowd you solicit them to…  These $25 bonds were structured as a cheap way for people to get fixed income, reinvested divs,  but the trade off is they are a lower rung on the ladder for payout in the event of a liquidation.  I guess they forgot to write something in the prospectus if taken over by the U.S. Govt.

Sep 15, 2008 3:09 am

No disespect meant, but how can anyone say dont look at the ratings? The ratings are what we go by. Its all we have. You could argue that the yields being high may be a function of the market being afraid of financials in general. It may (or may not) have nothing to do with the financial health of the co. We have to look at the ratings to determine that. Unless we are analysts. We are not. I've never seen a successful FA who thinks he;s an analyst. We tlook at all the information aviailable to us and make a judgement. The information comes from analysts. S&P analysts, Moodys analysts, and the analysts of our firm.

I dont believe they cant keep up. They get paid to keep up. You can call a pfd an equity, a debt, or whatever you want to call it. Its still an income investment. And the bonds that went bust did so with AA credit ratings from S&P. As far as what the govt did, there were a lot of ways they could have structured this, but they chose to structure it in a way that the pfd holders got dicked. And didnt take into account, as BondGuy pointed out, the types of investors in these instruments. For the record, in case i didnt mention it previously, i have only one client with a small position in FRE PFD, and none in FNM, none in LEH. So this isnt sour grapes. 
Sep 15, 2008 3:36 pm

Ice, I agree with your stupid strategy comment. Anyone who uses any one security for the lions share of their income is taking too much risk. That cuts both ways, as treasury only buyers are consigning themselves to a life of eating catfood once inflation does its thing. So, there’s principal risk and income risk.

  As for it being our job to know where preferreds fall on the financial food chain, I also agree. However, in the case of FNM where the preferreds fell on that food chain has nothing to do with what's happened to these investors. This is a government seizure that takes all equity away from these shareholders,and leaves them without recourse. In fact, had Fannie failed, gone into bankruptcy, and been forced to liquidate, the preferred holders would have, by virtue of their place in the food chain, been entitled to their share of the assets.  A much better outcome for them as well as the risk they signed up for.   I agree that, as always, the FA must fully understand the products and securities they use in their practice. However, to be clear, investing in FNM preferreds prior to the seizure was not a FA failure. The seizure was unpresedented.  The last official comments from Paulson, the White house, and FNM, indicated that a takeover was not needed. To fault the FA's for this, which i'm not sure you're doing, would be a mistake.   I agree many here don't understand preferreds. That said, what happened to the preferred holders of FNM has nothing to do with preferred stocks in general.   My take on Bob's comments is that he was agreeing with me in that the ratings agencies are keeping up. They were caught as flat footed as the rest of us by the seizure of Fannie and Freddie. So it goes with government seizures. Rating agencies are quick to downgrade and slow to upgrade. In fact it is the slow speed upgrading that creates many opportunites in the bond markets for traders as well as yield buyers who are paying attention.
Sep 16, 2008 3:34 am

Ice, BG,
My comment on the analysts was a reaction to Lady Traders comment that the analysts cant keep up. My comment was that its their job to keep up. If they cant, then S&P needs to hire more analysts.
As far as FA’s not understanding where on the food chain PFDS fall, i think that most of them understood that clearly. In my office there are many FA;s getting destroyed by the current situation, while I am not one of them (I’m getting destroyed more by the market in general than pfds) it is making me crazy to see it. These FA;s are sophisticated people with decades in the business. They understand that PFDS are different than and subordinate to bonds. They just didnt understand what was going on with the banks - sort of just like the analysts at S&P and elsewhere. And to BG;s point, they never for a minute could have imagined the U.S. Govt leaving all the little people holding the bag.
I could go on forever on this, but i dont want to sound defensive and repeat myself. It is just hard to watch what is going on.

One way or the other - the smart brokers will survive this and the ones left standing will THRIVE. But its going to take a long time, and a lot more pain. Even if the market turns tomorrow.
I am sitting here, reading the posts on the forum, with one eye on Bloomberg TV. I am literally getting nauseous thinking about the potential repercussions of whats happening, and also at the fact that the “watchdogs” or “regulators” let it get to this.
I am rambling, so apologies. I;ll stop now.

Sep 16, 2008 9:05 am

I just have to post a correction to my post. I said that LEH bonds was investment grade LAST month. It was actually investment grade this AM for Moody’s and S&P the morning it was declared bankrupt.

  S&P said this about Lehman debt 5 days ago:  "We continue to be concerned also about Lehman's longer range earnings potential, considering changes in its business mix, potential damage to its business franchise from recent turmoil, and uncertainty as to when market conditions might recover," said Mr. Sprinzen. "We continue to view Lehman's near-term liquidity as satisfactory, however."    
Sep 16, 2008 10:46 am


  treasury only buyers are consigning themselves to a life of eating catfood once inflation does its thing. So, there's principal risk and income risk.  [/quote]     On another note (and I suppose this question could go a lot of ways); do you think that WITHOUT government intervention, Freddie and/or Fannie would have failed?  If you think they WOULD have failed...do you think there would have been anything leftover for preferred holders anyway?    [/quote]   Yes, Fannie's assets are immence. How much? No one knows at this point, but i do believe we'll get some idea as the lawsuits start to emerge. Yesterday, Lehmans' senior debt was trading flat with a 30 bid. That's 3x what FNM preferreds are worth. And some estimates put the end value of those bonds at 60. Apples and oranges I know. But at least the Leh holders have recourse. Fannie holders do not.   Also, I'm not questioning that the gov had to step in. I'm only questioning the way they did it. And them taking the moral high ground by dismissing these small fry investors as speculators is discusting when the true speculators were the mgnt of FNM and the banks they dealt with. That most of this lay hidden for years just adds to the pain of deception.