Co-Ed Naked Call Writing

[Saras]

Just to illustrate how screwed up the credit markets are, see these terms of a Verizon bond issue:

http://www.reuters.com/article/marketsNews/idINN3065419020081030?rpc=44

BORROWER: VERIZON COMMUNICATIONS INC
FIRST TRANCHE:
AMT $2.0 BLN COUPON 8.75 PCT MATURITY 11/1/2018
TYPE SR NTS ISS PRICE 99.438 FIRST PAY 5/1/2009
MOODY'S A3 YIELD 8.835 PCT SETTLEMENT 11/4/2008
S&P SINGLE-A SPREAD 487.5 BPS/ PAY FREQ SEMI-ANNUAL
FITCH A-PLUS MORE THAN TREAS NON-CALLABLE
SECOND TRANCHE:
AMT $1.25 BLN COUPON 8.95 PCT MATURITY 3/1/2039
TYPE SR NTS ISS PRICE 97.483 FIRST PAY 3/1/2009
MOODY'S A3 YIELD 9.20 PCT SETTLEMENT 11/4/2008
S&P SINGLE-A SPREAD 487.5 BPS/ PAY FREQ SEMI-ANNUAL
FITCH A-PLUS MORE THAN TREAS NON-CALLABLE

[DanS]

Over 9% for a long-term senior bond issued by the telephone company.

/me whistles

[DanS]

I note that these issues are now selling well above par and currently yielding a still-high 8.1 - 8.2%.

http://reports.finance.yahoo.com/z1?is=verizon

[Saras]

Pepsico also did a deal some two weeks ago, also priced SIGNIFICANTLY (3% iirc) above treasuries. I mean, PEPSICO, probably the most recession proof consumer goods company...

[DrSpike]

Originally posted by DanS
And the BoE slashes rates by 1.5 percentage points. Does this magnitude of change have any precedents?

Nope, and lowest rate since the 50s. Should do the trick.

[DanS]

http://news.bbc.co.uk/2/hi/business/7791391.stm

[DanS]

Apparently, RBS isn't worth a nickle. It is now owned by the UK gov't. The tide went out and now we know that RBS was naked.

And UK house prices continue to fall at about a 2% per month clip -- roughly the same as in the US. Here's the WSJ's reporting on UK house prices.

* JANUARY 19, 2009, 10:09 P.M. ET
U.K. Home Prices Forecast to Drop 45% from Peak

By PHIL CRAIG

U.K. house prices will need to fall by nearly half from their peak of 18 months ago before they start to rise again, according to the current pricing of property derivatives, which analysts say would push substantial portions of U.K. banks' mortgage books into negative equity.

Analyst reports issued by Morgan Stanley and Royal Bank of Scotland Group PLC last week each said derivatives were pricing a peak-to-trough fall of 45% in U.K. house prices from August 2007 to the end of 2010. RBS's estimated that such a substantial fall would put 60% of HBOS's mortgage book into negative equity, more than half on Lloyds TSB's books and more than a third at Barclays PLC and RBS. HBOS and Lloyds this week merged into Lloyds Banking Group PLC.

Barclays said the average loan-to-value of its mortgage book in June last year was 35%, and average loan to value ratios on new residential mortgages were 51%, but it wouldn't comment further. Lloyds TSB declined to comment. HBOS and Royal Bank of Scotland didn't return phone calls seeking comment.

U.K. house prices have been hit by tight lending conditions, restricting the issuance of new mortgages. Nationwide, a leading mortgage lender the previous week said the average home in the U.K. lost £30,000 (about $44,200) in value over last year, falling to £150,000. The average price of houses now stands at about the same level as spring 2005, the report said.

Morgan Stanley said the average value of U.K. homes has already dropped by a fifth since the peak in August 2007.

http://online.wsj.com/article/SB123241510486096355.html?mod=googlenews_wsj

[OneFootInTheGrave]

and they have a way to go... dependable how other indicators fare like unemployment and repossessions... given that those two have barely started to get worse at this stage... it will be a "fun" 2009...

[OneFootInTheGrave]

Northern Rock staff get 10% bonus

http://news.bbc.co.uk/1/hi/uk_politics/7843124.stm

well I guess they met their targets...

[DanS]

I'm saddened to see bank compensation be in the "UK Politics" section of a news site.

[OneFootInTheGrave]

a bit more pessimism, but unfortunately not that unrealistic from my perspective

http://www.telegraph.co.uk/finance/financetopics/recession/4326894/Britain-on-the-brink-of-an-economic-depression-say-experts.html

Roger Bootle, the managing director of Capital Economics, said: "I think there’s a very good chance this recession will be the worst since the 1930s. I suspect the economy could shrink by 6 per cent from last year to the end of next year — and that might not be the end.

The plight facing Britain is uncannily similar to the 1930s, since prices of many assets —from shares to house prices — are falling at record rates, but the value of the debt against which they are held remains unchanged.

This “debt deflation” is among the most painful of all economic phenomena, since it means the amount families owe increases each year even if they borrow no more.

Albert Edwards, a strategist at Société Générale, likened the British economy to a Ponzi scheme — a fraudulent debt mountain like that allegedly used by the New York hedge fund manager Bernard Madoff.

“What I find amazing is that people aren’t really nailing Gordon Brown and [Bank of England Governor] Mervyn King for this,” he said. “At least in the US they had the excuse of the arrival of sub-prime — a new sector of the market. We didn’t really have anything similar but we ended up with a bigger national Ponzi scheme than the US.”

[One_more_turn]

Spanish economy shouldn't be much better than Britain's.

It seems there are far more naked European banks swimming around.

[notyoueither]

I don't follow that last bit, OFITG. Do they mean equity is being wiped out as the value of property decreases towards the amount owed, or that the amount owed is actually increasing? Ponzi scheme?

[DanS]

The last week has made it appear that this will be really bad for the UK and the rest of Europe -- perhaps even as bad or worse than the US is experiencing. But let's not conjure the ghosts of the 30s, please. All of the problems that we are having now are similar in kind to the 30s, but nowhere near the degree.

[notyoueither]

The 30's?

Ahhhhh!!!!!

Anyways, too late. The linked article makes it pretty plain this is not your father's recession. More like your grand dad's.