SEC Grinding Forward on MMF Regulation

May 7th, 2011

The Securities and Exchange Commission has announced:

the panelists and final agenda for the Money Market Funds and Systemic Risk Roundtable to be held May 10.

The roundtable will address:

  • The potential for money market funds to pose a systemic risk to broader financial markets – what makes money market funds vulnerable to runs and how should the role of money market funds be viewed through the prism of systemic risk analysis.
  • Possible options for further regulatory reform and their implications, including floating NAV, bank regulation, and options that reflect a hybrid of these regulatory approaches: a private liquidity bank; mandatory reserve or capital requirements; and liquidity fees.

The agenda and list of panelists can be found on the SEC website.

The roundtable discussion will begin at 2 p.m. and be available by webcast on the SEC website. The webcast also will be archived for later viewing.

I am very pleased to see Paul Volcker on the list of participants. It was his discussion of the issue and plan for regulation that got me interested in the subject, which I subsequently addressed in an article.

The sessions won’t be particularly long, but will serve as a basis for further discussion:

2:20-3:05 p.m. Discussion — Potential for Money Market Funds to Pose a Systemic Risk to Broader Markets
  • What makes money market funds vulnerable to runs?
  • How should the role of money market funds in the short-term funding market be viewed through the prism of systemic risk analysis?


3:20-5:00 p.m. Discussion — Regulatory Options and their Implications

  • Floating NAV vs. Bank regulation
  • Hybrid approaches to regulation: Private liquidity bank
  • Hybrid approaches to regulation: Mandatory reserve/capital requirements
  • Hybrid approaches to regulation: Liquidity fees

On this general topic, the Chicago Fed notes:

Firms face increasing pressure to weigh the value proposition MMFs offer over the intermediate term. Budget projections factor MMF waivers well into next year. While MMF fee waivers have been subsidized by higher asset management fee revenues a second abrupt market decline could cause further strain.

MMFs have reduced their holdings of CP in favor of repos and government debt. At the same time, CP issuers seek to lock in longer term funding rates due to Basel III higher liquidity standards. Net result is a more limited, concentrated pool of eligible CP debt offerings for MMFs. MMFs are a major funding source for bank issued CP, comprising 40% of all CP issuances.

Update, 2011-5-11: The stable NAV is the focus of criticism:

Federal Deposit Insurance Corp. Chairman Sheila Bair called money-market mutual funds “destabilizing” to the financial system and said investors would be served just as well if share prices floated.

“Money-market funds are maintaining a fiction of a stable” net-asset value, as shown by the September 2008 failure of the $62.5 billion Reserve Primary Fund, Bair said yesterday at a round-table meeting of fund-company executives and regulators arranged by the U.S. Securities and Exchange Commission in Washington. “That is skewing investment dollars into a structure that is highly unstable in a crisis.”

Former Federal Reserve Chairman Paul A. Volcker called a floating share price the “simplest” solution to the risk posed by money funds, which trade at a constant $1 a share.

This may be because it’s the only possible measure that can be introduced that won’t cost anybody any money!

May 6, 2011

May 6th, 2011

Remember the good old days of 2008-09? When every Friday night we could make a batch of popcorn and watch the parade of bankrupts? This weekend might have some interesting European news:

European finance officials are meeting in Luxembourg for an unscheduled session that may address proposals for restructuring Greek debt, said two European officials familiar with the situation.

A German official said the discussions would include a German paper on options for confronting Greece’s growing debt load, which has spurred speculation by investors that a restructuring was likely.

Earlier, Spiegel magazine reported that ministers are convening an emergency meeting after Greece threatened to withdraw from the euro region. Greece rejected the report, according to a finance ministry statement. German Chancellor Angela Merkel’s chief spokesman “categorically” denied that any discussions on a Greek exit were under way. He declined to comment when asked whether officials were meeting tonight.

Looks like the Bloc Quebecois can envy Scotland:

First Minister Alex Salmond’s pro- independence party won an unprecedented majority in elections to the Scottish Parliament, handing him a second term and a mandate to push for greater autonomy for Scotland.

British Prime Minister David Cameron vowed to defend the U.K. from potential breakup even as he congratulated Salmond on an “emphatic win” in yesterday’s vote. Salmond’s Scottish National Party crossed the 65-seat threshold for the first overall majority since the 129-member parliament in Edinburgh was established in 1999.

It was a strong day for the Canadian preferred share market, with PerpetualDiscounts roaring ahead by 29bp, FixedResets gaining 5bp and DeemedRetractibles picking up 10bp. There were only three entries in the Performance Highlights table – one from each of the main classes, oddly enough – but all were positive. Volume was low.

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 -0.1411 % 2,437.6
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.1411 % 3,666.2
Floater 2.47 % 2.26 % 39,321 21.61 4 -0.1411 % 2,632.0
OpRet 4.85 % 3.63 % 61,560 1.18 9 0.1199 % 2,420.5
SplitShare 5.20 % -1.49 % 69,539 0.61 6 -0.0463 % 2,499.7
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.1199 % 2,213.3
Perpetual-Premium 5.74 % 5.53 % 142,596 1.03 9 0.1441 % 2,060.8
Perpetual-Discount 5.55 % 5.59 % 119,270 14.48 15 0.2888 % 2,138.7
FixedReset 5.16 % 3.35 % 205,568 2.88 57 0.0548 % 2,301.1
Deemed-Retractible 5.21 % 5.02 % 308,926 8.13 53 0.0950 % 2,106.7
Performance Highlights
Issue Index Change Notes
IAG.PR.A Deemed-Retractible 1.07 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.67
Bid-YTW : 6.43 %
FTS.PR.H FixedReset 1.18 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-07-01
Maturity Price : 25.00
Evaluated at bid price : 25.75
Bid-YTW : 3.66 %
CIU.PR.A Perpetual-Discount 1.32 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-05-06
Maturity Price : 22.45
Evaluated at bid price : 22.61
Bid-YTW : 5.08 %
Volume Highlights
Issue Index Shares
Traded
Notes
MFC.PR.D FixedReset 60,929 TD crossed blocks of 40,000 and 10,000, both at 27.50.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-19
Maturity Price : 25.00
Evaluated at bid price : 27.45
Bid-YTW : 3.68 %
BAM.PR.T FixedReset 49,300 Desjardins crossed 35,400 at 24.92 and 10,000 at 24.90.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-05-06
Maturity Price : 23.08
Evaluated at bid price : 24.90
Bid-YTW : 4.66 %
RY.PR.A Deemed-Retractible 39,184 RBC crossed 25,000 at 23.90.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.90
Bid-YTW : 4.98 %
BMO.PR.O FixedReset 34,483 Nesbitt crossed 30,000 at 27.32.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-06-24
Maturity Price : 25.00
Evaluated at bid price : 27.31
Bid-YTW : 3.33 %
PWF.PR.O Perpetual-Premium 25,610 CIBC crossed 17,900 at 25.30.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-11-30
Maturity Price : 25.00
Evaluated at bid price : 25.21
Bid-YTW : 5.72 %
BNS.PR.K Deemed-Retractible 24,292 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-28
Maturity Price : 25.00
Evaluated at bid price : 25.05
Bid-YTW : 4.79 %
There were 25 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
FTS.PR.C OpRet Quote: 26.06 – 26.48
Spot Rate : 0.4200
Average : 0.2477

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2011-07-01
Maturity Price : 25.50
Evaluated at bid price : 26.06
Bid-YTW : -2.70 %

PWF.PR.L Perpetual-Discount Quote: 23.42 – 23.87
Spot Rate : 0.4500
Average : 0.2939

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-05-06
Maturity Price : 23.20
Evaluated at bid price : 23.42
Bid-YTW : 5.47 %

BAM.PR.P FixedReset Quote: 27.55 – 27.85
Spot Rate : 0.3000
Average : 0.2007

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-30
Maturity Price : 25.00
Evaluated at bid price : 27.55
Bid-YTW : 4.07 %

SLF.PR.F FixedReset Quote: 27.10 – 27.45
Spot Rate : 0.3500
Average : 0.2545

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-30
Maturity Price : 25.00
Evaluated at bid price : 27.10
Bid-YTW : 3.47 %

NA.PR.M Deemed-Retractible Quote: 26.16 – 26.48
Spot Rate : 0.3200
Average : 0.2248

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-14
Maturity Price : 25.00
Evaluated at bid price : 26.16
Bid-YTW : 5.11 %

CIU.PR.C FixedReset Quote: 24.95 – 25.29
Spot Rate : 0.3400
Average : 0.2620

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-07-01
Maturity Price : 25.00
Evaluated at bid price : 24.95
Bid-YTW : 3.80 %

May 5, 2011

May 5th, 2011

Surprise! Increased regulation lead to migration to non-regulated channels:

For Goldman Sachs Group Inc. (GS) and Morgan Stanley, two of Wall Street’s biggest commodities-trading firms, the year’s largest initial public offering represents a nightmare come true: the rise of unregulated rivals.

Glencore International AG’s IPO probably will catapult the Baar, Switzerland-based commodities firm from relative obscurity onto London’s FTSE 100 list of most valuable stocks this month. Chief Executive Officer Ivan Glasenberg, 54, a former coal trader, owns a 16 percent stake in Glencore worth $9.6 billion if the sale assigns the firm a mid-range value of $61 billion.

Glencore, like rivals such as Hong Kong-based Noble Group Ltd. (NOBL) and Amsterdam-based Trafigura Beheer BV, can take bigger trading risks in the commodities markets, helping to make them more profitable and more appealing as employers for top traders.

“Prop trading remains as a potent incentive to join Glencore, Noble, Trafigura and any of the major trading firms not restricted by banking rules,” said George H. Stein, managing director of Commodity Talent LLC, a recruitment firm in New York.

Glencore’s average 2010 value-at-risk, a measure of how much the firm’s traders could lose in a single day, jumped to $43 million from $27 million in 2009, according to the firm’s annual report. Goldman Sachs’s commodity price value-at-risk dropped to $33 million in 2010 from $36 million in 2009, company data show.

I don’t think that’s the end of the story, however. I suspect that the regulators will find a way to go after Glencore if there’s the slightest possibility of villainizing them. The end-game, I suspect, is a system with a multitude of small shops, each having $0.5-1.0-billion under management. This won’t do anything for financial stability because, by and large, all these guys will be making the same bets; but it will make everybody feel better that Something Was Done, and that’s what counts, isn’t it?

On cue, Bernanke delivered a warning:

Federal Reserve Chairman Ben S. Bernanke said the government must avoid imposing burdensome rules on financial companies as it carries out the biggest regulatory overhaul in seven decades.

“No one’s interests are served by the imposition of ineffective or burdensome rules that lead to excessive increases in costs or unnecessary restrictions in the supply of credit,” Bernanke said today in a speech in Chicago. “Regulators must aim to avoid stifling reasonable risk-taking and innovation in financial markets, as these factors play an important role in fostering broader productivity gains, economic growth, and job creation.”

But the immediate issues du jour are not directly related to Glencore et al:

U.S. banks have mounted a campaign against one Fed regulation under Dodd-Frank to cap “swipe” fees on debit cards. Bernanke said in March that the Fed would miss an April deadline for the rule, telling lawmakers the issues raised in more than 11,000 comment letters are “complex and difficult.”

Last week, the Treasury Department proposed exempting foreign-exchange swaps and forwards from most of the derivatives rules required under the Dodd-Frank Act, saying the market already meets many of the law’s objectives.

A coalition of 20 firms, including Deutsche Bank AG, Bank of New York Mellon Corp. and UBS AG, asked Treasury Secretary Timothy F. Geithner to grant an exemption in a November letter.

The TMX / LSE deal is getting more interesting:

:Banks opposed to the planned combination of TMX Group Inc. (X-T39.53-0.01-0.03%) and London Stock Exchange Group PLC are looking for ways to thwart the deal, and are seeking the backing of Canada’s biggest pension funds.

Talks among large Canadian financial institutions searching for an alternative to the merger of the Toronto and London stock market operators have been going on for weeks. Options under consideration include a potential counterbid for TMX, which is valued at almost $3-billion.

Call me paranoid, but I’m convinced there’s more to this than meets the eye. It may have something to do with power … with the present situation, the banks can quite reasonably expect the TMX to kowtow to them on demand, since all employees, from the CEO on down, have to worry about their future career prospects. This will not be the case if the TMX is part of a pugnacious international group. But who knows?

And anyway, commodities aren’t fashionable this week:

Commodities plunged the most since 2008, stocks worldwide posted the biggest three-day drop since March and the dollar rallied after American jobless claims unexpectedly rose and the European Central Bank signaled it will wait until after June to raise interest rates.

The Standard & Poor’s GSCI index of 24 commodities sank 7.3 percent at 3:19 p.m. in New York and has lost 11 percent this week. Silver tumbled 11 percent, extending its decline since April 29 to 28 percent. Oil sank 9.7 percent, falling below $100 a barrel for the first time since March 17. The MSCI All-Country World Index of shares in 45 nations fell 1.4 percent. The dollar gained 2.2 percent against the euro, making commodities quoted in the greenback more expensive for holders of other currencies.

Desjardins is raining all over the Maple parade:

There’s chatter in the bond world that the maple market is coming back, driven by increased issuance over the past four weeks.

However, at this point, the perceived strength is all hype. The numbers prove otherwise.

In 2011 maple issuers — which are foreign entities that raise debt issued in Canadian dollars — have financed $2.2-billion here in Canada. That’s just a fraction of the $17-billion raised in 2007 when the maple market was hot.

“Not only does this clearly put things into perspective, but also shows how far we are from a true ‘renaissance’ of the maple bond market,” Jean-François Godin of Desjardins Securities notes.

It was a restful day in the Canadian preferred share market, with PerpetualDiscounts losing 5bp, FixedResets down 3bp and DeemedRetractibles gaining 4bp. Volatility remained low, and volume was light.

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 0.1648 % 2,441.1
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.1648 % 3,671.3
Floater 2.47 % 2.25 % 38,833 21.64 4 0.1648 % 2,635.7
OpRet 4.86 % 3.67 % 62,297 1.18 9 -0.0770 % 2,417.6
SplitShare 5.20 % -1.48 % 72,409 0.61 6 0.0662 % 2,500.8
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0770 % 2,210.7
Perpetual-Premium 5.73 % 5.53 % 143,406 2.34 9 0.1168 % 2,057.8
Perpetual-Discount 5.56 % 5.62 % 120,556 14.46 15 -0.0482 % 2,132.5
FixedReset 5.16 % 3.37 % 207,709 2.88 57 -0.0305 % 2,299.8
Deemed-Retractible 5.21 % 5.02 % 312,934 8.13 53 0.0397 % 2,104.7
Performance Highlights
Issue Index Change Notes
PWF.PR.P FixedReset -1.05 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-03-01
Maturity Price : 25.00
Evaluated at bid price : 25.43
Bid-YTW : 4.04 %
HSB.PR.D Deemed-Retractible 1.03 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.60
Bid-YTW : 5.29 %
Volume Highlights
Issue Index Shares
Traded
Notes
RY.PR.A Deemed-Retractible 158,930 RBC crossed 30,000 at 23.90; Desjardins crossed 40,000 at the same price; TD crossed 75,000 at the same price again.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.90
Bid-YTW : 4.98 %
BMO.PR.H Deemed-Retractible 132,865 TD crossed blocks of 83,000 and 40,000, both at 25.15.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-03-27
Maturity Price : 25.00
Evaluated at bid price : 25.20
Bid-YTW : 4.70 %
MFC.PR.D FixedReset 110,819 RBC crossed 100,000 at 27.50.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-19
Maturity Price : 25.00
Evaluated at bid price : 27.46
Bid-YTW : 3.66 %
CM.PR.I Deemed-Retractible 57,885 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.59
Bid-YTW : 4.93 %
PWF.PR.M FixedReset 55,000 RBC crossed 50,000 at 26.92.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-02
Maturity Price : 25.00
Evaluated at bid price : 26.80
Bid-YTW : 3.36 %
BNS.PR.R FixedReset 53,100 Desjardins crossed 48,900 at 26.10.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-02-25
Maturity Price : 25.00
Evaluated at bid price : 26.04
Bid-YTW : 3.43 %
There were 26 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
FTS.PR.H FixedReset Quote: 25.45 – 25.94
Spot Rate : 0.4900
Average : 0.3018

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-07-01
Maturity Price : 25.00
Evaluated at bid price : 25.45
Bid-YTW : 3.96 %

POW.PR.B Perpetual-Discount Quote: 23.52 – 23.89
Spot Rate : 0.3700
Average : 0.2433

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-05-05
Maturity Price : 23.22
Evaluated at bid price : 23.52
Bid-YTW : 5.73 %

BMO.PR.M FixedReset Quote: 26.12 – 26.46
Spot Rate : 0.3400
Average : 0.2391

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-09-24
Maturity Price : 25.00
Evaluated at bid price : 26.12
Bid-YTW : 2.85 %

GWO.PR.N FixedReset Quote: 24.60 – 24.90
Spot Rate : 0.3000
Average : 0.1996

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.60
Bid-YTW : 3.96 %

W.PR.J Perpetual-Discount Quote: 24.05 – 24.30
Spot Rate : 0.2500
Average : 0.1871

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-05-05
Maturity Price : 23.74
Evaluated at bid price : 24.05
Bid-YTW : 5.87 %

BAM.PR.M Perpetual-Discount Quote: 21.43 – 21.62
Spot Rate : 0.1900
Average : 0.1360

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-05-05
Maturity Price : 21.43
Evaluated at bid price : 21.43
Bid-YTW : 5.62 %

RF.PR.A: Special Resolution Passes

May 5th, 2011

CA Bancorp Canadian Realty Finance Corporation has announced:

that the Class A and Series 1 Preferred Shareholders of the Corporation, each voting separately as a class, voted today to approve a special resolution to effect the following proposed transaction (the “Transaction”):
  • •the acquisition of all of the issued and outstanding shares of C.A. Bancorp Ltd., the manager of the Corporation, (the “Manager”) by Green Tree Capital Management Corp. (“Green Tree”);
  • •an amendment to the commitment agreement (the “Commitment Agreement”) dated January 31, 2008 between the Corporation and C.A. Bancorp Inc., the parent corporation of the Manager, (the “Parent”) to permit the assignment by the Parent of the Commitment Agreement to Green Tree and the release of the Parent from any further obligations under the Commitment Agreement; and
  • •an amendment to the management agreement between the Manager and the Corporation to provide that the Manager is not entitled to payment of a termination fee where the management agreement is terminated by the Corporation in the context of a material breach or default.

The Transaction is expected to be completed on or about May 11, 2011.

I had recommended a “No” vote Ah, well, we’ll just have to see what happens.

RF.PR.A is not tracked by HIMIPref™.

Some Good Papers on Regulatory Capture

May 5th, 2011

Nicholas Dorn, Erasmus University Rotterdam – Erasmus School of Law, Ponzi Finance, Regulatory Capture and the Credit Crunch:

The unfolding financial market instability provokes questions about the safety of all financial investments and, in doing so, reveals some large investment frauds, which can flourish only in buoyant markets. More broadly, as is now recognized by market regulators, there has been insufficient attention to fraudulent practices, conflicts of interest and evasion of regulatory controls, notably in relation to promotion of sub-prime mortgages, the role of ratings agencies, the packaging and selling on of the resulting debt instruments to investors worldwide, and circumvention of risk controls. So, where were the regulators? This paper proposes that institutional capture of the regulators by the market – in terms of adoption by the regulators of technical assumptions, ‘models’ and data defined as relevant by the private sector – provides a narrative on ‘what went wrong’. Moving towards a vision of the way forward for regulatory reform, the paper argues against the exclusionary notion of regulation that makes it a matter of coordination between those possessing technical expertise, separated off from moral questions, public politics and debate amongst citizens. The literature on security governance and ‘public goods’ is explored as one way of opening up the debate on financial regulation, reversing regulatory capture.

Daniel C. Hardy, Monetary and Financial Systems Department, International Monetary Fund, Regulatory Capture in Banking:

Banks will want to influence the bank regulator to favor their interests, and they typically have the means to do so. It is shown that such “regulatory capture” in banking does not imply ineffectual regulation; a “captured” regulator may impose very tight, costly prudential requirements to reduce negative spillovers of risk-taking by weaker banks. In these circumstances, differences in the regulatory regime across jurisdictions may persist because each adapts its regulations to suit its dominant incumbent institutions.

The Report of the Second Warwick Commission, The Warwick Commission on International Financial Reform: In Praise of Unlevel Playing Fields:

Capture was helped by the emergent view that public agencies ought to be independent of politics. As part of this process, a policy role for the private sector was legitimised. Intellectual capture, in turn, also relates to the ‘group-think’ that has taken hold in the making of financial policy. Regulatory and supervisory arrangements are discussed and agreed in expert and apolitical terms, bringing like-minded individuals who, whether in the official, private or academic sphere, can reach common understandings based on shared training, practice and access to economic ideas. Both in the national arena and, increasingly, in the international fora around the Basel process, such networks are technocratic, informal, politically unaccountable and have a narrowly defined understanding of financial policy. They are also often de-coupled from other economic considerations or broader questions about the role of finance.

It is important to break ‘group-think’ and introduce new voices and interests to debates about financial regulation.

Independent Evaluation Office of the International Monetary Fund, IMF Performance in the Run-Up to the Financial and Economic Crisis IMF Surveillance in 2004–07:

On the other side, the report ultimately ascribes the failure to warn about the crisis to “groupthink,” which is as much a description as an explanation. The report could have looked more at the extent to which staff considered contrarian views (arguably, they did) and how they judged these positions against the much larger evidence marshaled by the mainstream (clearly, they judged incorrectly). This also speaks to the IEO recommendation to increase financial expertise and staff diversity—which undoubtedly is correct, and indeed a goal of the institution, but does not follow from the pre-crisis experience: the vast majority of financial experts, from a diversity of countries and backgrounds, also failed to see the crisis coming. (Ironically, the prescient individuals cited by the report are from remarkably undiverse backgrounds—i.e., macroeconomists with PhDs from U.S.-U.K. universities.) That said, the recommendation to access thoughtful and diverse opinion is a very important one, and one that we return to below.

May 4, 2011

May 4th, 2011

The Bank of Canada has released a discussion paper by Gordon Wilkinson titled The Behaviour of Consumer Prices Across Provinces:

Measures of core inflation enable a central bank to distinguish price movements that are transitory and generated by non-monetary events from those that are more permanent and related to prior monetary policy decisions. The author uses standard statistical measures to assess the behaviour of consumer prices across provinces and identify price components with more divergent price patterns. The results indicate that energy, shelter and tobacco prices are the most volatile across provinces. Very large price movements restricted to one or a few provinces suggest that the forces or events triggering those movements may be province specific and unrelated to national demand pressures. Such results suggest that constructing a type of core inflation measure called the “trimmed mean” that excludes components with exceptionally large price changes at the provincial level may offer an alternative means of assessing underlying inflationary pressures.

Speaking of inflation, Statscan is changing the shopping basket:

For inflation’s scorekeepers, it’s out with film developing and in with tablet computers and smartphones.

Statistics Canada is revamping its approach to measuring the price of goods to reflect new realities about today’s consumer experience: Spending habits are changing more rapidly, and the lifespan of products is growing ever shorter.

This month, for the first time in four years, the federal agency is updating the basket of goods and services that measures price changes, adding new items like tablet computers, smart phones and dried lentils, and de-emphasizing older ones, such as photography services.

And starting next year, the agency plans to revise the basket every three years or less because consumption patterns are changing more quickly. Statscan has typically updated the basket every four or five years. Similar agencies in other countries, such as Britain or Sweden, update their measures every year or two.

The FRBB has released a Public Policy Discussion Paper by Geoffrey M.B. Tootell titled Do Commodity Price Spikes Cause Long-Term Inflation?:

This public policy brief examines the relationship between trend inflation and commodity price increases and finds that evidence from recent decades supports the notion that commodity price changes do not affect the long-run inflation rate. Evidence from earlier decades suggests that effects on inflation expectations and wages played a key role in whether commodity price movements altered trend inflation. This brief is based on a memo to the president of the Federal Reserve Bank of Boston as background to a meeting of the Federal Open Market Committee.

There’s a new Maple issuer:

The ranks of so-called Maple issues by non-financial borrowers has expanded by one with news Tuesday that Korea Gas Corporation priced and raised a $300-million, five-year offering.

KOGAS set up in 1983, is a public company which has grown to become the world’s largest LNG import company, originally planned to raise $250-million but raised more because of strong institutional demand. The A+ rated notes came with a coupon of 4.58% and a yield of 4.585% – for a spread of 203 basis points or two points tighter than what was presented in the marketing period.

The deal is the first by Kogas in Canada. Indeed the financing is the first Maple by either an Asian or South Korean borrower.

The market, both in its heyday and since its return to life a year back, is dominated by financial institutions. But investors soon get their fill of such issues and clamor for borrowings by industrial companies. Kogas has met those wishes and becomes the third non-financial issuer in the past eight months. Earlier, Molson Coors Brewing Co. ($500-million) and Anheuser-Busch InBev Worldwide Inc. ($600-million) raised capital in this market.

So fat this year $2.25-billion has been raised via the sale of Maple bonds, For the same period last year $1.8-billion. For all of 2010 $4.5-billion was raised. “I expect that demand will stay strong and issuance for the year will exceed last years,” added [John] Tkach [of Scotia Capital].

This issue is being sold on the exempt market, so you can’t buy it, suckers. The regulators have determined that you’re not smart enough.

OSFI’s Julie Dickson has delivered a 2011 Financial Services Invitational Forum, April 27, 2011. There was nothing very new or interesting in the content, but I was pleased to see that at least some attempt was made to support some of the assertions. One reference was to a letter to the Financail Times from Prof. Anat Admati of Stanford and others:

Banks’ high leverage and the resulting fragility and systemic risk contributed to the near collapse of the financial system. Basel III is far from sufficient to protect the system from recurring crises. If a much larger fraction, at least 15 per cent, of banks’ total, non-risk-weighted, assets were funded by equity, the social benefits would be substantial. And the social costs would be minimal, if any.

Debt that converts to equity, so-called “contingent capital”, is complex to design and tricky to implement. Increasing equity requirements is simpler and more effective.

Another reference was to a Bank of England discussion paper by David Miles, Jing Yang and Gilberto Marcheggiano titled Optimal Bank Capital:

This paper reports estimates of the long-run costs and benefits of banks funding more of their assets with loss-absorbing capital, or equity. Measuring those costs requires careful consideration of a wide range of issues about how shifts in funding affect required rates of return and on how costs are influenced by the tax system; it also requires a clear distinction to be drawn between costs to individual institutions (private costs) and overall economic (or social) costs. Without a calculation of the benefits from having banks use more equity no estimate of costs — however accurate — can tell us what the optimal level of bank capital is. We use empirical evidence on UK banks to assess costs; we use data from shocks to incomes from a wide range of countries over a long period to assess risks to banks and how equity funding (or capital) protects against those risks. We find that the amount of equity capital that is likely to be desirable for banks to use is very much larger than banks have used in recent years and also higher than targets agreed under the Basel III framework.

The US housing market is still sick:

U.S. lenders should consider debt-for- equity swaps to help homeowners who face default or owe more than their properties are worth, mortgage pioneer Lewis Ranieri said.

“If his house was $220,000, and now it’s $90,000, give me the keys, I give you a lease for seven years,” Ranieri, chairman of investment company Ranieri Partners LLC, said during a panel discussion at the Milken Institute Global Conference in Beverly Hills, California. “If you behave well, I will give you back the house.”

As many as 11 million troubled mortgages are weighing on the U.S. housing market, said Ranieri, who helped Salomon Brothers become Wall Street’s most profitable firm in the 1980s by packaging home loans into securities. Distressed sales made up 40 percent of transactions in March, the National Association of Realtors said April 20. Home prices fell 3.3 percent in February from a year earlier, according to the S&P/Case-Shiller measure of 20 cities.

I don’t understand how Ranieri’s idea can be described as a debt for equity swap (if you have to give it back, you don’t own it, do you?) but doubtless there’s some explanation.

Of much more interest than all this ephemeral financial stuff is the results of the NASA relativity test:

Gravity Probe B, built by Lockheed Martin Corp. (LMT) and designed by scientists from Stanford University near Palo Alto, California, measured how space and time are warped by gravitational bodies, a phenomenon called the geodetic effect. The probe launched in 2004 also analyzed frame-dragging, the way spinning objects pull space and time around them.

The effects were demonstrated by having Gravity Probe B point at a star, IM Pegasi, while orbiting Earth. If gravity didn’t affect space and time, the gyroscopes aboard the probe would point in the same direction forever during their orbit, as Isaac Newton had theorized. Instead, they showed tiny, measurable changes in the direction of their spin as Earth’s gravity tugged at them, as Einstein had predicted.

The project was one of the longest-running efforts in the U.S. space agency’s history, beginning in 1963, and cost about $750 million, NASA spokesman Trent Perrotto said today in a telephone interview. The findings were the culmination of 49 years of work by [Stanford physicist Francis] Everitt, who came to Stanford in 1962 to help build the most precise gyroscope ever designed and produced, according to NASA.

Forty-nine years! I think we can allow Dr. Everitt a day off now, right? Then he can work on the Higgs boson.

It was a strong day in the Canadian preferred share market, with PerpetualDiscounts roaring ahead 42bp, FixedResets winnning 15bp and DeemedRetractibles gaining 14bp. The Performance Highlights table, while hardly lengthy, was comprised entirely of gainers. Volume was good.

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 -0.0353 % 2,437.0
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.0353 % 3,665.3
Floater 2.47 % 2.26 % 39,268 21.62 4 -0.0353 % 2,631.4
OpRet 4.86 % 3.57 % 61,053 1.19 9 -0.0513 % 2,419.4
SplitShare 5.20 % -1.79 % 74,968 0.61 6 0.0598 % 2,499.2
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0513 % 2,212.4
Perpetual-Premium 5.74 % 5.62 % 144,729 2.35 9 0.0000 % 2,055.4
Perpetual-Discount 5.56 % 5.59 % 121,736 14.44 15 0.4245 % 2,133.6
FixedReset 5.16 % 3.39 % 210,354 2.89 57 0.1467 % 2,300.5
Deemed-Retractible 5.22 % 5.01 % 314,348 8.09 53 0.1381 % 2,103.9
Performance Highlights
Issue Index Change Notes
PWF.PR.P FixedReset 1.06 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-03-01
Maturity Price : 25.00
Evaluated at bid price : 25.70
Bid-YTW : 3.79 %
BAM.PR.M Perpetual-Discount 1.08 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-05-04
Maturity Price : 21.52
Evaluated at bid price : 21.52
Bid-YTW : 5.59 %
GWO.PR.I Deemed-Retractible 1.09 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.40
Bid-YTW : 6.47 %
PWF.PR.L Perpetual-Discount 1.35 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-05-04
Maturity Price : 23.04
Evaluated at bid price : 23.25
Bid-YTW : 5.51 %
Volume Highlights
Issue Index Shares
Traded
Notes
HSE.PR.A FixedReset 81,133 Nesbitt crossed 50,000 at 25.70.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.70
Bid-YTW : 3.98 %
PWF.PR.F Perpetual-Discount 63,912 Nesbitt crossed 60,000 at 23.81.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-05-04
Maturity Price : 23.55
Evaluated at bid price : 23.82
Bid-YTW : 5.54 %
MFC.PR.B Deemed-Retractible 59,037 RBC crossed 39,200 at 21.81.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.67
Bid-YTW : 6.50 %
TRP.PR.B FixedReset 44,790 Desjardins bought 10,700 from anonymous at 25.20 and crossed 17,700 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-07-30
Maturity Price : 25.00
Evaluated at bid price : 25.26
Bid-YTW : 3.80 %
RY.PR.A Deemed-Retractible 41,765 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.87
Bid-YTW : 4.99 %
MFC.PR.A OpRet 36,410 RBC crossed 35,000 at 25.75.
YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2015-12-18
Maturity Price : 25.00
Evaluated at bid price : 25.70
Bid-YTW : 3.57 %
There were 41 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
CIU.PR.B FixedReset Quote: 27.89 – 28.35
Spot Rate : 0.4600
Average : 0.3299

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-01
Maturity Price : 25.00
Evaluated at bid price : 27.89
Bid-YTW : 3.28 %

TRI.PR.B Floater Quote: 23.05 – 23.75
Spot Rate : 0.7000
Average : 0.5767

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-05-04
Maturity Price : 22.77
Evaluated at bid price : 23.05
Bid-YTW : 2.26 %

PWF.PR.A Floater Quote: 23.49 – 23.83
Spot Rate : 0.3400
Average : 0.2193

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-05-04
Maturity Price : 23.19
Evaluated at bid price : 23.49
Bid-YTW : 2.20 %

PWF.PR.M FixedReset Quote: 26.76 – 27.00
Spot Rate : 0.2400
Average : 0.1666

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-02
Maturity Price : 25.00
Evaluated at bid price : 26.76
Bid-YTW : 3.41 %

BNS.PR.Z FixedReset Quote: 24.50 – 24.70
Spot Rate : 0.2000
Average : 0.1537

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.50
Bid-YTW : 4.02 %

CU.PR.B Perpetual-Premium Quote: 25.37 – 25.64
Spot Rate : 0.2700
Average : 0.2241

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-07-01
Maturity Price : 25.00
Evaluated at bid price : 25.37
Bid-YTW : 5.63 %

RF.PR.A Reorg Meeting – This Is Getting Interesting!

May 4th, 2011

As noted in the post RF.PR.A Special Meeting Adjourned, the special meeting to decide on the reorganization of C.A. BANCORP CANADIAN REALTY FINANCE CORPORATION was adjourned from the original date of April 25, 2011 until tomorrow, May 5, 2011 at 4:00 p.m. EST, due to lack of quorum.

Now, Barry Critchley reports:

Pref shareholders are concerned with the credit risk they are being asked to assume if Green Tree acquires the management contract. In short, despite what C.A. Bancorp says about Green Tree’s “experienced team” and “enhanced infrastructure,” no one knows how successful the new team will be.

Can they run the commercial mortgage business well enough to generate enough income to continue to pay out on the prefs? Currently, pref shareholders receive fixed quarterly distributions of $0.4219 per share or 6.75% per annum. At the end of 2010, the fair value of the prefs was $31.1 million, or $21.18 per share.

But there’s more to it than that! There’s an external party opposed to the reorganization that has been scooping up shares in the present manager, CABancorp:

One investor, New York-based CDJ Global Catalyst, which owns 15.1% of C.A. Bancorp, said last week it disagrees with the realization strategy and indicated in a release it has had discussions and exchanged correspondence with C.A. Bancorp’s directors. CDJ, which also indicated it may “initiate proposals and/or transactions with a view to enhancing and protecting shareholder value,” couldn’t be reached for comment. It has been a steady buyer of C.A. Bancorp shares with its most recent purchase (251,400 shares) being bought at an average price of $2.16 a share. Book value is $2.53.

CDJ has been diligently writing press releases; the most recent, released April 27, is titled CDJ Announces Acquisition of Shares of C.A. Bancorp Inc.:

CDJ Global Catalyst LLC (“CDJ”) announced that from March 10, 2011 until April 26, 2011, CDJ acquired, for one or more of its managed client accounts in respect of which it exercises sole discretion, an aggregate of 251,400 common shares of C.A. Bancorp Inc. (TSX:BKP) (“CAB”) representing approximately 2% of the total issued common shares of CAB. The common shares were purchased for an average price of $2.16.

Combined with the shares held by client accounts in respect of which CDJ exercises sole discretion, CDJ now has control over 1,856,651 common shares, representing approximately 15.1% of the total issued and outstanding common shares of CAB.

CDJ intends from time to time to seek to continue to have discussions with representatives of CAB and its investee, C.A. Bancorp Canadian Realty Finance Corporation, (the “Subsidiary”).

CDJ strongly disagrees with CAB’s proposed Realization Strategy (as such term is defined in CAB’s public record), including the proposed sale of its interest in C.A. Bancorp Canadian Realty Finance Corp.

As a result, CDJ may, either alone or with others, consider and/or initiate proposals and/or transactions with a view to enhancing and protecting shareholder value, including the value of its investment to date. Such alternative proposals and/or transactions may include CDJ, either alone or with others, (i) seeking to influence decisions of CAB’s management and directors including, without limitation, by seeking representation by membership or through observer status on the board of directors or otherwise; (ii) seeking to add nominees designated by the Offeror to CAB’s board of directors, which could include expanding the size of the board of directors and/or removing individuals from CAB’s board of directors; and (iii) acquiring some or all of the outstanding securities of CAB or the Subsidiary. Such alternative proposals and/or transactions may also include CDJ supporting others in an alternative proposal and/or transaction.

CDJ may, from time to time and at any time, acquire additional common shares of CAB and/or its Subsidiary and/or other equity securities of the Company or the Subsidiary (collectively, the “Securities”) in the open market or otherwise and reserves the right to dispose of any and all of its Securities in the open market or otherwise, at any time and from time to time, and to engage in hedging or similar transactions with respect to the Securities.

At the present time, CDJ does not intend to acquire 20% or more of any class of Securities of the Company or the Subsidiary.

I continue to recommend that preferred shareholders vote “No” to the change in manager.

May 3, 2011

May 3rd, 2011

The FRB Cleveland has released the April, 2011, edition of Economic Trends.

There will be a conference on The Future of Life-Cycle Saving & Investing sponsored by the Boston Fed and others at the end of May.

The Portuguese bail-out has been agreed:

Portugal reached an agreement with officials preparing its European Union-led bailout that will provide as much as 78 billion euros ($116 billion) in aid and allow more time to reduce the country’s budget deficit.

The three-year plan set goals for a budget deficit of 5.9 percent of gross domestic product this year, 4.5 percent in 2012 and 3 percent in 2013, Prime Minister Jose Socrates said in Lisbon today. The government in March targeted a deficit of 4.6 percent this year, 3 percent in 2012 and 2 percent in 2013.

It was another mixed day in the Canadian preferred share market, but this one was much calmer: PerpetualDiscounts lost 10bp, FixedResets gained 6bp and DeemedRetractibles were basically flat. There was only one entry in the Performance Highlights table. Volume was very light.

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 -0.0118 % 2,437.9
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.0118 % 3,666.6
Floater 2.47 % 2.26 % 38,221 21.62 4 -0.0118 % 2,632.3
OpRet 4.90 % 3.30 % 59,456 2.04 8 0.1780 % 2,420.7
SplitShare 5.21 % -1.94 % 75,011 0.62 6 0.0240 % 2,497.7
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.1780 % 2,213.5
Perpetual-Premium 5.78 % 5.60 % 112,712 1.11 8 0.0397 % 2,055.4
Perpetual-Discount 5.57 % 5.59 % 146,657 14.41 16 -0.0983 % 2,124.6
FixedReset 5.17 % 3.39 % 213,398 2.89 57 0.0638 % 2,297.1
Deemed-Retractible 5.22 % 5.04 % 315,682 8.13 53 0.0023 % 2,101.0
Performance Highlights
Issue Index Change Notes
CM.PR.K FixedReset -1.59 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 26.67
Bid-YTW : 3.25 %
Volume Highlights
Issue Index Shares
Traded
Notes
SLF.PR.C Deemed-Retractible 86,838 Scotia crossed 59,400 at 21.25; Desjardins crossed 13,200 at the same price.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.25
Bid-YTW : 6.50 %
TD.PR.I FixedReset 85,148 RBC crossed two blocks of 40,000 each at 27.31.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 27.33
Bid-YTW : 3.31 %
BNS.PR.Y FixedReset 45,423 RBC bought 37,300 from anonymous at 25.00.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.02
Bid-YTW : 3.64 %
TRP.PR.A FixedReset 37,992 RBC crossed 25,000 at 25.90.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-01-30
Maturity Price : 25.00
Evaluated at bid price : 25.91
Bid-YTW : 3.67 %
CIU.PR.A Perpetual-Discount 25,800 Desjardins crossed 25,000 at 22.65.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-05-03
Maturity Price : 22.49
Evaluated at bid price : 22.65
Bid-YTW : 5.16 %
BNS.PR.K Deemed-Retractible 24,588 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.96
Bid-YTW : 4.85 %
There were 22 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
HSB.PR.E FixedReset Quote: 27.40 – 27.80
Spot Rate : 0.4000
Average : 0.2634

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-30
Maturity Price : 25.00
Evaluated at bid price : 27.40
Bid-YTW : 3.71 %

CM.PR.K FixedReset Quote: 26.67 – 27.00
Spot Rate : 0.3300
Average : 0.2275

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 26.67
Bid-YTW : 3.25 %

PWF.PR.I Perpetual-Premium Quote: 25.17 – 25.40
Spot Rate : 0.2300
Average : 0.1668

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-05-30
Maturity Price : 25.00
Evaluated at bid price : 25.17
Bid-YTW : 5.42 %

CM.PR.L FixedReset Quote: 27.68 – 27.95
Spot Rate : 0.2700
Average : 0.2160

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-30
Maturity Price : 25.00
Evaluated at bid price : 27.68
Bid-YTW : 2.91 %

ELF.PR.G Deemed-Retractible Quote: 20.35 – 20.67
Spot Rate : 0.3200
Average : 0.2673

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.35
Bid-YTW : 7.35 %

TD.PR.E FixedReset Quote: 27.16 – 27.36
Spot Rate : 0.2000
Average : 0.1481

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-30
Maturity Price : 25.00
Evaluated at bid price : 27.16
Bid-YTW : 3.36 %

BofA Maple Sub-Debt: Pretend-Maturity Will Be Ignored

May 3rd, 2011

Boyd Erman of the Globe & Mail reports in a piece titled Bank of America shocks Maple market:

Bank of America (BAC-N12.680.342.76%) has broken an unwritten rule and shocked the Canadian bond market by deciding not to redeem a $500-million bond issue.

But the unwritten, wink-and-nod agreement with the investors who bought them was that the bonds would be called at the end of five years so that investors would never have to face the lower rates.

Bank of America has decided not to call the bonds and will take advantage of the lower rates. For investors in the bonds, it means lower prices and lower interest income, and a tough decision about what to do next.

My suggestion is that they make a note to read the terms of the issue next time, but what do I know?

The bonds were originally sold with a coupon of 4.81 per cent. Now, under the floating structure, they will pay interest rate at a short-term benchmark plus a fraction of a percentage point. At the moment, that works out to about 1.8 per cent.

The bonds are now being quoted at about 96 to 97 cents on the dollar by some desks after being marked at par in the days before this on expectations that they would be called at 100 cents on the dollar, market sources said.

The comments on the Globe site are a hoot.

There’s not much information available on this issue, but it’s mentioned briefly in the RBC-CM Maple Guide of 2H08 – with all the pseudo-analysis based on a certainty of call, of course, as is usual with subordinated debt.

I last reviewed this topic in the post Bank Sub-Debt Redemptions.

May 2, 2011

May 2nd, 2011

The drive to protect incompetent traders continues:

U.S. prosecutors have joined regulators’ investigation into whether some high-speed traders are manipulating markets by posting and immediately canceling waves of rapid-fire orders, two officials said.

Justice Department investigators are “working closely” with the Securities and Exchange Commission to review practices “that are potentially manipulative, like quote-stuffing,” Marc Berger, chief of the Securities and Commodities Task Force at the U.S. Attorney’s Office for the Southern District of New York, said today at an event in New York.

While regulators previously said they were probing possibly abusive algorithmic trading practices, the attention of criminal authorities ramps up the stakes.

While researching something else, I ran across an opinion piece by Ed Waitzer titled New IIROC plan avoids putting duty on advisors to act in clients’ interest that illustrates the complete inability of professional regulators to analyze the simplest transaction. In talking about the “fiduciary responsibility” issue, he states:

To understand the difference between a “suitability” and “best-interest” standard, think of a student seeking advice at an electronics store about her need for a laptop. The salesperson recommends a highly priced unit with an expensive extended warranty — all designed to generate the highest commission. The laptop is suitable — it will satisfy the student’s needs. It clearly isn’t the best solution and a disclosure obligation isn’t likely to stand in the way of a motivated salesperson. If the salesperson had been bound by a “best-interest” standard, he would recommend a simpler, more reliable and affordable unit.

What utter balderdash. If the salesperson was bound by the “best-interest” standard and was being paid on commission, he would simply ensure that he had a plausible rationale for recommending the more profitable product as being in the student’s best interest. “What if it breaks? You’re on a tight budget! It might break at a bad time! You’re better off buying the extended warranty and fixing your costs. Then you can concentrate on your studies, instead of worrying about malfunctions in your machine.” No purpose would be served by a “best-interest” standard in the presence of commissioned sales except for the – very important, with respect to the employment prospects of some – generation of paperwork and checklists for the electronic consumer goods’ salesmen’s regulator.

I get hate mail whenever I write about the fiduciary responsibility issue – such as January 24 – so all I can suggest is: if you want a fiduciary, hire one. I’m a Portfolio Manager, for instance. I get paid for Assets Under Management, not for transactions. I’m a fiduciary – in fact, I’m legally (OSC) and ethically (CFA) required to be. If you don’t want a fiduciary, don’t hire a Portfolio Manager – hire a stockbroker or mutual fund salesman. It’s really quite simple.

It looks like Berkshire Hathaway has been stung by recent criticism and is now attempting to worm its way back into the good graces of morons by criticisizing investment banks:

Charles Munger, whose Berkshire Hathaway Inc. (BRK/A) holds $5 billion of options on Goldman Sachs Group Inc. (GS) stock, said the role of investment bankers in helping to mask Greece’s financial troubles was “perfectly disgusting.”

“Wall Street to some extent is deliberately trying to profit from sin, and I think it’s a mistake,” Munger told reporters yesterday after Berkshire’s annual press conference in Omaha, Nebraska. “Why should an investment banker go to Greece to teach them how to pretend their finances are different from what they really are? Why isn’t that a perfectly disgusting bit of human behavior?”

Goldman’s conduct with respect to Greece was discussed on PrefBlog when the issue became fashionable (see, for example, March 1, 2010). I eagerly await Munger’s next pronouncement, which may be on the topic of whether lawyers should represent Bad People. Still, I can’t blame him for chanting the slogan of the ‘finance as a cooperative game’ crowd – the Berkshire / Buffett / Munger mystique is worth what? 10%? 20% of their stock price? Who wants to guess?

The US Administration recently announced drastic measures against a Public Enemy. You know who I mean:

Citing an epidemic of childhood obesity, regulators are taking aim at a range of tactics used to market foods high in sugar, fat or salt to children, including the use of cartoon characters like Toucan Sam, the brightly colored Froot Loops pitchman, who appears in television commercials and online games as well as on cereal boxes.

Regulators are asking food makers and restaurant companies to make a choice: make your products healthier or stop advertising them to youngsters.

“Toucan Sam can sell healthy food or junk food,” said Dale Kunkel, a communications professor at the University of Arizona who studies the marketing of children’s food. “This forces Toucan Sam to be associated with healthier products.”

Walk the plank, Cap’n!

It was another mixed day for the Canadian preferred share market, with DeemedRetractibles bouncing back (a little, anyway) from a sub-par month of April: PerpetualDiscounts lost 1bp, FixedResets gained 13bp and DeemedRetractibles won 31bp. The badly beaten up DeemedRetractibles from insurers were prominent on the performance highlights table. Volume was good. And now it’s time to watch the election news…

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 0.5562 % 2,438.2
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.5562 % 3,667.0
Floater 2.47 % 2.26 % 38,192 21.62 4 0.5562 % 2,632.6
OpRet 4.91 % 3.20 % 59,032 2.04 8 0.0626 % 2,416.4
SplitShare 5.21 % -2.23 % 77,671 0.62 6 0.0750 % 2,497.1
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0626 % 2,209.6
Perpetual-Premium 5.78 % 5.65 % 116,502 1.11 8 0.0149 % 2,054.6
Perpetual-Discount 5.57 % 5.58 % 147,548 14.40 16 -0.0119 % 2,126.6
FixedReset 5.17 % 3.44 % 218,609 2.89 57 0.1330 % 2,295.7
Deemed-Retractible 5.22 % 5.04 % 314,948 8.12 53 0.3083 % 2,100.9
Performance Highlights
Issue Index Change Notes
GWO.PR.I Deemed-Retractible 1.00 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.13
Bid-YTW : 6.62 %
SLF.PR.B Deemed-Retractible 1.06 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.94
Bid-YTW : 5.93 %
TD.PR.C FixedReset 1.10 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-02
Maturity Price : 25.00
Evaluated at bid price : 26.70
Bid-YTW : 3.10 %
SLF.PR.E Deemed-Retractible 1.14 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.36
Bid-YTW : 6.49 %
SLF.PR.D Deemed-Retractible 1.14 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.26
Bid-YTW : 6.49 %
BNS.PR.O Deemed-Retractible 1.21 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-05-26
Maturity Price : 25.00
Evaluated at bid price : 26.00
Bid-YTW : 4.88 %
SLF.PR.C Deemed-Retractible 1.24 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.30
Bid-YTW : 6.47 %
PWF.PR.A Floater 1.25 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-05-02
Maturity Price : 23.19
Evaluated at bid price : 23.49
Bid-YTW : 2.20 %
MFC.PR.C Deemed-Retractible 1.28 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.37
Bid-YTW : 6.50 %
BAM.PR.O OpRet 1.44 % YTW SCENARIO
Maturity Type : Option Certainty
Maturity Date : 2013-06-30
Maturity Price : 25.00
Evaluated at bid price : 26.05
Bid-YTW : 3.20 %
Volume Highlights
Issue Index Shares
Traded
Notes
BNS.PR.O Deemed-Retractible 81,675 Nesbitt crossed 50,000 at 26.01.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-05-26
Maturity Price : 25.00
Evaluated at bid price : 26.00
Bid-YTW : 4.88 %
BMO.PR.L Deemed-Retractible 69,173 Nesbitt crossed 60,000 at 25.85.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-24
Maturity Price : 25.00
Evaluated at bid price : 25.76
Bid-YTW : 5.18 %
TRP.PR.C FixedReset 36,135 Scotia crossed 25,000 at 25.54.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-02-29
Maturity Price : 25.00
Evaluated at bid price : 25.55
Bid-YTW : 3.90 %
TD.PR.G FixedReset 35,911 RBC crossed 25,000 at 27.25.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-30
Maturity Price : 25.00
Evaluated at bid price : 27.16
Bid-YTW : 3.36 %
HSB.PR.E FixedReset 35,406 RBC crossed 25,000 at 27.35.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-30
Maturity Price : 25.00
Evaluated at bid price : 27.35
Bid-YTW : 3.76 %
BMO.PR.Q FixedReset 31,060 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.02
Bid-YTW : 3.85 %
There were 37 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
TRI.PR.B Floater Quote: 23.05 – 23.72
Spot Rate : 0.6700
Average : 0.4321

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-05-02
Maturity Price : 22.77
Evaluated at bid price : 23.05
Bid-YTW : 2.26 %

FTS.PR.G FixedReset Quote: 26.26 – 26.73
Spot Rate : 0.4700
Average : 0.3457

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-10-01
Maturity Price : 25.00
Evaluated at bid price : 26.26
Bid-YTW : 3.39 %

BAM.PR.X FixedReset Quote: 24.63 – 24.96
Spot Rate : 0.3300
Average : 0.2165

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-05-02
Maturity Price : 22.97
Evaluated at bid price : 24.63
Bid-YTW : 4.38 %

NA.PR.N FixedReset Quote: 26.15 – 26.50
Spot Rate : 0.3500
Average : 0.2617

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-09-14
Maturity Price : 25.00
Evaluated at bid price : 26.15
Bid-YTW : 3.19 %

CIU.PR.B FixedReset Quote: 27.68 – 27.94
Spot Rate : 0.2600
Average : 0.1733

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-01
Maturity Price : 25.00
Evaluated at bid price : 27.68
Bid-YTW : 3.54 %

NA.PR.P FixedReset Quote: 27.75 – 28.05
Spot Rate : 0.3000
Average : 0.2141

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-17
Maturity Price : 25.00
Evaluated at bid price : 27.75
Bid-YTW : 2.58 %