Archive for October, 2009

Big 8 Split to Relever: DBRS puts BIG.PR.B on Review-Negative

Thursday, October 29th, 2009

Dominion Bond Rating Service has announced:

has today placed the Pfd-2 (high) rating of the Class B Preferred Shares, Series 1 (the Class B Preferred Shares) issued by Big 8 Split Inc. (the Company) Under Review with Negative Implications.

The Company currently has 1,204,980 Class B Preferred Shares and an equal number of Class A capital shares (the Capital Shares) outstanding. The Class B Preferred Shares receive a fixed cumulative quarterly distribution yielding 7.00% annually on the issue price of $12 per share. The scheduled final maturity date of the Class B Preferred Shares is December 15, 2013.

The Company has filed a preliminary prospectus for the issuance of Class C Preferred Shares, Series 1 (the Class C Preferred Shares; collectively, with the Class B Preferred Shares, the Preferred Shares) and additional Capital Shares. The Company intends to declare and pay a dividend in Capital Shares to the current holders of the Capital Shares. The Company will then offer to issue a greater amount of Class C Preferred Shares than Capital Shares so that there will be an equal number of Capital Shares and Preferred Shares of the Company outstanding. The Class C Preferred Shares will rank pari passu with the Class B Preferred Shares with respect to return of principal and payment of dividends.

As of October 22, 2009, the net asset value (NAV) of the Company was $42.01 per unit, providing downside protection of approximately 71% to the Class B Preferred Shares. The re-leveraging of the Company described above at the time of issuance of the Class C Preferred Shares and additional Capital Shares will result in a lower amount of downside protection being available to the Class B Preferred Shares. Consequently, the rating on the Class B Preferred Shares has been placed Under Review with Negative Implications. Once the Class C Preferred Shares are issued, the Preferred Shares will benefit from the same amount of downside protection. Based on information received from TD Sponsored Companies Inc. (the Administrator and Promoter of the Company) to date, it is expected that the rating on the Class B Preferred Shares will be downgraded to Pfd-2 upon completion of the issuance of Class C Preferred Shares and additional Capital Shares.

The preliminary prospectus is on SEDAR:

A holder retracting Preferred Shares will receive a cash price per Preferred Share retracted equal to the amount, if any, by which 95% of the Unit Value exceeds the aggregate of (i) the average cost to the Company, including commissions, of purchasing a Capital Share in the market; and (ii) $1.00. See “Description of the Securities Distributed – Attributes of the Preferred Shares”.

Any outstanding Preferred Shares will be redeemed by the Company on December 15, 2013 (the “Redemption Date”) at a price per share (the “Preferred Share Redemption Price”) equal to the lesser of $12.00 and Unit Value.

The Company may also redeem Preferred Shares on December 15 of any year commencing in 2010 at a price per share equal to the Preferred Share Redemption Price to the extent that unmatched Capital Shares have been tendered for retraction under a Special Annual Retraction. See “Description of the Securities Distributed – Attributes of the Preferred Shares”.

In addition, the Board of Directors has the right to redeem the Preferred Shares then outstanding at the next Annual Retraction Payment Date if the market value of the Portfolio Shares held by the Company is $15,000,000 or less for two consecutive Valuation Dates.

It will be the policy of the Board of Directors of the Company to declare and pay quarterly distributions in an amount equal to the dividends received by the Company on the Portfolio Shares minus the dividends payable on the Company’s preferred shares and all administrative and operating expenses where the dividends on the Portfolio Shares exceed the dividends. It will be the policy of the Board of Directors of the Company to declare and pay quarterly distributions in an amount equal to the dividends received by the Company on the Portfolio Shares minus the dividends payable on the Company’s preferred shares and all administrative and operating expenses where the dividends on the Portfolio Shares exceed the dividends

These terms are heavily weighted weighted against the preferred shareholders (annual redemption possibility at par; poor retraction rights; no NAV test on distributions to Capital Unitholders) but … a fat coupon just might tip the scales. Sadly, the coupon on the new issue is not yet known – but most potential investors will be more interested in the four year term and good credit quality.

BIG.PR.B was last mentioned on PrefBlog when it was upgraded to Pfd-2(high) by DBRS. BIG.PR.B is not tracked by HIMIPref™.

October 28, 2009

Wednesday, October 28th, 2009

CIT amended terms on its exchange offer:

  • Extension of the expiration date of the offers and the solicitation of acceptances of the Plan of Reorganization only with respect to offers made by CIT Group Funding Company of Delaware LLC (“Delaware Funding”) from October 29, 2009 to November 5, 2009. The Early Tender Date for these notes is October 29, 2009,
  • Increased the interest rate payable on the Series B Notes from 9.0% per annum to 10.25% per annum.

… which sounds to me like the deal’s in trouble. They’ve also responded to Carl Icahn’s overtures (reported on PrefBlog on October 23) in a surprisingly mild-mannered way … but to no avail. Icahn’s stepping up the pressure:

Carl Icahn, who says he’s the largest bondholder of CIT Group Inc. with $2 billion of debt, stepped up his attacks on the lender’s restructuring plan as a deadline approaches tomorrow to avert collapse.

Icahn gave CIT an hour to respond late yesterday afternoon to his offer to provide $4.5 billion in financing, and threatened to sue the New York-based company if it chose a competing package from other bondholders. CIT said its plan to either exchange $30 billion of debt for new bonds and equity or file a pre-packaged bankruptcy is worth more to creditors.

Icahn, 73, who built his reputation in the 1980s as a corporate raider, said yesterday the investments are worth more in a traditional bankruptcy than in a so-called pre-packaged workout. He is proposing to buy “smaller” holders’ bonds for 60 cents on the dollar in a tender offer lasting 30 days if they reject CIT’s plans, “assuring them a floor price in the event the notes trade lower,” he said yesterday in a statement.

Egan-Jones says the pre-pack should be voted down:

CIT Group Inc. bondholders should reject a proposed $30 billion debt swap and pre-packaged bankruptcy plan designed to avert the 101-year-old commercial lender’s collapse, according to Egan-Jones Ratings Co.

CIT’s unsecured debt is worth about 90 cents on the dollar and senior creditors can expect close to full recovery, Egan- Jones President Sean Egan and analysts Kent Hughes and Gale Gillespie wrote in a report dated today.

And today, the secured facility was increased:

it has expanded its current $3 billion senior secured credit facility by an additional $4.5 billion. The new $4.5 billion tranche, which is being provided by a diverse group of lenders, including many of the Company’s bondholders, will be secured by substantially the same assets as the existing $3 billion tranche and any additional collateral that becomes available as a result of the Company’s refinancing of certain existing secured credit facilities.

The new $4.5 billion tranche matures in January 2012, and includes an option for the Company to extend all or a portion of the new tranche for an additional year. It is expected to close today and will be used to refinance a portion of the Company’s existing secured indebtedness, which may come due as a result of the restructuring, and for general corporate purposes.

The Company also addressed a commitment letter received yesterday from Carl Icahn to provide CIT a new $4.5 billion term loan. Although Mr. Icahn and his advisors had been in discussions with the Company for several days and were fully aware of CIT’s deadline, they provided the Company less than one hour to review and accept his commitment letter. Additionally, despite several requests from the Company for information and multiple deadline extensions, the Company has yet to receive a signed credit agreement and evidence of Mr. Icahn’s ability to fund the commitment.

As a result of the lack of evidence that Mr. Icahn has arranged sufficient funding at this time, CIT’s Board of Directors determined that the best interests of the Company and its stakeholders would be served by proceeding with the credit facility provided by a diverse group of lenders.

Norway has increased its policy rate:

Norges Bank raised its key interest rate a quarter point from a record low and signaled steeper increases than it previously forecast over the next three years as inflation accelerates and unemployment remains low.

The Oslo-based bank raised the overnight deposit rate to 1.5 percent, becoming the first European central bank to reverse its easing cycle since the credit crisis started to abate.

The bank expects underlying inflation, which adjusts for energy and taxes, to average 2.75 percent this year and 1.75 percent in 2010. The mainland economy will shrink 1.25 percent this year and grow 2.75 percent in 2010, it estimates.

The key rate will average 1.75 percent this year and 2.25 percent in 2010, rising to an average 4.25 percent by 2012, the bank said.

The AIG bail-out is providing providing fodder for conspiracy theorists:

The Federal Reserve Bank of New York said Tuesday that it had no choice but to instruct American International Group last November to reimburse the full amount of what it owed to big banks on derivatives contracts, a move that ended months of effort by the insurance giant to negotiate lower payments.

Fed officials offered the explanation in a rare response to a media report after Bloomberg News said that the New York Fed, led at the time by then-President Timothy F. Geithner, directed AIG to make the payments after it received a massive government bailout. The officials said AIG lost its leverage in demanding a better deal once the company had been saved from bankruptcy.

Lawmakers and financial analysts critical of the payouts say it amounted to a back-door bailout for big banks.

The precise cost to taxpayers of these decisions is difficult to determine. Bloomberg, quoting an industry source, reported Tuesday that AIG was aiming to pay just 40 percent of the $32.5 billion it owed to the banks. Using those figures, the report concluded that the government needlessly overpaid $13 billion.

New York Fed officials explained that the main reason creditors were willing for a time to accept less than full reimbursement was their fear of an AIG bankruptcy. The government’s rescue of the company removed that threat and left the company with virtually no way to wrestle concessions from the banks.

Just because conspiracy theorists are nuts doesn’t mean they’re always wrong!

The SEC released today Testimony Concerning Dark Pools, Flash Orders, High Frequency Trading, and Other Market Structure Issues. Interesting, although ultimately unsatisfying: I remain perplexed regarding the badness of flash orders and high-frequency trading:

while flash orders may potentially be providing benefits to certain traders, it may no longer serve the interests of long-term investors or the markets as a whole. The Commission has stated, both in adopting Regulation NMS and in proposing to ban flash orders, that the interests of long-term investors should be upheld as against those of professional short-term traders, when those interests are in conflict. The comment period on the proposal to ban flash orders remains open until November 23, and the staff and the Commission look forward to carefully analyzing the comments received.

It was another putrid period of poorly performing preferreds today, with PerpetualDiscounts down 20bp and FixedResets losing 11bp. Volume was off a bit (prefhound was putting his orders through Pure today), but still healthy.

PerpetualDiscounts now yield 6.05%, equivalent to 8.47% interest at the standard equivalency factor of 1.4x. Long Corporates now yield a hair under 6.0%, so let’s call the Pre-Tax Interest-Equivalent Spread (also called the Seniority Spread, according to me) 250bp, with all levels indistinguishable from those reported on October 21.

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 0.5390 % 1,477.4
FixedFloater 6.59 % 4.65 % 47,374 18.00 1 -2.4260 % 2,362.4
Floater 2.64 % 3.08 % 106,963 19.51 3 0.5390 % 1,845.7
OpRet 4.87 % -6.67 % 114,728 0.09 15 -0.0051 % 2,293.5
SplitShare 6.43 % 6.51 % 477,131 3.93 2 -0.3535 % 2,056.6
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0051 % 2,097.1
Perpetual-Premium 5.90 % 5.93 % 141,654 13.82 11 -0.0183 % 1,856.7
Perpetual-Discount 6.00 % 6.05 % 214,992 13.82 63 -0.2038 % 1,729.2
FixedReset 5.53 % 4.30 % 447,423 4.00 41 -0.1075 % 2,103.9
Performance Highlights
Issue Index Change Notes
BAM.PR.G FixedFloater -2.43 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-28
Maturity Price : 25.00
Evaluated at bid price : 16.49
Bid-YTW : 4.65 %
BNS.PR.P FixedReset -2.40 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-05-25
Maturity Price : 25.00
Evaluated at bid price : 25.19
Bid-YTW : 4.77 %
MFC.PR.A OpRet -1.71 % YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2015-12-18
Maturity Price : 25.00
Evaluated at bid price : 25.85
Bid-YTW : 3.58 %
GWO.PR.L Perpetual-Discount -1.66 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-28
Maturity Price : 22.97
Evaluated at bid price : 23.11
Bid-YTW : 6.18 %
POW.PR.B Perpetual-Discount -1.33 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-28
Maturity Price : 21.56
Evaluated at bid price : 21.56
Bid-YTW : 6.27 %
TD.PR.A FixedReset -1.28 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-02
Maturity Price : 25.00
Evaluated at bid price : 25.47
Bid-YTW : 4.51 %
GWO.PR.F Perpetual-Discount -1.26 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-28
Maturity Price : 23.99
Evaluated at bid price : 24.29
Bid-YTW : 6.14 %
PWF.PR.G Perpetual-Premium -1.19 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-28
Maturity Price : 23.76
Evaluated at bid price : 24.06
Bid-YTW : 6.16 %
TD.PR.Q Perpetual-Discount -1.15 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-28
Maturity Price : 23.96
Evaluated at bid price : 24.17
Bid-YTW : 5.82 %
RY.PR.C Perpetual-Discount -1.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-28
Maturity Price : 19.75
Evaluated at bid price : 19.75
Bid-YTW : 5.83 %
BAM.PR.P FixedReset 1.13 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-30
Maturity Price : 25.00
Evaluated at bid price : 26.85
Bid-YTW : 5.47 %
NA.PR.N FixedReset 1.16 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-09-14
Maturity Price : 25.00
Evaluated at bid price : 26.20
Bid-YTW : 3.95 %
ENB.PR.A Perpetual-Premium 1.20 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2009-11-27
Maturity Price : 25.00
Evaluated at bid price : 25.31
Bid-YTW : 0.84 %
BAM.PR.K Floater 1.98 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-28
Maturity Price : 12.85
Evaluated at bid price : 12.85
Bid-YTW : 3.08 %
Volume Highlights
Issue Index Shares
Traded
Notes
CIU.PR.B FixedReset 60,475 Desjardins crossed 50,000 at 28.00.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-01
Maturity Price : 25.00
Evaluated at bid price : 28.00
Bid-YTW : 4.17 %
SLF.PR.D Perpetual-Discount 47,778 RBC crossed 40,000 at 18.49.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-28
Maturity Price : 18.40
Evaluated at bid price : 18.40
Bid-YTW : 6.13 %
TRP.PR.A FixedReset 40,025 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-01-30
Maturity Price : 25.00
Evaluated at bid price : 25.28
Bid-YTW : 4.46 %
RY.PR.I FixedReset 34,255 RBC bought 10,000 from anonymous at 25.69.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-26
Maturity Price : 25.00
Evaluated at bid price : 25.57
Bid-YTW : 4.34 %
SLF.PR.B Perpetual-Discount 27,339 RBC crossed 22,900 at 19.88.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-28
Maturity Price : 19.80
Evaluated at bid price : 19.80
Bid-YTW : 6.14 %
W.PR.J Perpetual-Discount 25,800 RBC crossed 23,600 at 23.30.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-28
Maturity Price : 23.12
Evaluated at bid price : 23.38
Bid-YTW : 6.03 %
There were 31 other index-included issues trading in excess of 10,000 shares.

Alpha Trading, Pure and Preferred Shares

Wednesday, October 28th, 2009

Assiduous Reader prefhound writes in and says:

I have a question about two weird pref share trades that ocurred in my [REDACTED BY JH] account today.

I was buying something (after trying other prices) at an offer price of $22.40, so I put in a buy limit price of $22.40. I was filled at 22.39, but my trade volume and price does not show up in the daily quotes (high for this stock is given as 22.27; my volume and trade is not reported by the TSX and my fill made no difference to the offer price of 22.40 and number of lots).

Several hours later, I was selling something (again after trying higher prices) at a bid price of $21.58. I placed a limit sell at $21.58 but was filled at 21.59 (again one penny difference), but my trade volume and price do not show up again.

Is it possible that [REDACTED BY JH] is blindly internally matching bids and offers at a 1 cent difference to the market, then filling by a cross with me and not reporting the trade?

Alternatively, is this a “dark pool” or “rapid trading” issue?

I guess I am not supposed to be unhappy with internal crosses at 1 cent bonus to me, but I’m wondering if unreported trades don’t distort the market — my trade in the second stock is 5X the reported volume!

Your trade was almost certainly filled by an Alternative Trading System such as Alpha Trading Systems, which currently claims overall market share of 20% and challenges to become the primary market in some securities.

Now, it’s very nice to get filled a penny better than you expected – but there are issues for those among us who attempt to sell liquidity. If your limit order has been routed to the Toronto Stock Exchange, for example, and you look at only data feeds from the Exchange, you might be doing yourself out of a little money.

Say you put in a bid at 20.00 at a time when the Exchange is quoting the issue at 19.90-10. Immediatley afterwards, the Exchange will report the quote as 20.00-10 … so far, so good. But there could be ten bazillion market orders to sell coming down the pipe, all of them getting filled on Alpha at the Alpha bid of 20.01. Not only will you not get filled, but you won’t even know about these orders.

Alpha’s October Newsletter contains a discussion of their market data pricing strategy, and their website shows a list of authorized vendors of this data.

To get an idea of volumes and delayed quotes, you may wish to go to the sites of Alternative Trading Systems – I have added a category of links (in the right hand navigation panel) titled “Quotes (Delayed)” with some addresses. For example, the following data can be compiled for GWO.PR.H:

Trading in GWO.PR.H
2009-10-28
Exchange Range Volume Closing Quote
TMX 19.58-70 5,566 19.52-66, 2×1
Pure 19.61-73
(Last 10 Trades)
4,500 None-19.84, 0x5
Alpha Last trade 2009-10-20

OSFI Joins Contingent Capital Bandwagon

Wednesday, October 28th, 2009

The Office of the Superintendent of Financial Institutions (OSFI) has released a speech by Julie Dickson to the C.D. Howe Institute titled Considerations along the Path to Financial Regulatory Reform.

The most important part was the section on contingent capital:

Explore the use of contingent capital. This refers to sizeable levels of lower quality capital that could convert into high quality capital at pre-specified points, and clearly before an institution could receive government support. Such conversions could make use of triggers in the terms of a bank’s lower quality capital, while the bank remains a going-concern. This would add market discipline for even the largest banks during good times (as common shareholders could be significantly diluted in an adverse scenario), while stabilizing the situation by recapitalizing such banks if they fall on hard times. Boards and management of these recapitalized banks could be replaced. Issues to be studied to make such a proposal operational include grandfathering of existing lower quality securities, and/or transitioning towards new features in lower quality securities, considering capital markets implications of changing the terms of lower quality capital and the selection of triggers, and determining the amounts and market for such instruments.

Contingent capital was first proposed in such a form – as far as I know! – in HM Treasury’s response to the Turner Report.

Under the heading Making Failure a Viable Option, she advocates:

More control of counterparty risk via capital rules and limits, so that imposing losses on major institutions who are debt holders in a failed financial institution does not prove fatal.

It is possible that this might be an attack on the utterly ridiculous Basel II risk weighting of bank paper according to the credit rating of the bank’s supervisor; that is, paper issued by a US bank is risk-weighted according to the credit rating of the US, which is perhaps the most difficult thing to understand about the Basel Rules. If the regulators are serious about reducing systemic risk, then paper issued by other financial institutions should attract a higher risk weighting than that of a credit-equivalent non-financial firm, not less.

I have often remarked on the Bank of Canada’s attempts to expand its bureaucratic turf throughout the crisis; two can play at that game!

one could try to experiment and adjust capital requirements up or down based on macro indicators. But, the challenge will be how to make a regime which ties macro indicators to capital effective. Indeed, in upturns in the domestic market where capital targets are increased due to macro factors, companies would have the option to obtain loans from banks in countries with less robust economic conditions, as banks in that country will have lower requirements. Thus, an increase in capital in the domestic market might not have the desired impact of slowing things down.

Alternatively, because many countries have well developed financial sectors, borrowers can go beyond the regulated financial sector to find money, as regulated financial institutions are not the only game in town.

Umm … hello? The objective of varying credit requirements is to strengthen the banks should there be a possible downturn; the Greenspan thesis is that it is extremely difficult to tell if you’re in a bubble while you’re in the middle of it (and therefore, you do more damage by prevention than is done by cure) has attracted academic support (as well as being simple common sense; if a bubble was obvious, it wouldn’t exist).

Most authorities agree that Central Banks have the responsibility for “slowing things down” via monetary policy; OSFI should stick to its knitting and concentrate on assuring the relative health of the regulated financial sector it regulates.

Of particular interest is her disagreement with one element of Treasury’s wish-list:

Yes, regulators should try to assess systemic risk. But no, we should not try to define systemically important financial institutions.

The IMF work on identifying systemic institutions rightly points out that what is systemic in one situation may not be in another, and that there is considerable judgement involved.

Ms. Dickson also made several remarks about market discipline, which should not be taken seriously.

Update: I’ve been trying to find the “IMF work” referred to in the last quoted paragraph; so far, my best guess is Chapter 3 of the April ’09 Global Financial Stability Report:

Cascade effects. Another use of the joint probability distribution is the probability of cascade effects, which examines the likelihood that one or more FIs in the system become distressed given that a specific FI becomes distressed. It is a useful indicator to quantify the systemic importance of a specific FI, since it provides a direct measure of its effect on the system as a whole. As an example, the probability of cascade effects is estimated given that Lehman or AIG became distressed. These probabilities reached 97 percent and 95, respectively, on September 12, 2008, signaling a possible “domino” effect in the days after Lehman’s collapse (Figure 3.10). Note that the probability of cascade effects for both institutions had already increased by August 2007, well before Lehman collapsed.

The IMF Country Report No. 09/229 – United States: Selected Issues points out:

It remains to be seen how the Federal Reserve, in consultation with the Treasury, will draw up rules to guide the identification of systemic firms to be brought under its purview, and how the FSOC will ensure that remaining intermediaries are monitored from a broader financial stability perspective. Although the criteria for Tier 1 FHC status appropriately include leverage and interconnectedness as well as size, identifying systemic institutions ex ante will remain a difficult task (cf., AIG).

I have sent an inquiry to OSFI asking for a specific reference.

Update, 2009-11-9: OSFI’s bureaucrats have not seen fit to respond to my query, but the Bank for International Settlements has just published the Report to G20 Finance Ministers and Governors: Guidance to Assess the Systemic Importance of Financial Institutions, Markets and Instruments: Initial Considerations which includes the paragraph:

The assessment is likely to be time-varying depending on the economic environment. Systemic importance will depend significantly on the specifics of the economic environment at the time of assessment. Structural trends and the cyclical factors will influence the outcome of the assessment. For instance, under weak economic conditions there is a higher probability that losses will be correlated and failures in even relatively unimportant elements of the financial sector could become triggers for more general losses of confidence. A loss of confidence is often associated with uncertainty of asset values, and can manifest in a contagious “run” on short-run liabilities of financial institutions, or more generally, in a loss of funding for key components of the system. The dependence of the assessment on the specific economic and financial environment has implications about the frequency with which such assessments should take place, with the need for more frequent assessments to take account of new information when financial systems are under stress or where material changes in the environment or the business and risk profile of the individual component have taken place.

It is regrettable that OSFI does not have a sufficiently scholarly approach to its work to provide references in the published version of Julie Dickson’s speeches – or that she would not insist on such an approach. It is equally regrettable that OSFI is unable to answer a simple question regarding such a reference within a day or so.

October 27, 2009

Tuesday, October 27th, 2009

It has been obvious for a while that a story like this would be coming … but it’s funny anyway:

Mr. Greenberg has been quietly building up a family of insurance companies that could compete with A.I.G. To fill the ranks of his venture, C.V. Starr & Company, he has been hiring some people he once employed.

Now, Mr. Greenberg may have received some unintended assistance from the United States Treasury. Just last week, the Treasury severely limited pay at A.I.G. and other companies that were bailed out by taxpayers. That may hasten the exodus of A.I.G.’s talent, sending more refugees into Mr. Greenberg’s arms, since C. V. Starr is free to pay whatever it wants.

“Basically, he’s just starting ‘A.I.G. Two’ and raiding people out of ‘A.I.G. One,’ ” said Douglas A. Love, an insurance executive who has also hired A.I.G. talent for his company, Investors Guaranty Fund of Pembroke, Bermuda.

Treasury officials said their special master for pay, Kenneth R. Feinberg, was aware that if he set pay standards that were too stringent, he could further harm A.I.G. by driving away its executives. “We’re acutely aware of this possibility,” said Andrew Williams, a department spokesman. “That’s why Ken Feinberg spent hours at A.I.G. trying to understand that specific dynamic and strike the right balance.”

Hours. What dedication! What thoroughness!

Mark Carney has come up with a good illustration of the intellectual bankruptcy of many of the current regulatory efforts:

Financial institutions need to demonstrate an awareness of their broader responsibilities. Financiers should ask themselves every day how their activities affect systemic risk? and what are they doing to promote economic growth?

Oh, yeah? Who’s going to pay them to do this? Who’s going to give them a look at the books of their counterparties? Who’s going to give them power over their counterparties? This is just another cheap attempt to shield regulators from responisibility for the consequences of their actions.

And there may be consequences: Roubini thinks another bubble is forming:

Investors worldwide are borrowing dollars to buy assets including equities and commodities, fueling “huge” bubbles that may spark another financial crisis, said New York University professor Nouriel Roubini.

“We have the mother of all carry trades,” Roubini, who predicted the banking crisis that spurred more than $1.6 trillion of asset writedowns and credit losses at financial companies worldwide since 2007, said via satellite to a conference in Cape Town, South Africa. “Everybody’s playing the same game and this game is becoming dangerous.”

On the other hand, the new paradigm means that employer cartels can cloak themselves in holiness:

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said he won’t actively recruit the best employees from competitors operating under pay restrictions imposed after federal bailouts.

“I morally have an issue with people going against those companies that are hamstrung,” Dimon said today at the Securities Industry and Financial Markets Association meeting in New York. “It’s wrong to say, ‘Let’s go hire the best people.’ We’re not going to do that.”

It’s wrong to compete! It’s wrong to put the boots into your competitor when he’s down!

John Mackie has written an interesting piece about bond indentures, Bonds’ Bold Terms: Bonds Rule, With Banks Out

Despite all my efforts, there are still a few misguided souls out there who believe that Credit Rating Agencies should predict future economic conditions; some of these even believe that if they don’t do it better than the Fed, it must be because they are either corrupt or incompetent and probably both. DBRS has today released its overview of Canadian credit markets, with slides from presentations on structured finance and the outlook for 2010 and beyond. The forecasts have the usual quota of entertainment value; there are a few interesting charts:


Click for big

Back to normal for preferreds, with PerpetualDiscounts losing 14bp on the day and FixedResets down fractionally. Volume was normal – OK, maybe off a bit – but the volume highlights were dominated by straights.

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 -0.6470 % 1,469.4
FixedFloater 6.43 % 4.52 % 46,309 18.18 1 2.9860 % 2,421.2
Floater 2.65 % 3.09 % 110,622 19.50 3 -0.6470 % 1,835.8
OpRet 4.87 % -6.81 % 115,411 0.09 15 0.1845 % 2,293.6
SplitShare 6.41 % 6.45 % 482,876 3.94 2 -0.0221 % 2,063.9
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.1845 % 2,097.3
Perpetual-Premium 5.89 % 5.92 % 140,830 13.92 11 0.2387 % 1,857.1
Perpetual-Discount 5.99 % 6.06 % 217,339 13.84 63 -0.1441 % 1,732.7
FixedReset 5.53 % 4.23 % 451,614 4.00 41 -0.0064 % 2,106.2
Performance Highlights
Issue Index Change Notes
BAM.PR.K Floater -2.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-27
Maturity Price : 12.60
Evaluated at bid price : 12.60
Bid-YTW : 3.14 %
PWF.PR.E Perpetual-Discount -1.89 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-27
Maturity Price : 21.93
Evaluated at bid price : 22.28
Bid-YTW : 6.19 %
BAM.PR.P FixedReset -1.41 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-30
Maturity Price : 25.00
Evaluated at bid price : 26.55
Bid-YTW : 5.74 %
BMO.PR.K Perpetual-Discount -1.27 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-27
Maturity Price : 22.49
Evaluated at bid price : 22.62
Bid-YTW : 5.91 %
RY.PR.G Perpetual-Discount -1.12 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-27
Maturity Price : 19.38
Evaluated at bid price : 19.38
Bid-YTW : 5.82 %
GWO.PR.I Perpetual-Discount -1.08 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-27
Maturity Price : 18.30
Evaluated at bid price : 18.30
Bid-YTW : 6.23 %
ENB.PR.A Perpetual-Premium 1.01 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-27
Maturity Price : 24.69
Evaluated at bid price : 25.01
Bid-YTW : 5.58 %
POW.PR.B Perpetual-Discount 1.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-27
Maturity Price : 21.52
Evaluated at bid price : 21.85
Bid-YTW : 6.16 %
IGM.PR.A OpRet 2.47 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2009-11-26
Maturity Price : 26.00
Evaluated at bid price : 27.40
Bid-YTW : -46.86 %
BAM.PR.G FixedFloater 2.99 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-27
Maturity Price : 25.00
Evaluated at bid price : 16.90
Bid-YTW : 4.52 %
Volume Highlights
Issue Index Shares
Traded
Notes
TRP.PR.A FixedReset 82,010 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-01-30
Maturity Price : 25.00
Evaluated at bid price : 25.33
Bid-YTW : 4.41 %
BMO.PR.L Perpetual-Premium 42,630 RBC bought 15,000 from Nesbitt at 25.05.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-27
Maturity Price : 24.69
Evaluated at bid price : 24.91
Bid-YTW : 5.92 %
BNS.PR.O Perpetual-Premium 31,300 RBC crossed 21,700 at 24.41.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-27
Maturity Price : 24.09
Evaluated at bid price : 24.30
Bid-YTW : 5.79 %
IAG.PR.A Perpetual-Discount 29,400 RBC crossed 23,600 at 19.00.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-27
Maturity Price : 18.86
Evaluated at bid price : 18.86
Bid-YTW : 6.18 %
RY.PR.A Perpetual-Discount 29,371 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-27
Maturity Price : 19.29
Evaluated at bid price : 19.29
Bid-YTW : 5.78 %
CM.PR.I Perpetual-Discount 28,055 RBC crossed 11,200 at 19.50.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-27
Maturity Price : 19.50
Evaluated at bid price : 19.50
Bid-YTW : 6.07 %
There were 45 other index-included issues trading in excess of 10,000 shares.

Research: Break-Even Rate Shock

Tuesday, October 27th, 2009

Investors will often purchase FixedResets in preference to PerpetualDiscounts because “there is better inflation protection”. In this essay, derived from the appendix to the June, 2009, PrefLetter, I attempt to quantify and discuss this effect.

The related Break-Even Rate Shock Calculator has been published previously.

Look for the research link!

October 26, 2009

Monday, October 26th, 2009

OSFI has released a statement on federally regulated pension plan solvency:

The latest results show that the average estimated solvency ratio of federally regulated defined benefit private pension plans at June 30, 2009 was 0.88, meaning the total value of assets of all federal plans was 12 per cent lower than liabilities, calculated on a solvency basis. This compares to an estimated solvency ratio of 0.85 in December 2008.

The private pension plans subject to OSFI regulation currently represent seven per cent of all private pension plans in Canada, accounting for approximately 12 per cent of private pension assets.

Prior Fed policies are under continued attack:

A month after warning that property prices are rising “probably excessively,” Norges Bank Governor Svein Gjedrem is set to increase interest rates on Oct. 28. Reserve Bank of Australia Governor Glenn Stevens cited costlier real estate as a reason for raising rates three weeks ago.

At the Federal Reserve, officials under Chairman Ben S. Bernanke are reviewing whether recent gains in asset prices and narrowing credit spreads are justified as they try to ensure near-zero borrowing costs don’t generate future market turmoil.

The approach may herald what New York-based Morgan Stanley calls a “new era” in which central banks pay more attention to asset prices when setting monetary policy and devising regulation, broadening their focus from inflation.

Former Fed Chairman Alan Greenspan advocated a hands-off approach to asset prices during the U.S. expansion that lasted six years until December 2007. He said it was easier to clean up the mess of a bust than to spot bubbles and that monetary policy was too blunt to deflate them.

“There is no evidence that it works other than in computer models,” he said in a January 2008 interview about the idea that central banks should raise rates to pop asset bubbles. He noted that the stock market merely leveled off when the Fed doubled rates to 6 percent in 1994-95 and then resumed its climb.

All I can suggest is: as long as there are policies and policy makers, there will be policy errors. The new paradigm will not eliminate errors; it will merely change their nature.

Springfield Massachussets saved a few bucks on outrageous portfolio management fees:

Salvatore Calvanese, the treasurer of Springfield, Massachusetts, for four years, had a ready defense for why he risked $14 million of taxpayer money on collateralized-debt obligations laden with subprime mortgages in 2007.

He didn’t know what he was buying, he says, and trusted the financial professionals who sold them and told him they were safe.

With a jealous eye on the $369-million held under CBO, BMO has introduced a short term bond ETF:

The BMO Short Corporate Bond Index ETF seeks to replicate, to the extent possible, the performance of a short term corporate bond index, net of expenses. Currently, the BMO Short Corporate Bond Index ETF seeks to replicate the performance of the DEX Short Term Corporate Bond Index. The Manager may, in its discretion and without unitholder approval, change the DEX Short Term Corporate Bond Index to another widely recognized short term corporate bond index in order to provide investors with exposure to a short term corporate bond index. If the Manager changes the DEX Short Term Corporate Bond Index, or any index replacing such Index, the Manager will issue a press release identifying the new index. The BMO Short Corporate Bond Index ETF invests in a variety of debt securities primarily with a term to maturity between one and five years. Securities held in the Index are generally corporate bonds issued domestically in Canada in Canadian dollars, with an investment grade rating. As an alternative to or in conjunction with investing in and holding the Constituent Securities, BMO Short Corporate Bond Index ETF may invest in or use exchange traded funds, mutual funds or institutional pooled funds and derivative instruments to obtain exposure to the performance of the DEX Short Term Corporate Bond Index.

The MER is 30bp – and they’re looking to track the index net of fees. There are a number of ways in which this could be attempted:

  • Taking views on the markets
  • Trading the hell out of it
  • heavily overweighting teeny-tiny issues and/or bad credits and/or non-bonds

I suspect they’ll try to juice the yields by holding non-bonds, such as sub-debt (well … OK. These are in fact bonds, they’re just not short-term bonds) and Tier 1 issues (not bonds by any stretch of the imagination) – but we will see.

Nine times out of ten – no, that’s too gloomy, call it ninety-nine times out of one-hundred – the increased risk won’t make any difference. That last time however? Just wait for the whining. ‘How was I supposed to know the terms? I’m only the portfolio manager! And … gloryosky! They’re in the index!’

The Canadian preferred share market managed to eke out small gains today, with PerpetualDiscounts up 3bp and FixedResets gaining 10bp. Volume was solid, dominated as usual by FixedResets.

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 0.6061 % 1,479.0
FixedFloater 6.63 % 4.68 % 45,431 17.96 1 -5.4179 % 2,351.0
Floater 2.64 % 3.07 % 107,382 19.55 3 0.6061 % 1,847.7
OpRet 4.88 % -7.81 % 112,547 0.09 15 -0.0742 % 2,289.3
SplitShare 6.41 % 6.45 % 488,807 3.94 2 0.2658 % 2,064.4
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0742 % 2,093.4
Perpetual-Premium 5.91 % 5.94 % 140,735 13.89 11 0.2024 % 1,852.7
Perpetual-Discount 5.98 % 6.05 % 215,033 13.83 63 0.0335 % 1,735.2
FixedReset 5.53 % 4.24 % 454,817 4.01 41 0.0966 % 2,106.3
Performance Highlights
Issue Index Change Notes
BAM.PR.G FixedFloater -5.42 % Quite real enough, as the issue traded 4,600 shares in a range of 16.43-40 before closing at 16.41-73, 11×3, with a chunk of that volume in the 16.50 area at lunchtime, with no afternoon trading.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-26
Maturity Price : 25.00
Evaluated at bid price : 16.41
Bid-YTW : 4.68 %
ELF.PR.F Perpetual-Discount -1.40 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-26
Maturity Price : 19.03
Evaluated at bid price : 19.03
Bid-YTW : 7.04 %
MFC.PR.B Perpetual-Discount -1.14 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-26
Maturity Price : 19.08
Evaluated at bid price : 19.08
Bid-YTW : 6.19 %
BAM.PR.I OpRet -1.03 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2010-07-30
Maturity Price : 25.50
Evaluated at bid price : 25.83
Bid-YTW : 4.21 %
CM.PR.D Perpetual-Discount 1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-26
Maturity Price : 23.94
Evaluated at bid price : 24.26
Bid-YTW : 5.95 %
PWF.PR.L Perpetual-Discount 1.20 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-26
Maturity Price : 21.16
Evaluated at bid price : 21.16
Bid-YTW : 6.06 %
BAM.PR.M Perpetual-Discount 1.31 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-26
Maturity Price : 17.84
Evaluated at bid price : 17.84
Bid-YTW : 6.75 %
TD.PR.A FixedReset 1.46 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-02
Maturity Price : 25.00
Evaluated at bid price : 25.76
Bid-YTW : 4.21 %
IAG.PR.C FixedReset 1.48 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-30
Maturity Price : 25.00
Evaluated at bid price : 26.82
Bid-YTW : 4.46 %
PWF.PR.G Perpetual-Premium 1.89 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-26
Maturity Price : 23.95
Evaluated at bid price : 24.25
Bid-YTW : 6.11 %
Volume Highlights
Issue Index Shares
Traded
Notes
MFC.PR.D FixedReset 95,714 RBC crossed 77,100 at 27.85.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-19
Maturity Price : 25.00
Evaluated at bid price : 27.79
Bid-YTW : 4.20 %
CM.PR.L FixedReset 63,697 Nesbitt crossed 50,000 at 27.40.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-30
Maturity Price : 25.00
Evaluated at bid price : 27.40
Bid-YTW : 4.23 %
BNS.PR.X FixedReset 60,425 RBC bought 10,000 from Scotia at 27.24; then crossed 25,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-25
Maturity Price : 25.00
Evaluated at bid price : 27.30
Bid-YTW : 4.09 %
BNS.PR.L Perpetual-Discount 54,720 Desjardins crossed two lots of 24,000 each at 19.65 apiece.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-26
Maturity Price : 19.55
Evaluated at bid price : 19.55
Bid-YTW : 5.79 %
NA.PR.L Perpetual-Discount 51,571 RBC crossed 50,800 at 20.84.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-26
Maturity Price : 20.80
Evaluated at bid price : 20.80
Bid-YTW : 5.85 %
RY.PR.Y FixedReset 41,650 Nesbitt sold 10,000 to anonymous; then crossed 18.700 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-12-24
Maturity Price : 25.00
Evaluated at bid price : 26.95
Bid-YTW : 4.36 %
There were 38 other index-included issues trading in excess of 10,000 shares.

Subprime mortgages: Myths and reality

Saturday, October 24th, 2009

The paper Understanding the Subprime Mortgage Crisis by Yuliya S. Demyanyk and Otto Van Hemert has been previously discussed on PrefBlog, but it’s about to be published on a formal basis (forthcoming in the Review of Financial Studies) and the authors are beating the drums for it on VoxEU.

In the essay Subprime mortgages: Myths and reality, they highlight the following sources of confusion about the Credit Crunch:

  • Myth: Subprime mortgages went only to borrowers with impaired credit
  • Myth: Subprime mortgages promoted homeownership
  • Myth: Declines in mortgage underwriting standards triggered the subprime crisis
  • Myth: Subprime mortgages failed because people used homes as ATMs
  • Myth: Subprime mortgages failed because of mortgage rate resets
  • Myth: Subprime borrowers with hybrid mortgages were offered (low) “teaser rates”

Their conclusion is in line with what I’ve been saying for some time:

Many of the myths presented here single out some characteristic of subprime loans, subprime borrowers, or the economic circumstances in which those loans were made as the cause of the crisis. All of these factors are certainly important for borrowers with subprime mortgages in terms of their ability to keep their homes and make regular mortgage payments. But no single factor is responsible for the subprime failure.

In hindsight, the subprime crisis fits neatly into the classic lending boom and bust story – subprime mortgage lending experienced a remarkable boom, during which the market expanded almost sevenfold over six years. In each of these years between 2001 and 2007, the quality of mortgages was deteriorating, their overall riskiness was increasing, and the pricing of this riskiness was decreasing (see Demyanyk and Van Hemert 2008). For years, rising house prices concealed the subprime mortgage market’s underlying weaknesses and unsustainability. When this veil was finally pulled away by a nationwide contraction in prices, the true quality of the loans was revealed in a vast wave of delinquencies and foreclosures that continues to destabilise the US housing market even today.

Subprime is just another boom and bust story; just another example of the manner in which easy money will find an outlet. Usually, of course, easy money will express itself in terms of inflation; since there was not much inflation in the period 2001-07, the Fed missed the underlying problem. This isn’t just my thesis: it has been suggested by Ken Taylor of Taylor Rule fame and researchers from the Kansas City Fed.

Unfortunately, the politicians have taken over public discussion of the issue and find it much more convenient to blame bankers and their compensation; when, in fact, these guys are in the same position as those poor suckers who get caught by customs with a suitcase-full of heroin. Yes, they did wrong; but it is more important to find out who filled the suitcase.

October 23, 2009

Friday, October 23rd, 2009

CIT has released a review of its restructuring plan threatening carnage if it does not pass. The PDF of the SEC filing is copy-protected, of course, because it’s SECRET, but they estimate recovery on unsecured claims – such as senior bonds – of between 5.9% and 37.2%. Ouch!

Carl Icahn estimates minimum 80% recovery if the firm is put into run-off; perhaps 100%.

In news guaranteed to amaze and astound, American financial institutions with severely restricted retention plans are having retention problems:

At Bank of America, for instance, only 14 of the 25 highly paid executives remained by the time Feinberg announced his decision. Under his plan, compensation for the most highly paid employees at the bank would be a maximum of $9.9 million. The bank had sought permission to pay as much as $21 million, according to Treasury Department documents.

At American International Group, only 13 people of the top 25 were still on hand for Feinberg’s decision.

Isn’t that incredible? Who would ever have thought that employees had choices, or that there was any point to retention bonuses beyond the fun of doing evil?

The preferred share market had a respite from the steady drip of declines today, with PerpetualDiscounts gaining 6bp and FixedResets up 11bp. Volume was steady.

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 0.5190 % 1,470.1
FixedFloater 6.27 % 4.37 % 44,792 18.37 1 -1.0268 % 2,485.7
Floater 2.65 % 3.08 % 107,565 19.52 3 0.5190 % 1,836.6
OpRet 4.88 % -10.45 % 115,663 0.09 15 0.0897 % 2,291.0
SplitShare 6.42 % 6.49 % 496,167 3.94 2 0.4003 % 2,058.9
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0897 % 2,094.9
Perpetual-Premium 5.92 % 5.95 % 139,605 13.88 11 -0.1176 % 1,848.9
Perpetual-Discount 5.98 % 6.05 % 216,289 13.81 63 0.0550 % 1,734.7
FixedReset 5.53 % 4.25 % 459,325 4.02 41 0.1104 % 2,104.3
Performance Highlights
Issue Index Change Notes
BAM.PR.M Perpetual-Discount -1.34 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-23
Maturity Price : 17.61
Evaluated at bid price : 17.61
Bid-YTW : 6.83 %
BAM.PR.G FixedFloater -1.03 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-23
Maturity Price : 25.00
Evaluated at bid price : 17.35
Bid-YTW : 4.37 %
BAM.PR.B Floater 1.03 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-23
Maturity Price : 12.80
Evaluated at bid price : 12.80
Bid-YTW : 3.09 %
SLF.PR.F FixedReset 1.11 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-30
Maturity Price : 25.00
Evaluated at bid price : 27.31
Bid-YTW : 4.00 %
ELF.PR.G Perpetual-Discount 1.16 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-23
Maturity Price : 17.40
Evaluated at bid price : 17.40
Bid-YTW : 6.89 %
BAM.PR.I OpRet 1.32 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2009-11-22
Maturity Price : 25.75
Evaluated at bid price : 26.10
Bid-YTW : -6.92 %
BAM.PR.K Floater 1.58 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-23
Maturity Price : 12.85
Evaluated at bid price : 12.85
Bid-YTW : 3.08 %
Volume Highlights
Issue Index Shares
Traded
Notes
BMO.PR.O FixedReset 96,980 RBC crossed 79,400 at 28.00.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-06-24
Maturity Price : 25.00
Evaluated at bid price : 27.97
Bid-YTW : 4.01 %
RY.PR.X FixedReset 71,395 RBC bought 25,000 from Nesbitt at 27.05, then crossed 18,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-09-23
Maturity Price : 25.00
Evaluated at bid price : 27.19
Bid-YTW : 4.21 %
BAM.PR.K Floater 66,750 Nesbitt crossed three blocks, 24,700 shares, 21,600 and 13,800, all at 12.75.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-23
Maturity Price : 12.85
Evaluated at bid price : 12.85
Bid-YTW : 3.08 %
TD.PR.G FixedReset 64,055 RBC bought 10,000 from Scotia at 27.10, then crossed 30,000 at 27.13.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-30
Maturity Price : 25.00
Evaluated at bid price : 27.15
Bid-YTW : 4.22 %
MFC.PR.B Perpetual-Discount 59,608 Nesbitt crossed 24,600 at 19.35; RBC crossed 13,000 at the same price.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-23
Maturity Price : 19.30
Evaluated at bid price : 19.30
Bid-YTW : 6.11 %
RY.PR.T FixedReset 46,065 National bought 14,600 from Scotia at 27.00, then crossed 16,500 at 27.04.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-09-23
Maturity Price : 25.00
Evaluated at bid price : 26.98
Bid-YTW : 4.38 %
There were 39 other index-included issues trading in excess of 10,000 shares.

Tarullo Confronts 'Too Big to Fail'

Friday, October 23rd, 2009

Daniel K Tarullo, Member of the Board of Governors of the US Federal Reserve System, has delivered a speech to the Exchequer Club, Washington DC, 21 October 2009:

Generally applicable capital and other regulatory requirements do not take account of the specifically systemic consequences of the failure of a large institution. It is for this reason that many have proposed a second kind of regulatory response – a special charge, possibly a special capital requirement, based on the systemic importance of a firm. Ideally, this requirement would be calibrated so as to begin to bite gradually as a firm’s systemic importance increased, so as to avoid the need for identifying which firms are considered too-big-to-fail and, thereby, perhaps increasing moral hazard.

While very appealing in concept, developing an appropriate metric for such a requirement is not an easy exercise. There is much attention being devoted to this effort – within the U.S. banking agencies, in international fora, and among academics – but at this moment there is no specific proposal that has gathered a critical mass of support.

I support the idea of assessing a progressive surcharge on risk-weighted assets such that, for instance, RWA in excess of $250-billion wiould be increased by 10% for capital calculation purposes, RWA in excess of $300-billion another 10% on top of that, and so on. Very few formal ideas have been proposed in this line; the US Treasury wish-list does not mention such an idea but endorses a special regime for those institutions deemed too big to fail.

A second kind of market discipline initiative is a requirement that large financial firms have specified forms of “contingent capital.” Numerous variants on this basic idea have been proposed over the past several years. While all are intended to provide a firm with an increased capital buffer from private sources at the moment when it is most needed, some also hold significant promise of injecting market discipline into the firm. For example, a regularly issued special debt instrument that would convert to equity during times of financial distress could add market discipline both through the pricing of newly issued instruments and through the interests of current shareholders in avoiding dilution.

I heartily endorse this idea, which was first proposed by HM Treasury in its response to the Turner report and endorsed by William Dudley of the New York Fed. It looks like this idea is gaining some traction!

To my gratification, he does not forget to mention the systemic risk posed by money market funds:

Of course, financial instability can occur even in the absence of serious too-big-to-fail problems. Other reform measures – such as regulating derivatives markets and money market funds – are thus also important to pursue.