Archive for June, 2010

June 23, 2010

Wednesday, June 23rd, 2010

American real estate agents are going hungry:

Purchases of U.S. new homes fell in May to the lowest level on record after a tax credit expired, showing the market remains dependent on government support.

Sales collapsed an unprecedented 33 percent from April to an annual pace of 300,000, less than the median estimate of economists surveyed by Bloomberg News and the fewest in data going back to 1963, figures from the Commerce Department showed today in Washington. Demand in prior months was revised down.

Like the Fed says:

Business spending on equipment and software has risen significantly; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

But fear not! Fannie Mae is tightening standards:

Borrowers who have the means to make mortgage payments and don’t work with lenders to restructure loans will be banned from obtaining new mortgages backed by Fannie Mae for seven years from the date of foreclosure, the company said today in a statement.

Homeowners walking away from mortgages they can afford accounted for about 12 percent of U.S. mortgage defaults in February, New York-based Morgan Stanley said in an April report.

It would be much more to the point if non-recourse mortgages carried a penalty rate; but that would be too logical.

Argentina is showing Greece how it’s done:

The results of Argentina’s debt swap offer exceeded the government’s expectations and will help close a chapter on the country’s record $95 billion default in 2001, Economy Minister Amado Boudou said.

Creditors holding about $12.1 billion of $18.3 billion in defaulted debt tendered their securities in the restructuring, which Boudou said was the result of “hard” negotiating on the part of Argentina. Combined with the results of a 2005 restructuring, a total of 92.4 percent of the defaulted debt has been swapped for a mix of new bonds, he said.

The government has no fiscal need to issue debt and can wait until it is able to sell bonds that yield less than 10 percent, Boudou said.

Yields on the country’s benchmark dollar bonds due in 2015 rose 11 basis points, or 0.11 percentage point, to 12.86 percent at 10:59 a.m. New York time.

The question is … will a serial defaulter ever be able to issue bonds at less than 10%?

All the money that’s being dropped on the G-20 is having an effect.

PerpetualDiscounts kept the streak alive in the Canadian preferred share market, gaining 11bp, while FixedResets were down 11bp. Volume was moderate.

PerpetualDiscounts now yield 6.02%, equivalent to 8.43% interest at the standard equivalency factor of 1.4x. Long Corporates are now at about 5.55% so the pre-tax interest equivalent spread (also called the Seniority Spread) is now about 290bp, a significant widening from the +270bp reported on June 16 due to the sharp decline in long yields.


Click for big
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 2.72 % 2.78 % 32,522 20.51 1 -0.9302 % 2,097.6
FixedFloater 5.14 % 3.29 % 21,636 19.84 1 0.2369 % 3,114.3
Floater 2.42 % 2.79 % 76,717 20.26 3 -0.2939 % 2,243.9
OpRet 4.86 % 2.45 % 89,246 0.08 11 0.2081 % 2,337.5
SplitShare 6.30 % 6.25 % 95,689 3.49 2 0.1088 % 2,200.2
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.2081 % 2,137.4
Perpetual-Premium 0.00 % 0.00 % 0 0.00 0 0.1109 % 1,911.0
Perpetual-Discount 5.94 % 6.02 % 196,645 13.88 77 0.1109 % 1,808.9
FixedReset 5.42 % 4.01 % 331,957 3.46 45 -0.1098 % 2,182.0
Performance Highlights
Issue Index Change Notes
MFC.PR.B Perpetual-Discount -1.08 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-06-23
Maturity Price : 19.21
Evaluated at bid price : 19.21
Bid-YTW : 6.10 %
BAM.PR.R FixedReset -1.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-06-23
Maturity Price : 23.22
Evaluated at bid price : 25.35
Bid-YTW : 4.92 %
BAM.PR.N Perpetual-Discount 1.07 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-06-23
Maturity Price : 17.95
Evaluated at bid price : 17.95
Bid-YTW : 6.66 %
GWO.PR.M Perpetual-Discount 1.41 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-06-23
Maturity Price : 24.20
Evaluated at bid price : 24.40
Bid-YTW : 5.97 %
Volume Highlights
Issue Index Shares
Traded
Notes
SLF.PR.D Perpetual-Discount 87,336 RBC crossed 72,200 at 18.35.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-06-23
Maturity Price : 18.34
Evaluated at bid price : 18.34
Bid-YTW : 6.10 %
BMO.PR.J Perpetual-Discount 57,838 Desjardins crossed 30,200 at 19.88.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-06-23
Maturity Price : 19.82
Evaluated at bid price : 19.82
Bid-YTW : 5.75 %
BNS.PR.T FixedReset 42,768 TD bought 13,100 from Nesbitt at 27.40.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-25
Maturity Price : 25.00
Evaluated at bid price : 27.28
Bid-YTW : 4.04 %
CM.PR.K FixedReset 38,545 RBC crossed 30,000 at 26.48.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 26.60
Bid-YTW : 3.88 %
IAG.PR.E Perpetual-Discount 37,730 Desjardins crossed 20,000 at 25.00.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-06-23
Maturity Price : 24.78
Evaluated at bid price : 25.00
Bid-YTW : 6.03 %
BNA.PR.C SplitShare 32,700 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2019-01-10
Maturity Price : 25.00
Evaluated at bid price : 20.00
Bid-YTW : 7.65 %
There were 27 other index-included issues trading in excess of 10,000 shares.

Swiss Support Progressive Bank Capital Requirements

Tuesday, June 22nd, 2010

Mr Thomas Jordan, Vice-Chairman of the Governing Board of the Swiss National Bank, provided introductory remarks at the half-yearly media news conference, Geneva, 17 June 2010:

It is essential that capital requirements be significantly increased and that they rise in line with the degree of systemic importance of a bank. This is the only way to ensure that the banks internalise the risks which, until now, they have been able to pass on to the general public, to some extent. Moreover, progressive capital requirements should create an incentive for banks to reduce their systemic importance, with its associated risk potential.

Bravo! Capital surchages have long been advocated on PrefBlog and will serve not just to discourage banks from becoming too big, but will also act as a countercyclical buffer … and the question of countercyclical buffers is one that seems to have been relatively neglected lately.

Bank capital surcharges were last discussed on PrefBlog in the post Bank Capital Surcharge Proposals Gaining Ground.

June 22, 2010

Tuesday, June 22nd, 2010

Nothing happened today.

The Canadian preferred share market was fairly well-behaved today, with PerpetualDiscounts up 7bp to keep the streak alive (only six more trading days until month-end!) and FixedResets down 6bp. Volume was slighly above average, but there is only one entry in the performance highlights.

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 2.69 % 2.84 % 33,679 20.66 1 0.0000 % 2,117.3
FixedFloater 5.15 % 3.30 % 21,307 19.84 1 0.0474 % 3,106.9
Floater 2.41 % 2.78 % 76,325 20.28 3 -0.0551 % 2,250.6
OpRet 4.87 % 1.79 % 92,282 0.08 11 0.0741 % 2,332.6
SplitShare 6.31 % 6.26 % 97,080 3.49 2 -0.0435 % 2,197.8
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0741 % 2,133.0
Perpetual-Premium 0.00 % 0.00 % 0 0.00 0 0.0669 % 1,908.9
Perpetual-Discount 5.94 % 6.02 % 197,370 13.86 77 0.0669 % 1,806.9
FixedReset 5.41 % 3.99 % 342,951 3.47 45 -0.0557 % 2,184.4
Performance Highlights
Issue Index Change Notes
PWF.PR.E Perpetual-Discount -1.13 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-06-22
Maturity Price : 22.32
Evaluated at bid price : 22.75
Bid-YTW : 6.13 %
Volume Highlights
Issue Index Shares
Traded
Notes
TD.PR.S FixedReset 148,120 RBC crossed blocks of 50,000 and 10,000, both at 25.95. GMP bought blocks of 31,200 at 26.00 and 20,400 at 25.95, both from anonymous.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-08-30
Maturity Price : 25.00
Evaluated at bid price : 25.96
Bid-YTW : 3.98 %
TD.PR.E FixedReset 84,164 RBC crossed 50,000 at 27.35.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-30
Maturity Price : 25.00
Evaluated at bid price : 27.31
Bid-YTW : 4.02 %
MFC.PR.A OpRet 59,500 RBC crossed 58,200 at 25.60.
YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2015-12-18
Maturity Price : 25.00
Evaluated at bid price : 25.55
Bid-YTW : 3.68 %
CM.PR.H Perpetual-Discount 49,078 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-06-22
Maturity Price : 20.28
Evaluated at bid price : 20.28
Bid-YTW : 6.02 %
RY.PR.W Perpetual-Discount 35,875 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-06-22
Maturity Price : 21.39
Evaluated at bid price : 21.39
Bid-YTW : 5.80 %
TRP.PR.A FixedReset 33,500 Nesbitt bought 11,300 from Scotia at 25.50.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-01-30
Maturity Price : 25.00
Evaluated at bid price : 25.51
Bid-YTW : 4.11 %
There were 34 other index-included issues trading in excess of 10,000 shares.

Repo 105 and the Next Crisis

Tuesday, June 22nd, 2010

Remember Repo 105, which was discussed March 12? The Examiner in the Lehman bankruptcy explained it:

Unlike an ordinary repo transaction, Lehman did not record the borrowing of cash from a Repo 105 transaction even though Lehman was obliged to repay the borrowing. Instead, Lehman established a long inventory derivative asset representing the obligation under a forward contract to repurchase the full amount of securities “sold.”3009 As Lehman’s internal Repo 105 Accounting Policy explained, assuming Lehman borrowed $100 cash in exchange for a pledge of $105 of fixed income collateral, Lehman booked a $5 derivative, which represented Lehman’s obligation to repurchase the securities at the end of the term of the repo transaction. The $5 arose from the fact that when it came time to repurchase the pledged securities, Lehman paid $100 cash for $105 worth of securities. The transaction therefore had a $5 value to Lehman reflecting the market value of the “overcollateralization” amount of the Repo 105 transaction. Because it had a positive fair value of $5, the derivative was recorded as an asset under SFAS 133.

My continued irritation with the Bank of Canada’s Central Clearing cheerleading has led me into another thought … Canadian repos are going to settle with central clearing … derivatives are going to settle with central clearing, as discussed on May 11, tangentially on March 17, by John Hull, December 16 and October 5. Lots before then, of course, but those links carry enough information to make the point.

Anyway, the objective of Central Clearing is to increase the chance that no trades at all wil fail, increase the chance that all trades will fail, increase the potential for contagion in the financial system and increase the number of really good jobs available for ex-regulators. I feel quite certain it will do all of those things.

But … what happens when a firm goes down, or is on the ropes? It is overwhelmingly likely that all of its centrally cleared derivative and repo trades will settle in full. That’s the whole point, right? But what if it goes down? The fact that all of these trades settled in full means there will be less money in the kitty to pay off debt holders and commercial paper holders.

Risks to holders of debt and commercial paper have therefore increased, and there may be other implications as well. Remember Confederation Life? When it went down, all of its profitable FX trades settled tootsy-sweetsy, while all of the unprofitable ones (i.e., about half, given hedging) were delayed while the receiver decided who was going to get paid.

The next crisis will see some very strange games being played. Why would you buy commercial paper from a bank or brokerage, when instead you can pay $99 for the future right to sell them a 1-day T-Bill at $200?

Has there been any discussion or analysis of the reordering of creditor priority inherent in wholesale central clearing? I haven’t seen any, but I’d like to. Here in Canada, of course, it’s impossible even to determine the relative seniority of a BA vs. a BDN!

FRBKC Publishes 2Q10 Economic Review

Tuesday, June 22nd, 2010

The Federal Reserve Bank of Kansas City has released its 2Q10 Economic Review with articles:

  • The Efficacy of Large-Scale Asset Purchases at the Zero Lower Bound
  • What Is the Effect of Financial Stress on Economic Activity?
  • Taylor Rule Deviations and Financial Imbalances
  • The Changing Nature of U.S. Card Payment Fraud: industry and Public Policy Options

The Taylor Rule paper by George A. Khan is most interesting and concludes that the “strongest and most robust relationship is between house price indicators and Taylor Rule deviations”. Unfortunately, the PDF is locked (why do they do this?) so I won’t quote from it.

FFN.PR.A: Capital Units Dividend Suspended

Tuesday, June 22nd, 2010

Financial 15 Split Corp. II has announced:

There will not be a distribution paid to Financial 15 II Class A Shares for June 30, 2010 as per the Prospectus which states no regular monthly dividends or other distributions will be paid on the Class A Shares in any month as long as the net asset value per unit is equal to or less than $15.00. The net asset value as of June 15, 2010 was $14.47.

FFN.PR.A was last mentioned on PrefBlog when the capital unit dividend was suspended in February (it was reinstated in March). FFN.PR.A is tracked by HIMIPref™, but is relegated to the Scraps index on credit concerns.

Contingent Capital: Canada a Laughing-stock?

Tuesday, June 22nd, 2010

The Globe & Mail reports:

Finance Minister Jim Flaherty is edging away from his alternative to a global bank tax, acknowledging in an interview that it’s “debatable” whether enough countries can be won over to make Canada’s contingent capital plan work on a global scale.

It’s still too early to write off the idea, which would require banks to sell debt that would convert to equity at times of stress. Mr. Flaherty stressed that he remains a fan of the concept, which he sees as a form of self-insurance that would make financial institutions less likely to rely on taxpayers to bail them out in future.

But the proposal has run into a wall of doubt in financial markets, where investors are skeptical that enough buyers could be found to make the securities affordable for banks to issue.

“I like the contingent capital idea, but I understand some of the concerns that have been expressed about it. It needs more work, more discussion.”

As far as Canada is concerned, it might be a good idea to try some work, some discussion; any work, any discussion.

As I have complained in the past, Canada’s efforts to provide a coherent plan have been limited to an off-the-cuff remark from the Central Bank (promoting an insane extension to the idea that has the intent of eliminating creditors’ rights) together with an intellectually dishonest speech and childish essay by the head of bank regulation. There is no evidence of any money being spent whatsoever on research, discussion, or thought.

Canada may not just have blown its own credibility with these antics, but, such are the vagaries of politics, have made the entire idea more difficult to achieve.

What did we ever do to deserve a clown like Spend-Every-Penny as Finance Minister?

Pairs Equivalency Calculator

Monday, June 21st, 2010

I discussed the concept during my seminar on Floating Rate Issues; prepared a spreadsheet that was linked in the February 2010 Edition of PrefLetter; and have finally linked it in a “PrefPick” in Canadian Moneysaver … so it’s time to link to it publicly.

The Pairs Equivalency Calculator allows for easy valuation comparison between elements of a Strong Pair. ‘Nuff said?

BoC Releases June 2010 Financial System Review

Monday, June 21st, 2010

The Bank of Canada has released the Financial System Review: June 2010.

The entire section on the the banking sector is well worth reading, but I will highlight only:

While Canadian banks continue to experience elevated loan losses, loss rates have declined materially in recent quarters (Chart 16).

footnote: We follow the convention of using the income statement expense, Provision for Credit Losses, as the measure of loan losses.


Click for big

Following the reviews of the financial and economic environment are the reports:

  • The Bank of Canada’s Extraordinary Liquidity Policies and Moral Hazard
  • The Impact of the Financial Crisis on Cross-Border Funding
  • The Role of Securities Lending in Market Liquidity
  • Securitized Products, Disclosure, and the Reduction of Systemic Risk
  • The Bank of Canada’s Analytic Framework for Assessing the Vulnerability of the Household Sector

Quite frankly, I find the reasoning in the Moral Hazard article to be a little opaque:

In an abnormal situation, where a large systemic event creates a widespread shortage of liquidity that disrupts a wide range of institutions and markets, distorting asset prices more generally, the Bank is most effective when it provides liquidity to a variety of institutions. Moral hazard is minimized by limiting such interventions to the shortest time period possible—specifically, to periods when the liquidity premium is significantly distorted across the system, leaving market participants fully exposed to risks associated with idiosyncratic shocks and small systemic shocks.

The idea that the BoC can determine when asset prices are distorted and when they are not smacks of hubris. Additionally, if the BoC is serious about minimizing moral hazard, its lending will always be at a penalty rate that ensures the borrowers are financing at a negative carry. Institutions with liquidity problems – all of them – should be offered a choice: finance your assets at the Bank at rates that will hurt you, or sell them at prices that will ruin you.

This was not done: the bank auctioned off credit at rates that made arbitrage profitable. The only excuse for doing so would be that the falling price of financial assets was having an effect on the real economy; but this was not the case in Canada.

Additionally:

Finally, the Bank supports the development, implementation, and ongoing functioning of the core infrastructure for generating liquidity in the Canadian financial system. This includes promoting greater use of central clearing counterparties for core funding markets, such as repos, as well as other mechanisms that help market participants to self insure against idiosyncratic liquidity shocks.

Do we have any engineers here? How many think that moving to a system subject to single-point failure is a step forward? Central clearing increases moral hazard by making the identity of your counterparties less important.

Contingent capital got a mention:

The prudential supervisor could also implement a scheme for converting subordinated debt into equity, contingent on a credit-risk event that depletes capital by an unacceptable amount.

footnote: See J. Dickson, “Protecting banks is best done by market discipline,” U.K. Financial Times, “Comment,” 8 April 2010.

The fact that the best reference the BoC can come up with is Dickson’s childish essay leads me to believe that the rot is spreading. I’m not sure whether it’s political capture (of the BoC by the Department/Minister of Finance) or regulatory capture (of the BoC by the banks), but either way is a sad thing; a sad thing that will ultimately cost us a lot of money.

The authors did not mention Carney’s notion to ban the bond. They’re going to get their knuckles rapped!

Finally, unable to defend the Bank’s actions during the crisis, the authors take refuge in an attempt to create a tautology where none exists:

It is impossible to eliminate all moral hazard, because
effective extraordinary intervention means that liquidity will be provided at a yield below what would prevail without the intervention.

Since liquidity premiums rise in a crisis because of the shortage of liquidity, the Bank provides liquidity at premiums below those prevailing in the market.

Very disappointing, and makes no allowance for the idea that in the absence of intervention some banks (hello, CM & BMO!) will have to borrow above the already elevated market rate.

The paper on securitization suffers greatly from the absence of Mark Zelmer, who, it will be recalled, wrote the single most sensible statement during the entire crisis:

In the end though, investors need to accept responsibility for managing credit risk in their portfolios. While complex instruments such as structured products enhance the benefits to be gained from relying on credit ratings, investors should not lose sight of the fact that one can delegate tasks but not accountability. Suggestions such as rating structured products on a different rating scale could be helpful, in that this may encourage investors to think twice before investing in such complex instruments. Nevertheless, investors still need to understand the products they invest in, so that they can critically review the credit opinions provided by the rating agencies.

Instead, the authors of this particular paper (as was the case with the authors of the December 2009 Review) drink the regulatory Kool-aid and insist that everybody is at fault except the guys who actually buy the stuff.

Much has been said about what went wrong with securitized products and what should be done to put securitization markets on a stable footing. The way forward includes several elements: (i) a better alignment of economic interests in the securitization process; (ii) appropriate prudential regulation and accounting standards; (iii) simplified and standardized structures based on high-quality real-economy assets; and (iv) greater standardization of documentation and increased transparency and disclosure to facilitate investors’ efforts to understand and manage the risks inherent in securitized products. Enhanced disclosure is only one necessary element of a comprehensive policy and industry response to the recent financial crisis.

Yes! After all, investing is simple. Let’s make sure that every bank teller in Canada can confidently recommend whatever is in the bank’s inventory, without ever having to know anything! Only in such a manner will bank profits be sufficient to hire lots of ex-regulators!

The way to eliminate the market’s systemic risk due to idiotic investing is to eliminate idiots from the market. This will be best done by publishing composite performance numbers as part of an advisor’s registration. In the case of banks, it is best accomplished by ensuring that traders actually trade, and surcharging risk-weighted assets if they become aged.

Mistakes are made by the best of us, and sometimes investments don’t turn out well even though no identifiable mistakes were made. But that only hurts you. Concentration kills you.

June 21, 2010

Monday, June 21st, 2010

Good article in The Atlantic about algorithmic and high-frequency trading, titled Monsters in the Market. I was a little disappointed by the precious tone of their comments:

At least a few high-frequency traders have learned to make a killing by detecting the more simplistic algo strategies deployed by basic pension funds and mutual funds, buying the next stock the funds plan to buy, and then selling it to them at a higher price. This may not be illegal, but it’s almost certainly unfair to the funds’ investors. “It is increasingly clear that there are quite a number of high-frequency bandits in the high- frequency-trading community who pump up volume statistics, front-run investor orders, increase transaction costs, and hurt real liquidity,” David Weild, an adviser at Grant Thornton and a former vice chairman of Nasdaq, told me. *

I would have been much more interested in an expose of just why basic pension funds and mutual funds are using the “more simplistic algo stretegies”. My guess is that they can’t be bothered; the money is much better spent on marketting.

It should also be noted that David Weild’s use of the term “front-run” is moronic. There is no misappropriation of client information in these strategies. One wonders what Mr. Weild’s performance track record is like! Vice Chairman of NASDAQ? Big deal, Madoff was chairman.

The UK will probably be getting a bank tax:

U.K. Chancellor of the Exchequer George Osborne is pushing ahead with plans to tax banks in his first budget, according to three people with knowledge of the plans, an announcement to go along with spending cuts that may prompt forecasters to lower economic-growth estimates.

The tax, which may be imposed on assets or liabilities, could raise at least 2 billion pounds ($3 billion), one of the people said. Osborne has said the June 22 budget statement would set the stage for the deepest spending reductions since the 1980s.

There is some reporting of the dissent regarding the ECB’s bond-buying:

On May 10, just hours after the European Central Bank stepped into government bond markets for the first time, Axel Weber broke ranks with most of his colleagues on the ECB’s Governing Council — including his boss, President Jean-Claude Trichet.

“The purchase of government bonds poses significant stability risks, and that’s why I’m critical of this part of the ECB council’s decision,” said Weber, president of Germany’s Bundesbank.

“Weber’s public opposition to a policy move by the ECB that the politicians are presumably very keen on could make his appointment a bit difficult,” says David Mackie, chief European economist at JPMorgan Chase & Co. in London. “They might feel: ‘Do we really want this guy to be in charge?’”

Weber was nonetheless right to warn about the danger of buying bonds, Mackie says. By taking the helm of the world’s second-most-important central bank, Weber would face “huge” challenges, says Nouriel Roubini, the New York University economist who predicted the financial crisis.

Quite right. The sovereign debt problem (crisis?) is not one that can be solved with liquidity injections, like the banks’ crisis. The banks, to a large extent, simply needed time for the markets to reflect values and for their short-term assets to run off the books … in such a case, Bagehot’s principle of supplying liquidity to an illiquid, but solvent, bank is the correct prescription. For the sovereigns, however, the problem is of spending and structural deficits and while bond-buying may buy time, it does not even begin to address the underlying problem.

Those puzzled by the SEC’s handling of the Goldman lawsuit can rest assured that yes, sometimes the SEC does manage to make allegations of genuine wrongdoing:

ICP kept some bonds in one of AIG’s CDOs after the New York-based insurer rejected them in October 2007, the SEC said. “In late 2008, after AIG complained about unauthorized trades, ICP was compelled to stop nearly all reinvestments by the Triaxx CDOs,” the complaint said.

[ICP founder and CEO Thomas] Priore also backdated trades of mortgage-backed bonds in 2008, using prices from a year earlier, causing one of the Triaxx vehicles to overpay by about $3.5 million, the SEC said.

The Canadian preferred share market rally just kept on going today, the PerpetualDiscounts up 15bp and FixedResets up 10bp, with a slight uptick in volume. The performance highlights table is sparsely populated and the volume highlights are dominated by PerpetualDiscounts.

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 2.69 % 2.84 % 35,046 20.67 1 0.0000 % 2,117.3
FixedFloater 5.15 % 3.30 % 22,185 19.85 1 0.8604 % 3,105.5
Floater 2.41 % 2.78 % 77,049 20.28 3 0.0184 % 2,251.8
OpRet 4.87 % 3.19 % 92,720 0.43 11 -0.0035 % 2,330.9
SplitShare 6.31 % 6.25 % 97,734 3.49 2 -0.1086 % 2,198.8
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0035 % 2,131.4
Perpetual-Premium 0.00 % 0.00 % 0 0.00 0 0.1476 % 1,907.6
Perpetual-Discount 5.95 % 6.03 % 199,032 13.86 77 0.1476 % 1,805.7
FixedReset 5.41 % 3.96 % 355,554 3.47 45 0.1015 % 2,185.7
Performance Highlights
Issue Index Change Notes
BAM.PR.O OpRet -1.08 % YTW SCENARIO
Maturity Type : Option Certainty
Maturity Date : 2013-06-30
Maturity Price : 25.00
Evaluated at bid price : 25.67
Bid-YTW : 4.03 %
BMO.PR.H Perpetual-Discount 1.35 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-06-21
Maturity Price : 22.66
Evaluated at bid price : 23.32
Bid-YTW : 5.71 %
Volume Highlights
Issue Index Shares
Traded
Notes
SLF.PR.C Perpetual-Discount 142,625 RBC crossed blocks of 90,000 and 34,700 at 18.35.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-06-21
Maturity Price : 18.36
Evaluated at bid price : 18.36
Bid-YTW : 6.09 %
BNS.PR.T FixedReset 106,935 Scotia crossed 91,100 at 27.40.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-25
Maturity Price : 25.00
Evaluated at bid price : 27.45
Bid-YTW : 3.85 %
TD.PR.O Perpetual-Discount 37,955 Nesbitt bought 14,900 from RBC at 21.25.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-06-21
Maturity Price : 21.14
Evaluated at bid price : 21.14
Bid-YTW : 5.84 %
POW.PR.D Perpetual-Discount 26,139 CIBC crossed 20,000 at 20.70.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-06-21
Maturity Price : 20.70
Evaluated at bid price : 20.70
Bid-YTW : 6.05 %
CM.PR.I Perpetual-Discount 25,660 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-06-21
Maturity Price : 19.90
Evaluated at bid price : 19.90
Bid-YTW : 6.01 %
SLF.PR.D Perpetual-Discount 25,180 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-06-21
Maturity Price : 18.34
Evaluated at bid price : 18.34
Bid-YTW : 6.10 %
There were 32 other index-included issues trading in excess of 10,000 shares.