PrefBlog

The Financial Post published an interesting factoid on Canadas:

Canadian 10-year yields gained 47 basis points to 3.28% today, from 2.81% on Nov. 4, the day after the Fed unveiled plans to buy US$600-billion in Treasuries through June to spur economic growth. The yields are rising so fast they exceed all 18 of the March 2011 forecasts of economists in a Bloomberg survey. The highest, from Kurt Karl, Swiss Re’s chief U.S. economist, calls for yields at 3.2% by then. The weighted average estimate is 2.95%.

The Boston Fed has released a four-part video lecture on the Great Recession. I must say, I’m pleased and impressed at this sort of outreach programme – I prefer written commentary myself, but I know most people prefer video. We never see anything like this in Canada … pity.

TD CEO Ed Clark announced today that he is an enthusiastic proponent of moral hazard:

If policy makers want Canadians to stop borrowing too much, it’s up to Ottawa, not financial institutions, to force a change in behaviour, says one of Bay Street’s longest-serving senior bankers.

Toronto-Dominion Bank chief executive officer Ed Clark acknowledged Canadians’ alarming debt levels, but said the issue is a matter of public policy and would be best resolved by a tighter government rules on residential mortgages.

In an interview with The Globe and Mail, Mr. Clark said that no bank wants to be the first to impose stricter requirements on borrowers out of fear that it will suffer a major loss of customers to rivals. Personal banking “is a highly competitive industry,” Mr. Clark said. “If we said ‘Look, we’re going to be heroes and save Canada from itself, and we’ll impose a whole new [mortgage] regime on everyone else,’ the other four [large] banks would say ‘Let’s carve them up.’ ”

Listen up, Mr. Clark! Nobody wants or needs you to save Canada from itself. You’re being paid a rather fat salary to save TD Bank from itself. Why are you so eager to make mortgage loans to poor credits? Why are you so worried that the poor credits will stampede to other banks, leaving TD in the miserable position of having a high quality mortgage portfolio?

Mr. Clark proposes government action, citing rules on credit cards as an example of where the banks follow whatever guidelines are provided. The Canadian banking system is run by “adults” who are able to come together and work with the government to guide the process, he said, so there is no trouble sitting everyone down at the same table.

The Canadian banking system is run by weak-kneed oligarchy of idiots, who have the idea that tough management consists of begging Mama to tell them what to do.

Naturally, the Globe and Mail is quick to urge arbitrary measures:

From Gordon Nixon of Royal Bank of Canada, to Ed Clark of Toronto-Dominion Bank, to William Downe of Bank of Montreal, chief executives of big banks are all on the record with some version of the same refrain: Something needs to be done to slow the growth in consumer debt.

So who can do it? The banks, you say? They could just turn down customers seeking loans more often. It’s not going to happen. Saying no would make the banks the bad guys. Plus, the bank executives are wont to point out, probably rightly, that competitive pressures mean that even if one says no, another will probably say yes.

If the government is to do anything, it has two logical measures: tighten up the rules on the risk-weighting of loans (via OSFI) and/or charge more to insure risky mortgages (via the CMHC). Early on in the US housing crunch, I suggested a regime whereby 25% (or so) capital was required on mortgages. If the consumer didn’t put it up as a down payment, then the required amount gets deducted, dollar for dollar, from the bank’s tier 1 capital. That’s the capital part of the loan. Then the rest gets risk-weighted as a normal mortgage.

More and more, I’m seeing a move towards central planning. It always sounds good and it never works.

Good news on the Canadian preferred share market today, as investors lost less than usual on continued elevated volume. PerpetualDiscounts were down 15bp, while FixedResets managed to gain a whopping 3bp.

PerpetualDiscounts now yield 5.48%, equivalent to 7.67% interest at the standard equivalency factor of 1.4x. Long Corporates now yield about 5.6%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 210bp, a widening from the 200bp reported December 8 as long corporate yields increased but interest-equivalent PerpetualDiscount yields increased more.

The FOMC Statement held no surprises:

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.

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 for the federal funds rate for an extended period.
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Voting against the policy was Thomas M. Hoenig. In light of the improving economy, Mr. Hoenig was concerned that a continued high level of monetary accommodation would increase the risks of future economic and financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy.

It occurs to me that Mr. Hoenig is being used – probably with his enthusiastic cooperation – as a straw man. The Fed wants to send an explicit signal that they’ve thought about this, discussed this and reached a concensus to reject this. There’s no shortage of blogs out there claiming hyperinflation is imminent! Given the increased public discussion of economic data, with various levels of competence, one wonders if more public pronouncements by governments and their agencies will set up straw men in their releases and recognize that forecasts are necessarily imprecise.

“The Cabinet today decided that all protesters at G-20 meetings held in Canada will be billy-clubbed. Voting against the motion was the Public Safety Commissioner, who wished to place land-mines in approved protest areas”.

Oh boy, this is just like the old days! The Canadian preferred share market got clobbered today, with PerpetualDiscounts losing 70bp and FixedResets down 12bp. Volume continued at elevated levels.

CalPERS, the gigantic California pension fund most notable for not doing its own credit analysis, has been told to take a running jump:

Judge Richard Kramer in San Francisco state court said yesterday that the companies’ ratings of three structured investment vehicles that the California Public Employees’ Retirement System lost money on are a form of speech about an issue of public interest that is protected under a state law designed to fend off cases meant to chill public debate.
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The companies all gave their highest ratings to Cheyne Finance LLC, Stanfield Victoria Funding LLC and Sigma Finance Inc., prompting Calpers to invest $1.3 billion in them in 2006, the fund said in its complaint.

The Australian covered bond market is attracting attention:

Westpac Banking Corp., Commonwealth Bank of Australia, Australia & New Zealand Banking Group Ltd. and National Australia Bank Ltd. may be able to issue three-year covered bonds priced to yield about 50 basis points more than the bank bill swap rate, less than the 85 basis-point spread on senior debt, according to Royal Bank of Scotland Group Plc. Moody’s Investors Service estimates savings of 20 percent.

Covered bonds are “essential weapons as banks look for cheaper and more diversified sources of funding,” John Manning, a credit analyst at RBS in Sydney, said in a telephone interview. Even when global credit markets seized up, European banks “had good access to covered bond markets and were able to access the funding they required at quite commercially acceptable rates,” he said.

The Australian government will amend the law to let financiers issue the securities for the first time, Treasurer Wayne Swan said Dec. 12 as he announced an overhaul package aimed at spurring competition in the banking industry. Global sales of the securities, including Pfandbriefe, as they are known in Germany, have surged 33 percent to a record 329 billion euros ($435 billion) in 2010, according to data compiled by Bloomberg, as investors seek the relative safety of debt backed by both the issuer and an underlying pool of assets.
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Investors in Europe demand 177 basis points of extra yield to hold covered bonds instead of government debt, according to Bank of America Merrill Lynch’s EMU Covered Bonds index. Spreads average 237 basis points, or 2.37 percentage points, on the region’s financial debt, a separate index shows.

Australia’s government will release draft amendments to the Banking Act to allow the sale of covered securities during the first sitting of Parliament next year, according to a federal document detailing the planned changes.

Allowing covered bonds will help “secure the long-term safety and sustainability” of Australia’s banking system, the document states. Treasury may impose a cap on the amount of covered bonds that each bank can sell, “for example five percent of an issuer’s total Australian assets,” it said.
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Canadian Imperial Bank of Commerce raised A$750 million in October in the first sale of Australian dollar-denominated covered bonds since the start of the credit crisis in 2007. The Australian laws don’t block overseas banks issuing the notes.

The 5.75 percent notes due December 2013 were priced to yield 91.25 basis points more than similar-maturity government debt, according to a statement at the time. The spread has narrowed to 87 basis points, according to ANZ Bank prices on Bloomberg. A basis point is 0.01 percentage point.

It was clobberin’ time on the Canadian preferred share market, as high volume and losses continued. PerpetualDiscounts got smacked for 42bp, while FixedResets were down 10bp.

The most irritating news of the day was the closing quote on BNA.PR.E, which settled on Friday and has already been forgotten by the underwriters who made a nice little fee for flogging it. It traded 64,885 shares on the day in a range of 24.81-91. So far, so good, right? The closing quote was 22.00-24.80, 20×50. That’s a two dollar and eighty cent spread on issue that closed on the previous trading day. This is a disgrace; the market maker, the exchange and the underwriters should be ashamed of themselves.

One factoid of note is that Scotia was the only broker with any buying interest, responsible for 60,500 of the buy side, leaving only 4,385 for the rest of the street.

Meanwhile, remember GWO.PR.J? It was quoted Friday at 26.40-27.60 after trading 2,457 shares and today traded 5,764 shares in a range of 26.75-95 before closing with a quote of 26.80-60, 1×8.

This is simply not acceptable. Market makers get valuable privileges and if they want to keep them, should be required to earn them.

I have sent the following eMail to the Exchange:

Sirs,

I have not yet received a reply to the eMail below. Can you tell me when I might expect to receive it?

I note additionally that GWO.PR.J had a closing quote 26.40-27.60 on Friday and a quote of 26.80-60. Can you explain why you permit such incompetent market making?

I also note that BNA.PR.E, a new issue which settled on Friday, closed the second trading day of its existence with a quote of 22.00 – 24.80. Why does the Exchange permit such a lackadaisical attitude by those whom it rewards with market making privileges?

I sent the original eMail on December 2.