November 22, 2010

The Irish have some wiggle-room in bail-out negotiations:

Ireland won’t be required to raise its corporate tax rate as part of a European Union bailout, French President Nicolas Sarkozy said, addressing an issue that looms as a stumbling block to an aid agreement.

“When you have to tackle a deficit, you have two levers, spending and taxes,” Sarkozy said today in Lisbon at a summit of NATO leaders. “I can’t believe that our Irish friends, in full sovereignty, won’t look at both since they have more room for maneuver given that their tax rates are lower. But that’s not a demand or a condition, just an opinion.”

So much for bravado:

Finance Minister Brian Lenihan said Ireland will apply for a bailout as it sets itself up to be the second euro member to seek a rescue from the European Union and the International Monetary Fund.

“I will be proposing to my colleagues that they should formally apply for a program,” Lenihan said in an interview with state broadcaster RTE in Dublin. “The banks were too big a problem for the country. The key issue all the time for the government is to ensure that we do not have a collapse of the banking sector.”

And now, it’s official:

Ireland sought international aid, becoming the second euro country to need a rescue as the cost of saving its banks threatened a rerun of the Greek debt crisis that destabilized the currency.

Ireland will channel some of the money from the European Union and International Monetary Fund to lenders through a “contingent” capital fund, Irish Finance Minister Brian Lenihan told reporters late yesterday. The rest of the package, which Goldman Sachs Group Inc. estimates may total 95 billion euros ($130 billion), would help Ireland avoid selling bonds.

“The banks were too big a problem for the country,” Lenihan said in Dublin. “The key issue all the time for the government is to ensure that we do not have a collapse of the banking sector.”

This is interesting in light of the prognostications of Willem Buiter and Ann Sibert in The collapse of Iceland’s banks: the predictable end of a non-viable business model (discussed on November 5, 2008):

Iceland’s circumstances were extreme, but there are other countries suffering from milder versions of the same fundamental inconsistent – or at least vulnerable – quartet:
(1) A small country with (2) a large, internationally exposed banking sector, (3) its own currency and (4) limited fiscal spare capacity relative to the possible size of the banking sector solvency gap.

Countries that come to mind are:

and even to some extent the UK, although it is significantly larger than the others and has a minor-league legacy reserve currency.

Ireland, Belgium, the Netherland and Luxembourg possess the advantage of having the euro, a global reserve currency, as their national currency. Illiquidity alone should therefore not become a fatal problem for their banking sectors. But with limited fiscal spare capacity, their ability to address serious fundamental banking sector insolvency issues may well be in doubt.

One way or another, there are repercussions:

Ireland’s bid for financial aid may trigger a cut in the country’s credit rating, the demise of the government and an exodus of multinational companies.

The euro fell and Irish bonds pared their advance after Moody’s Investors Service said a “ multi-notch” downgrade in Ireland’s Aa2 credit rating was “most likely” because the aid would increase the country’s debt burden. The prospect of January elections loomed as the Green Party said it would pull out of Prime Minister Brian Cowen’s coalition.

Accounting rules are a big issue:

A dispute between U.S. and international accounting groups about how to value financial instruments is threatening to derail efforts to converge global standards, affecting how trillions of dollars of assets are marked on bank balance sheets.

The debate pits the U.S. Financial Accounting Standards Board, which wants to expand the use of fair-value accounting to all financial assets, including loans and deposits, against the London-based International Accounting Standards Board, which opposes such a wide usage. The outcome also will determine how much capital banks have to hold to meet new rules.

FASB’s proposal, announced in May, could cause 26 of the largest U.S. banks to write down the value of about $4 trillion of loans on their books by as much as $138 billion, estimated Jason Goldberg, an analyst at Barclays Plc. Lenders, regulators and some investors have taken IASB’s side, leaving the U.S. standard-setter isolated in its battle.

The five U.S. banking regulators sent a joint letter to FASB in September voicing opposition as well.

“We are concerned about the potential implications of the proposal for financial intermediation and stability and, therefore, we oppose the proposed requirement to report substantially all of a financial institution’s financial instruments at fair value,” the Fed, the Federal Deposit Insurance Corp. and three other regulators said.

Volcker who was Fed chairman in the 1980s and now advises U.S. President Barack Obama, said he favors IASB’s approach on valuing financial instruments.

“You can’t have everything at fair value,” Volcker, 83, said. “I’m not in favor of fair valuing bank loans because we don’t know their fair value anyway. It’s not consistent with the basic business model of commercial banks.”

Goldman Sachs Group Inc., the most profitable U.S. securities firm, has said that banks hide losses on loans used to generate investment-banking fees. In a Sept. 1 letter to FASB, Goldman Sachs described how banks lend at below-market rates to win equity and debt-underwriting deals, a practice known as “lend to play.” Goldman Sachs executives have argued that the firm’s practice of marking assets to market value helped it prepare for the credit contraction earlier than rivals.

Spend-Every-Penny says he’s going to make some tough but fair decisions:

The country’s top financial policymakers warned Canadians on Sunday to brace for tough decisions and “very big challenges” ahead as Canada tries to secure its recovery in an ever-changing global economic landscape.

Finance Minister Jim Flaherty — set to deliver a key speech on federal economic policy in Oakville, Ont., on Monday — said the Conservative government is determined to cap program spending so Canada can return to a balanced budget position and avoid the turmoil Europe is undergoing.

He acknowledges this won’t be a popular decision, with certain segments of the population and his political opponents.

I’m astonished! I thought we were going to return to a balanced budget (wooHoo!) without any pain or effort whatsoever, and that anybody who spoke of structural deficits was wrongheaded and politically motivated.

One correlation measure states that stocks and bonds have decoupled:

For the first time since the financial crisis started, U.S. shares are moving independently of the bond market, a sign that profits and valuations are guiding investors more than concern about the economy.

The 30-day correlation coefficient measuring how often the Standard & Poor’s 500 Index moves in tandem with 10-year Treasury yields fell to minus 0.42 from a record 0.89 in June, data compiled by Bloomberg show. Readings of 1 indicate prices are moving together, while zero shows no link and minus 1 means they are going in opposite directions. Stocks and debt are ending a lockstep relationship that began in July 2007 and lasted through the worst recession since the 1930s.

Meredith Whitney thinks the shadow banking system will expand:

U.S. banks will close 5,000 branches in the next 18 months as they face profit declines from decreased loan demand and lower fee revenue, said Meredith Whitney, the former Oppenheimer & Co. analyst who now runs her own firm.

Whitney has said earnings pressures and new regulation will lead to some lower-income customers losing access to banking services. The number of households without access to the “traditional banking system” will rise to 41 million by 2015 from 30 million in 2009, she said in the Nov. 18 note.

“The most regrettable unintended consequence of some of the quickly written regulatory reform, we believe, will be the inevitable ‘debanking’ of the U.S. financial system,” said Whitney, who started New York-based Meredith Whitney Group after correctly predicting Citigroup Inc.’s dividend cut in 2007. “Fewer ‘bankable’ customers will contribute to the trend in fewer bank branches.”

Potash Corp. is issuing 30-year USD notes at 5.625%. DBRS rates them BBB(high) and comments that the issue has a poison put and continuous call:

The terms of the Notes will include a change of control provision, which upon the occurrence of both (1) a change of control and (2) a downgrade of a particular series of notes below an investment grade rating (as specified), will require Potash to make an offer to purchase such series of notes at a price equal to 101% of the aggregate principal amount of such notes, plus accrued and unpaid interest to the date of repurchase. The Notes will also be redeemable, in whole or in part, at the option of Potash at any time and from time to time at a redemption price equal to the greater of: (1) 100% of the principal amount of the notes to be redeemed; and (2) the sum of the present values of the remaining scheduled payments of principal and interest on the notes being redeemed on the redemption date (not including any portion of any payments of interest accrued to the redemption date) discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at specified discount rate; plus any accrued and unpaid interest.

The draft prospectus makes it clear that the discounting rate is a spread over treasuries, but does not specify the spread.

Moody’s is acquiring CSI Global Education:

Moody’s Corporation (NYSE:MCO) announced today that it has acquired CSI Global Education Inc. (CSI), Canada’s leading provider of financial learning, credentials, and certification. CSI will operate within Moody’s Analytics, strengthening Moody’s capabilities for delivering credit training programs, research and analytical services, and risk management software to financial institutions worldwide.

Moody’s purchased CSI for C$155 million (US$151.4 million), subject to customary closing adjustments. Inclusive of the unfavorable impact of purchase accounting, the acquisition is expected to have a negligible impact on Moody’s GAAP earnings per share (EPS) for the fourth quarter of 2010 and full-year 2011, and to be accretive to EPS thereafter. The acquisition was funded from cash on hand.

This will be an interesting thing to follow, because CSI-GE is a joke of a company, producing the most inadequate training courses in the history of the universe. The only reason they exist is because they’ve got (what amounts to) an exclusive contract with Canadian securities regulators to provide required industry courses for box-ticking purposes. We shall see if quality improves over the next few years … and if the monopoly continues!

It was a day of declines in the Canadian preferred share market, with PerpetualDiscounts down 3bp and FixedResets getting hit for 12bp, taking the median weighted average yield on the latter index up to 3.10%. Volume continued at high levels.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
(at bid)
Mod Dur
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.4925 % 2,256.2
FixedFloater 4.94 % 3.58 % 26,539 19.02 1 0.0000 % 3,404.4
Floater 2.64 % 2.34 % 59,138 21.42 4 0.4925 % 2,436.1
OpRet 4.76 % 3.00 % 61,816 2.43 8 -0.0143 % 2,392.2
SplitShare 5.40 % -0.69 % 120,773 1.05 3 0.0661 % 2,491.0
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0143 % 2,187.4
Perpetual-Premium 5.66 % 5.26 % 164,747 3.04 24 -0.1202 % 2,016.5
Perpetual-Discount 5.35 % 5.38 % 266,975 14.90 53 -0.0266 % 2,043.7
FixedReset 5.23 % 3.10 % 356,305 3.17 50 -0.1242 % 2,280.3
Performance Highlights
Issue Index Change Notes
MFC.PR.B Perpetual-Discount -1.28 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-22
Maturity Price : 20.78
Evaluated at bid price : 20.78
Bid-YTW : 5.61 %
CIU.PR.B FixedReset -1.24 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-01
Maturity Price : 25.00
Evaluated at bid price : 27.85
Bid-YTW : 3.33 %
BMO.PR.H Perpetual-Discount -1.15 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-22
Maturity Price : 23.51
Evaluated at bid price : 25.01
Bid-YTW : 5.24 %
RY.PR.H Perpetual-Premium -1.01 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-23
Maturity Price : 25.00
Evaluated at bid price : 25.59
Bid-YTW : 5.25 %
Volume Highlights
Issue Index Shares
TRP.PR.A FixedReset 145,011 Nesbitt crossed 116,000 at 26.50; National crossed 11,400 at 26.37.
Maturity Type : Call
Maturity Date : 2015-01-30
Maturity Price : 25.00
Evaluated at bid price : 26.35
Bid-YTW : 3.37 %
RY.PR.L FixedReset 102,678 RBC crossed 99,500 at 27.00.
Maturity Type : Call
Maturity Date : 2014-03-26
Maturity Price : 25.00
Evaluated at bid price : 27.02
Bid-YTW : 3.00 %
BAM.PR.T FixedReset 85,747 Recent new issue.
Maturity Type : Limit Maturity
Maturity Date : 2040-11-22
Maturity Price : 23.09
Evaluated at bid price : 25.00
Bid-YTW : 4.49 %
SLF.PR.A Perpetual-Discount 64,395 National crossed 41,000 at 21.96.
Maturity Type : Limit Maturity
Maturity Date : 2040-11-22
Maturity Price : 21.68
Evaluated at bid price : 21.95
Bid-YTW : 5.39 %
BNS.PR.N Perpetual-Discount 60,696 Desjardins bought three blocks of 11,000 shares each from anonymous; the first at 25.01, the next two at 25.00.
Maturity Type : Limit Maturity
Maturity Date : 2040-11-22
Maturity Price : 24.75
Evaluated at bid price : 24.99
Bid-YTW : 5.30 %
BNS.PR.P FixedReset 59,195 National crossed 52,500 at 26.49.
Maturity Type : Call
Maturity Date : 2013-05-25
Maturity Price : 25.00
Evaluated at bid price : 26.46
Bid-YTW : 2.67 %
There were 57 other index-included issues trading in excess of 10,000 shares.

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