September 6, 2011

The US has a new plan to balance its books, remarkably similar to Europe’s:

Bank of America Corp. and JPMorgan Chase & Co. (JPM) were among 17 banks sued by the U.S. to recoup $196 billion spent on mortgage-backed securities bought by Fannie Mae and Freddie Mac.

The Federal Housing Finance Agency, on behalf of Fannie Mae and Freddie Mac, filed 17 lawsuits yesterday in New York state and federal courts and in federal court in Connecticut. The FHFA accuses the banks of misleading Fannie Mae and Freddie Mac about the soundness of the mortgages underlying the securities.

The UK government may have caught a sanity germ:

U.K. Prime Minister will seek a “significant watering down” of a planned overhaul in banking regulations because the new rules may hurt growth and spur lenders to quit the country, the Sunday Telegraph reported.

Cameron told senior cabinet officials that any proposals from the Independent Commission on Banking to split banks’ retail and investment units or require lenders to raise capital must be reviewed, the newspaper reported, citing unidentified officials. The government is concerned that HSBC Holdings Plc (HSBA) and possibly other banks may move operations away from the U.K. if planned “ring-fencing” rules are implemented, according to the Sunday Telegraph.

With respect to liquidity, here’s a report from the front lines:

Banks are seeking to retain their liquidity, making interbank lending more difficult, as funding from money and capital markets becomes harder to obtain, ABN Amro Group NV Chief Executive Officer Gerrit Zalm said.

Interbank borrowing for more than six months is also becoming problematic because banks are reluctant to lend to competitors with “big positions in weaker countries’ debt, for instance,” he said today on Dutch television program “Buitenhof.”

A demise of the euro would have “catastrophic” consequences for the Dutch economy, which sends about three- fourths of its exports to other euro-zone states, and “would cause a recession that would make the 1930s a trifle by comparison,” Zalm said.

Europe is getting more interesting by the day:

Finland is stepping up efforts to find a compromise with Europe on its collateral demands amid International Monetary Fund opposition to forcing Greece to give euro members extra security for new loans.

Europe’s efforts to contain its debt crisis risk unraveling as individual nations’ demands for collateral, Greece’s deteriorating economic predicament and wavering commitment to austerity packages from euro members such as Italy throw any recovery in doubt.

Finland’s anti-bailout party, which calls itself “The Finns,” last month polled as the country’s most popular, according to broadcaster YLE. The party saw its backing surge fourfold in the April election, making it parliament’s third- biggest. The party’s leader Timo Soini has railed against the costs of funding bailouts and rejects Europe’s ambition of preventing a Greek default.

“The European Union is breaking its own rules and Finland shouldn’t have anything to do with it,” Soini said last week. “This is a disaster. Finland should stay outside and oppose these measures.”

The Finns aren’t the only ones opposing a bail-out:

The Social Democrats, Germany’s main opposition party, took 36.1 percent to win yesterday’s election in Mecklenburg-Western Pomerania, while Merkel’s Christian Democratic Union had 23.3 percent, ZDF television projections showed. The result in the eastern state where Merkel’s election district is located means her national coalition has been defeated or lost votes in all six German state elections so far this year as voters resist her bid to prevent a euro-region breakup by putting more taxpayer money on the line for bailouts.

“Merkel’s CDU got beat in her home state, adding to the sense that opposition to any solution to a deepening crisis is growing,” Sebastien Galy, a senior foreign-exchange strategist at Societe Generale SA in London, wrote in an e-mailed note.

Ackerman had some cheerful things to say about the markets:

The chief executive officer of Deutsche Bank AG (DBK), Josef Ackermann, said market conditions remind him of late 2008, and urged lawmakers to act to avoid a repeat of the financial crisis, which spawned the worst global recession since the Great Depression. Investors drove yields higher on the bonds of Greece, Portugal, Spain and Italy yesterday on doubts Europe’s leaders will be able to stop the sovereign debt contagion.

The Bloomberg Europe Banks and Financial Services Index of 46 stocks dropped almost 10 percent in the past two sessions, to the lowest level since March 31, 2009. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers soared 13 basis points to 259, according to JPMorgan Chase & Co. The difference between the three-month euro interbank offered rate, or Euribor, and the overnight indexed swap rate, a measure of banks’ reluctance to lend to each other, rose to 0.77 percentage point, the widest gap since April 2009.

Many European banks “obviously” wouldn’t be able to shoulder writedowns on sovereign debt held in their banking books based on market values, Ackermann said. Greek two-year notes traded yesterday at less than 50 percent of face value.

However, Greece is going to accellerate its reforms, so everything will be all right. Just don’t panic, OK! Dear God, don’t panic! STOP PANICKING THIS MINUTE, YOU NASTY SPECULATORS!:

Greece said it will accelerate austerity measures pledged in return for international financing as pressure mounted from European partners before the payment of a sixth tranche of bailout loans.

“Greece isn’t a pariah in the European Union or an open wound,” Finance Minister Evangelos Venizelos said from Athens on state-run NET Radio today. “Greece is an equal member of the European Union with deficit and debt problems. Greece can overcome these problems with these reforms.”

Venizelos said he received approval from the Cabinet today to immediately transfer state assets to a special fund for sale, place civil servants in a “reserve” system to retrain them and cut expenses, as well as merge and shut down dozens of government agencies that are a drag on spending.

Ackerman was also in the news for the latest IIF counter-attack against excessive regulation:

The study includes a series of scenarios and a considerable number of variables in determining the impact of the sum of financial regulatory measures. It estimated that all the measures combined will significantly boost the capital needs of banks relative to a base scenario – an additional capital requirement for banks in the leading industrial economies of $1.3 trillion by 2015, according to its central scenario, and this could push bank lending rates up by over 3 ½ percentage points on average for the next five years. The result could be 3.2 percent lower output by 2015 in these economies than would otherwise be the case. This would lead to about 7.5 million fewer jobs being created. The negative economic effects would likely fade in 2016 and beyond but, the maximum drag of reform on the global economy would be at a time when it is apparently least well placed to handle it.

Naturally, the regulators immediately countered:

Group of Seven finance ministers and central bankers will discuss financial regulation at a meeting Friday in Marseille, a Canadian Finance Department official told reporters Tuesday on a conference call.

The official said overly indebted countries in Europe and overly indebted households in the U.S. are the more important headwinds facing the global economy. Canada is relatively pleased with the progress the G20 is making on completing its regulatory program, and Finance is dismissive of the argument that demanding the banks to keep bigger financial cushions is hurting the economy.

If we had better financial regulation in 2007 and 2008, we might not be in the situation we are in now, the Canadian official said.

And if it rained lemonade we could all have a nice drink. So?

I believe that they’re probably both right: all else being equal, increased regulation on the contemplated scale will cause a depression, and that the IIF is being alarmist. I believe this because all else is not equal and never is. What is far more likely is that the banks, constrained by capital requirements, will simply reduce their lending business and there will be an increasing amount of disintermediation as corporations and governments go directly to the public markets. They might lend to small business, but they might also face increased competition in that sector from unregulated shadow banks.

So what will this lead to? It will lead to an ostensibly safer, but far more brittle financial system. Manulife got into trouble during the crisis, but were able to pump a huge amount of capital into their operating subsidiary on very short notice because the holdco was able to borrow billions from the banks on short notice. BofA was able to take over Merrill Lynch on short notice.

If capital regulation leads to lower bank flexibility in a crisis, watch out! We’ve all seen what a mess the politicians make of things when they make up new rules on the fly. It won’t be pretty.

YLO’s CFO has “stepped down”. That was sudden. There were no insider trading reports for YLO on SEDI today. Interestingly – and perhaps related to the hasty departure? – there was no insider trading of the preferreds reported by the TMX today either.

HSB is selling its Canadian retail brokerage:

As HSBC Holdings PLC (HCS-N26.440.100.38%) looks to shed costs from its global operations, the bank acknowledged it is in talks to sell part of its Canadian operations, but said a deal has not yet been reached.

After reports two weeks ago that the U.K.-based bank had opened the books on its Canadian retail brokerage to potential bidders, HSBC issued a statement Tuesday confirming the process. However, “no decision has yet been made to proceed with any transaction,” the bank said.

DBRS confirmed IGM on Friday:

DBRS has today confirmed the Unsecured Debentures rating of IGM Financial Inc. (IGM or the Company) at A (high) and the First Preferred Shares rating at Pfd-2 (high); the trends are Stable. IGM is one of the most consistently profitable financial services companies in Canada, reflecting a leading market position in the mutual fund manufacturing and distribution market through the operations of both Investors Group Inc. (IG) and Mackenzie Financial Corporation (Mackenzie). The rating is primarily based on the profitability, operating cash flow and business strengths of the Company’s IG subsidiary, while recognizing the complementary positive contribution of diverse products, brands and distribution channels offered through the Company’s Mackenzie and Investment Planning Counsel Inc. (IPC) business segments.

In addition to strong profitability, the Company’s credit rating also benefits from strong cash flows, which easily cover the upfront distribution costs of mutual fund sales; strong liquidity; and a conservative financial profile. Debt plus preferred shares-to-EBITDA was less than one time which is very conservative and a sharp improvement from year ago levels following a large debt maturity and growth in retained earnings. Over the past 12 months, the Company’s ratio of debt plus preferred shares-to-total capitalization fell from 29.1% to 25.7%, which remains appropriate for the rating.

DBRS also confirmed twenty-two SplitShares:

The Preferred Shares were last confirmed in August 2010. Equity performance was generally positive from July 31, 2010, to March 31, 2011; however, net asset values (NAVs) dropped over the past few months as global equity markets were negatively affected by concerns over the European sovereign debt crisis and the U.S. debt ceiling deadline. High volatility levels intensified following the downgrade of the U.S. long-term debt rating below AAA by one major rating agency. Notwithstanding the current volatility and sharp drop in markets over the past few months, the current levels of protection available to the Preferred Shares are commensurate with the ratings assigned. The rating confirmations are also based on longer-term performance and structural features of the Issuers that benefit the Preferred Shares. Other key rating factors are the credit quality and diversification of each Portfolio; the amount of distributions paid to the Capital Shares; and the expected maturity date of the Preferred Shares of each Issuer.

Frankly, I’m a little surprised at some of the names in the confirmation list! FFN.PR.A still at Pfd-3(low)? NAVPU was only 13.10 at August 31, presumably a little less now. When it was last confirmed 2010-8-10 the NAVPU was 13.73.

Today’s red-hot investment idea is: buy stock in producers of mosquite repellant and producers of anti-mosquite-borne-disease drugs. Our beloved morons on Toronto City Council have decreed mandatory downspout disconnection, so today I finally got around to booking an appointment with a contractor who can do it without injuring himself or toppling the house over, like I would. I was told that a lot of people aren’t redirecting their downspouts, they’re just capping them – so (a) the eavestroughs will just overflow when full and (b) we’re going to have a lot of standing water in the future. It’s interesting to note the similarity to what I believe will be the unintended consequences of increased bank capital regulation, and the fact that regulators, in general, are incapable of thinking things through; but the situation does suggest my red-hot investment idea. Never say I don’t do enough for you guys!

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts winning 20bp FixedResets losing 3bp and DeemedRetractibles gaining 7bp. Not much volatility. Volume was abysmal.

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 -0.3806 % 2,150.0
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.3806 % 3,233.5
Floater 3.01 % 3.35 % 58,687 18.80 3 -0.3806 % 2,321.4
OpRet 4.82 % 2.92 % 66,787 1.66 8 -0.0290 % 2,446.9
SplitShare 5.38 % 0.07 % 55,236 0.48 4 -0.0727 % 2,493.1
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0290 % 2,237.5
Perpetual-Premium 5.63 % 4.80 % 127,929 1.10 16 -0.0296 % 2,110.6
Perpetual-Discount 5.29 % 5.37 % 127,152 14.82 14 0.2010 % 2,245.1
FixedReset 5.15 % 3.15 % 212,765 2.68 59 -0.0257 % 2,327.1
Deemed-Retractible 5.05 % 4.62 % 249,887 5.95 46 0.0725 % 2,193.9
Performance Highlights
Issue Index Change Notes
POW.PR.A Perpetual-Premium -1.30 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-09-06
Maturity Price : 24.85
Evaluated at bid price : 25.06
Bid-YTW : 5.67 %
BAM.PR.K Floater -1.25 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-09-06
Maturity Price : 15.75
Evaluated at bid price : 15.75
Bid-YTW : 3.37 %
BAM.PR.X FixedReset -1.03 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-09-06
Maturity Price : 22.78
Evaluated at bid price : 24.11
Bid-YTW : 3.70 %
IAG.PR.A Deemed-Retractible 1.32 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.00
Bid-YTW : 5.62 %
Volume Highlights
Issue Index Shares
IFC.PR.A FixedReset 61,890 RBC bought blocks of 11,800 and 10,600 from Nesbitt, both at 24.95.
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.97
Bid-YTW : 3.95 %
BNS.PR.R FixedReset 54,195 RBC crossed 50,000 at 25.13.
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 26.11
Bid-YTW : 3.26 %
TD.PR.I FixedReset 41,645 RBC crossed 40,000 at 27.44.
Maturity Type : Call
Maturity Date : 2014-07-31
Maturity Price : 25.00
Evaluated at bid price : 27.39
Bid-YTW : 3.03 %
IFC.PR.C FixedReset 28,550 Recent new issue.
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.00
Bid-YTW : 4.19 %
RY.PR.W Perpetual-Discount 20,530 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-09-06
Maturity Price : 24.38
Evaluated at bid price : 24.71
Bid-YTW : 4.98 %
BNS.PR.N Deemed-Retractible 18,461 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-01-28
Maturity Price : 25.50
Evaluated at bid price : 26.02
Bid-YTW : 4.70 %
There were 14 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
BAM.PR.J OpRet Quote: 26.40 – 27.23
Spot Rate : 0.8300
Average : 0.6233

Maturity Type : Soft Maturity
Maturity Date : 2018-03-30
Maturity Price : 25.00
Evaluated at bid price : 26.40
Bid-YTW : 4.61 %

CM.PR.P Deemed-Retractible Quote: 25.54 – 26.00
Spot Rate : 0.4600
Average : 0.3050

Maturity Type : Call
Maturity Date : 2012-10-29
Maturity Price : 25.00
Evaluated at bid price : 25.54
Bid-YTW : 4.06 %

POW.PR.A Perpetual-Premium Quote: 25.06 – 25.40
Spot Rate : 0.3400
Average : 0.2205

Maturity Type : Limit Maturity
Maturity Date : 2041-09-06
Maturity Price : 24.85
Evaluated at bid price : 25.06
Bid-YTW : 5.67 %

CIU.PR.A Perpetual-Discount Quote: 23.51 – 23.99
Spot Rate : 0.4800
Average : 0.3662

Maturity Type : Limit Maturity
Maturity Date : 2041-09-06
Maturity Price : 23.06
Evaluated at bid price : 23.51
Bid-YTW : 4.90 %

GWO.PR.I Deemed-Retractible Quote: 22.48 – 22.78
Spot Rate : 0.3000
Average : 0.1919

Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.48
Bid-YTW : 5.80 %

RY.PR.H Deemed-Retractible Quote: 26.57 – 27.00
Spot Rate : 0.4300
Average : 0.3339

Maturity Type : Call
Maturity Date : 2013-05-24
Maturity Price : 26.00
Evaluated at bid price : 26.57
Bid-YTW : 4.22 %

One Response to “September 6, 2011”

  1. […] else in the release, the writedown could be dismissed as an effort by the new CFO (introduced on September 6) to put her mark on the company. But there were other things in the […]

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