March 13, 2013

Boyd Erman made some good points on mortgages yesterday:

Imagine the federal government lauding cellphone carriers for keeping rates high, or airlines for declining to match each other’s fare cuts. There would be an outcry. Yet Finance Minister Jim Flaherty congratulates banks for not competing to offer the best loan price on what will likely be the biggest purchase most Canadians’ ever make, their home, and nobody can gin up much outrage.

Mortgage debt seems to becoming one of those perceived ills, like booze and cigarettes, where the government not only regulates how they can be sold, but sets minimum prices aimed at preventing people from overindulging. If that’s the case, maybe the government ought to come right out and say it.

I don’t agree with everything he said, but by and large – well done, Mr. Erman!

I mentioned the Too-Big-To-Fail subsidy on March 11 and complained that the banks’ rebuttal of estimates of the subsidy’s size was not available. Well, it has finally been released:

the Financial Services Forum, the Financial Services Roundtable, The Clearing House, Securities Industry and Financial Markets Association, and the American Bankers Association, released the following policy brief in response to questionable assertions of a “taxpayer subsidy” to large banks. The following points should be kept in mind:
  • The recent estimation that large banking companies enjoy a subsidy worth $83 billion is based on a flawed methodology, and on the extrapolation of stale and unreliable financial market data collected before passage of the Dodd-Frank Act.
  • An IMF analysis completed in 2010 – before passage of Dodd-Frank – estimated the cost of funding advantage enjoyed by large banking companies to be only “about 20 basis points on average.”
  • Several more recent studies indicate that, since the passage of Dodd-Frank, any cost of funding advantage has been dramatically reduced or even eliminated. In fact, two recent studies conclude that markets are now imposing a cost of funding premium on large banks of up to 35 basis points.

Bloomberg’s editors continue the debate:

Finally, the two papers by Cyree and Balasubramnian represent good-faith efforts that the authors readily admit are far from ideal. They found that big banks’ borrowing costs increased relative to those of small banks in the second half of 2010, and attributed the change to Dodd-Frank’s elimination of the subsidy. They employed data on 30 banks, only 11 of which were not too big to fail, a small sample that might have skewed the estimated funding advantages of the bigger institutions. Also, their statistical controls could have missed important factors — such as the brewing European debt crisis — that might have had a differential effect on the borrowing costs of the biggest banks.

As Cyree put it: “I can’t tell you that this is strictly due to Dodd-Frank.”

Of course, no statistical study is perfect, particularly when dealing with something as difficult to estimate as the bank subsidy. That said, a paper by three economists — Viral Acharya of New York University, Deniz Anginer of Virginia Tech and A. Joseph Warburton of Syracuse University — looked at a larger sample of financial institutions and found that the too-big-to-fail subsidy amounted to almost $100 billion in 2010, the year Dodd-Frank was signed into law. The paper also included a separate test, which looked at bond yields immediately before and after the House and Senate reconciled their versions of the bill. It suggested that Dodd-Frank might have actually increased the subsidy.

One thing Bloomberg pointed out was a cheap-shot by the bank lobbyists:

Given these analytic shortcomings, it is not surprising that the title page of the paper bears a boxed disclaimer stating in bold font: “This working paper should not be reported as representing the views of the IMF.”

Bloomberg points out:

The disclaimer is standard boilerplate for IMF working papers.

I’m not aware of any central-bank-style research that does not carry such a disclaimer. The banks’ attempt to make it appear to be a deliberate distancing of the IMF from the research does nothing but harm their own credibility.

It would appear that there are now so many regulators they can’t all be hired by banks, so they’re widening the net:

A series of proposed rule changes from the country’s securities regulators would make hostile takeover bids harder to pull off, tightening a regime critics say has rendered corporate Canada easy hunting grounds for U.S. hedge funds.

On Wednesday, the Canadian Securities Administrators (CSA), which is the umbrella group for Canada’s provincial market watchdogs, officially unveiled its proposal to lower the “early warning” stock ownership threshold that forces would-be hostile takeover bidders to disclose their holdings in a target company. As previously reported in The Globe, bidders would have to go public after acquiring 5 per cent of a target company’s shares, down from 10 per cent. The CSA says the change would improve “market transparency.”

And on Thursday, the CSA will formally unveil a long-awaited proposal that would strengthen what are known as “poison pills”: tactics used by boards of directors to try to fend off hostile takeover bidders. The plan would see securities regulators allow companies to use poison pills indefinitely, provided they are approved by shareholders at the most recent annual meeting or at a special meeting held in the face of a hostile bid.

It was a mild day for the Canadian preferred share market (except for RON.PR.A!), with PerpetualPremiums flat, FixedResets off 4bp and DeemedRetractibles down 5bp. Volatility was muted. Volume was average.

PerpetualDiscounts now yield 4.82%, equivalent to 6.27% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.35%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 210bp, unchanged from the figure reported on March 6.

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 -0.0157 % 2,615.7
FixedFloater 4.09 % 3.43 % 28,979 18.42 1 0.0862 % 3,975.1
Floater 2.55 % 2.84 % 88,453 20.15 5 -0.0157 % 2,824.2
OpRet 4.82 % 3.31 % 55,311 0.46 5 -0.0618 % 2,597.9
SplitShare 4.29 % 4.11 % 720,756 4.22 4 0.0227 % 2,934.8
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0618 % 2,375.6
Perpetual-Premium 5.21 % 1.69 % 90,101 0.58 31 -0.0029 % 2,357.8
Perpetual-Discount 4.83 % 4.82 % 151,739 15.79 4 0.2565 % 2,666.3
FixedReset 4.89 % 2.55 % 291,039 3.31 80 -0.0374 % 2,514.9
Deemed-Retractible 4.87 % 2.86 % 137,140 0.62 44 -0.0492 % 2,445.2
Performance Highlights
Issue Index Change Notes
TRI.PR.B Floater -1.19 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-03-13
Maturity Price : 23.82
Evaluated at bid price : 24.07
Bid-YTW : 2.17 %
PWF.PR.P FixedReset -1.07 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-03-13
Maturity Price : 23.70
Evaluated at bid price : 25.97
Bid-YTW : 2.84 %
HSB.PR.D Deemed-Retractible 1.25 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-04-12
Maturity Price : 25.50
Evaluated at bid price : 25.90
Bid-YTW : -16.44 %
Volume Highlights
Issue Index Shares
Traded
Notes
TRP.PR.D FixedReset 105,804 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-03-13
Maturity Price : 23.27
Evaluated at bid price : 25.55
Bid-YTW : 3.56 %
PWF.PR.S Perpetual-Discount 73,424 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-03-13
Maturity Price : 24.61
Evaluated at bid price : 25.00
Bid-YTW : 4.82 %
TD.PR.G FixedReset 55,575 Scotia crossed 50,000 at 26.43.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-04-30
Maturity Price : 25.00
Evaluated at bid price : 26.45
Bid-YTW : 1.68 %
ENB.PR.F FixedReset 54,569 Nesbitt crossed 40,000 at 26.02.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-06-01
Maturity Price : 25.00
Evaluated at bid price : 25.87
Bid-YTW : 3.31 %
FTS.PR.C OpRet 36,755 Desjardins crossed 30,500 at 25.23.
YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2013-08-31
Maturity Price : 25.00
Evaluated at bid price : 25.22
Bid-YTW : 3.93 %
RY.PR.P FixedReset 34,203 RBC crossed 25,000 at 26.05.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-02-24
Maturity Price : 25.00
Evaluated at bid price : 26.04
Bid-YTW : 2.16 %
There were 36 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
TCA.PR.X Perpetual-Premium Quote: 51.17 – 51.65
Spot Rate : 0.4800
Average : 0.3441

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-10-15
Maturity Price : 50.00
Evaluated at bid price : 51.17
Bid-YTW : 2.70 %

TRI.PR.B Floater Quote: 24.07 – 24.40
Spot Rate : 0.3300
Average : 0.2310

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-03-13
Maturity Price : 23.82
Evaluated at bid price : 24.07
Bid-YTW : 2.17 %

IAG.PR.A Deemed-Retractible Quote: 24.88 – 25.11
Spot Rate : 0.2300
Average : 0.1312

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.88
Bid-YTW : 4.66 %

ABK.PR.C SplitShare Quote: 32.00 – 32.24
Spot Rate : 0.2400
Average : 0.1474

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-10
Maturity Price : 31.64
Evaluated at bid price : 32.00
Bid-YTW : 2.86 %

FTS.PR.E OpRet Quote: 26.37 – 26.66
Spot Rate : 0.2900
Average : 0.2105

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-06-01
Maturity Price : 25.75
Evaluated at bid price : 26.37
Bid-YTW : -5.35 %

PWF.PR.P FixedReset Quote: 25.97 – 26.16
Spot Rate : 0.1900
Average : 0.1270

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-03-13
Maturity Price : 23.70
Evaluated at bid price : 25.97
Bid-YTW : 2.84 %

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