I’m becoming more and more convinced that the Credit Crunch has evolved from its fundamental role as Reducer of Excesses to a new position as Political Football.
My thoughts on this are influenced by many things. For instance, compare the sub-prime credit loss estimates of the Bank of England with those of the IMF. These estimates are, as has been noted, not just wildly at variance with each other, but prepared without even taking note of each other. For all my respect for these two institutions, this smacks of intellectual dishonesty – and in my book, there is no greater crime.
Quite frankly, I believe the methodology of the IMF report (which leaned heavily on the paper by Greenlaw et al.) to be deeply flawed; and not just deeply flawed but deliberately skewed. So why would the IMF adopt it? They have a lot of smart people on staff; I won’t be the only person in the world to have noticed the dicey bits; why was this methodology used holus-bolus instead of simply providing the top end of a range of estimates?
My hypothesis is that it’s simply politics. The two basic factions in the investment world are those who want lots of regulation to save us from the evil Bonfire of the Vanities and those who feel that over-regulation is simply promoting inefficiency of the capital markets. These opposing forces are not comprised exclusively of idealogically pure crusaders, either! In Canada, for instance, the banks can be counted upon to promote wise regulation, not too much, not too little …. as long as whatever happens favours capital markets players who have deep, deep pockets.
There will be members of both factions on staff at the IMF, and at any regulatory group or ultimately responsibile government. Sometimes you win, sometimes you lose, in general things proceed in an ultimately half-way reasonable manner, albeit with one step back for each two steps forward. Forecasting the effects of regulation is no easier than forecasting markets … and at least when you attempt to forecast the market you have a pretty good idea of your ultimate objective!
The hard-liners in either faction are never satisfied, however – and the more cynical players, taking whatever position best serves their business will always be looking for more. Thus, every development in the capital markets is carefully examined to determine its value as a weapon in the struggle.
Canadian ABCP? It’s been used to justify a call for higher pay for regulators, to justify calls for the OSFI to expand its mandate to ensure nobody ever loses money on anything and to justify a federal regulator. The Bank of Canada has brought forth some rules to ensure that the banks never again have to worry about competition in the ABCP market from snot-nosed small corporation scum.
And so it is with Bear Stearns. I wrote about the Econbrowser post yesterday. The Econbrowser piece wanted Bernanke (i.e., the Fed) to Do Something about leverage in the brokerage industry … which is not the Fed’s purview at all, it’s in the SEC’s bailiwick. There was a note from Dave Altig of the Atlanta Fed in the Econbrowser comments, drawing attention to the Fed’s preventative measures … and still, not a word about the SEC. You can find inumerable instances of hand-wringing on the web, bewailing the fact that the Fed is (sort-of) forced to backstop a system over which it has no direct supervisory function – although, as I have pointed out, separation of lending/monetary functions and bank supervision functions are more standard throughout the world than otherwise.
The more I think about it, the more convinced I am that most of the discussion of Bear Stearns has absolutely nothing to do with a genuine desire for better regulation (you want more margin and less leverage? OK, how much more margin and how much less leverage? Let’s discuss it!) and a lot more to do with a desire to change the identities of the regulators. It’s a world-wide bureaucratic turf fight; the credit crunch, sub-prime and Bear Stearns are merely the latest weapons of convenience.
For the record, my position at the moment is that supervisory responsibility for the brokerage sector should remain with the SEC. Assiduous Readers will by now be sick and tired of reading this, but I believe the brokerages should represent a riskier and less constrained layer surrounding a banking core in the financial system. If the Central Bank has supervisory functions, there will be both a higher degree of expectation of emergency assistance in times of stress and a higher probability as well, since staff at the Central Bank – however upright and angelic their characters – will be somewhat more inclined to double-down with assistance from the discount window than to admit a possible failure of regulation and let an insolvent firm go bankrupt.
I might work this up into a formal article at some point. Remember, you read it on PrefBlog first!
As remarked by Accrued Interest, now that reports are increasing that the credit crunch is over and companies might actually be able to pay back some money, there are also growing concerns that the money we get might not be worth very much:
Bernanke and San Francisco Fed President Janet Yellen, in separate speeches yesterday, said markets remain “far from normal” after some improvement since March. Yellen, Cleveland Fed President Sandra Pianalto, Kansas City Fed President Thomas Hoenig and the Dallas Fed’s Richard Fisher said they’re concerned about rising prices.
…
Yellen, 61, who doesn’t vote on rates this year, also said she anticipates consumer prices will moderate as the labor market weakens and “commodity prices level off.”The Fed can’t be “complacent about inflation,” she told the CFA Institute Annual Conference. Recent measures of price expectations “highlight the risk that our attempts to deal with problems in the real economy could lead to higher inflation expectations and an erosion of our credibility,” she said.
Fisher, speaking in Midland, Texas, said the U.S. may be in for a “prolonged” period of slow growth, which may end with faster-than-desirable inflation.
“How deep that slowdown will be is a question mark,” said Fisher, who voted against the last three rate cuts. “I am not sure it will be very deep at all, but it may be prolonged, because we have to correct the excesses of this credit crisis.”
Naked Capitalism notes a post by Willem Buiter, who burnishes his monetarist credentials:
In a fiat money world, central banks cause inflation, or, more precisely, only central banks are resposible for inflation. Other shocks, real and nominal, can influence the general price level if the central bank does not respond swiftly and determinedly, but these non-central bank-induced changes in the general price level can always be offset by the central bank, given enough time, freedom to act and courage.
But, in the medium and long term (at horizons of two years and over, say) central banks choose the average rate of inflation. Not globalisation; not indirect taxes; not bad harvests; not OPEC and the price of oil; not the Chinese and their exchange rate management. There is no oil inflation, food inflation or cost-push inflation. There is just inflation. Inflation may be accompanied by changes in key relative prices – in the real prices of oil, of food, of oil and of labour for instance – if other relative demand and supply shocks accompany the inflationary impulses created by the central bank. Large increases in the real price of food will be bad news to food importers (including most urban households) and good news to rural food producers and exporters. But don’t confuse it with inflation.
In the petty annoyances department, Andrew Willis discusses the Sprott IPO:
Brokers are using the “anonymous” function on the TSX to do much of their selling, with 1.5 million shares sold this way. Disguising orders by not disclosing the name of the brokerage house doing the transaction fits that segment of the hedge fund and dealer crowd that prefers to be discreet. Dealers are sensitive to the issue of flipping an IPO from a money manager who also counts as a major trading client.
Does Mr. Willis know or care that it would be grossly unethical for Sprott to allow annoyance with IPO selling to influence – in any way – its trading with client money?
From Prefblog’s Out-of-time-here’s-the-links Department:
- What we know and what we would like to know about Central Bank communication
- Fed’s Direct Loans to Banks Climb to Record Level
- Bernanke Urges ‘Hunkering’ Banks to Raise Capital
Floaters finally had a bad day … they are now up a mere 8.26% on the month.
BNS issues did well:
| BNS Straight Perpetuals Prices & Performance 5/15 |
|||
| Issue | Bid | Yield | Day’s Return |
| BNS.PR.L | 20.70 | 5.49% | +0.7299% |
| BNS.PR.M | 20.80 | 5.46% | +1.2165% |
| BNS.PR.K | 21.91 | 5.53% | +0.7356% |
| BNS.PR.N | 24.01 | 5.51% | +1.7373% |
| BNS.PR.J | 24.42 | 5.34% | +1.2858% |
| BNS.PR.O | 25.12 | 5.61% | 0.0000% |
In general, volume dropped off a little, but it was a very strong day.
| Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30 | |||||||
| Index | Mean Current Yield (at bid) | Mean YTW | Mean Average Trading Value | Mean Mod Dur (YTW) | Issues | Day’s Perf. | Index Value |
| Ratchet | 4.83% | 4.86% | 48,893 | 15.81 | 1 | 0.0000% | 1,081.9 |
| Fixed-Floater | 4.67% | 4.61% | 63,642 | 16.08 | 7 | -0.0175% | 1,069.6 |
| Floater | 4.14% | 4.18% | 61,665 | 17.01 | 2 | -0.4926% | 911.7 |
| Op. Retract | 4.82% | 2.53% | 89,447 | 2.59 | 15 | +0.0724% | 1,055.7 |
| Split-Share | 5.26% | 5.55% | 70,913 | 4.15 | 13 | +0.0620% | 1,053.1 |
| Interest Bearing | 6.13% | 6.09% | 52,905 | 3.81 | 3 | 0.0000% | 1,105.5 |
| Perpetual-Premium | 5.88% | 5.10% | 139,428 | 4.38 | 9 | +0.1151% | 1,022.9 |
| Perpetual-Discount | 5.65% | 5.69% | 304,062 | 13.88 | 63 | +0.3378% | 926.0 |
| Major Price Changes | |||
| Issue | Index | Change | Notes |
| BAM.PR.B | Floater | -1.0345% | |
| WFS.PR.A | SplitShare | +1.1000% | Asset coverage of 1.8+:1 as of May 8, according to Mulvihill. Now with a pre-tax bid-YTW of 5.12% based on a bid of 10.11 and a hardMaturity 2011-6-30 at 10.00. |
| HSB.PR.D | PerpetualDiscount | +1.1416% | Now with a pre-tax bid-YTW of 5.73% based on a bid of 22.15 and a limitMaturity. |
| BNS.PR.M | PerpetualDiscount | +1.2165% | Now with a pre-tax bid-YTW of 5.46% based on a bid of 20.80 and a limitMaturity. |
| BNA.PR.C | SplitShare | +1.2500% | Asset coverage of just under 3.2:1 as of April 30, according to the company. The ex-date of the current dividend is not yet known. Now with a pre-tax bid-YTW of 6.57% based on a bid of 21.06 cum dividend and a hardMaturity 2019-1-10 at 25.00. |
| BNS.PR.J | PerpetualDiscount | +1.2858% | Now with a pre-tax bid-YTW of 5.34% based on a bid of 24.42 and a limitMaturity. |
| BNS.PR.N | PerpetualDiscount | +1.7373% | Now with a pre-tax bid-YTW of 5.51% based on a bid of 24.42 and a limitMaturity. |
| RY.PR.A | PerpetualDiscount | +2.3210% | Now with a pre-tax bid-YTW of 5.40% based on a bid of 20.72 and a limitMaturity. |
| Volume Highlights | |||
| Issue | Index | Volume | Notes |
| FTS.PR.E | Scraps (Would be OpRet, but there are credit concerns) | 200,000 | CIBC crossed two lots of 100,000 shares each at 25.45. Now with a pre-tax bid-YTW of 4.67% based on a bid of 25.38 and a softMaturity 2016-8-31 at 25.00. |
| SLF.PR.B | PerpetualDiscount | 198,300 | Nesbitt bought 77,100 from National Bank at 21.90, TD crossed 50,000 at 21.91, then TD crossed another 40,000 at 21.91. Now with a pre-tax bid-YTW of 5.56% based on a bid of 21.90 and a limitMaturity. |
| TD.PR.P | PerpetualDiscount | 92,638 | CIBC crossed 35,000 at 24.25. Now with a pre-tax bid-YTW of 5.46% based on a bid of 24.20 and a limitMaturity. |
| BMO.PR.J | PerpetualDiscount | 64,995 | Now with a pre-tax bid-YTW of 5.60% based on a bid of 20.13 and a limitMaturity. |
| BMO.PR.K | PerpetualDiscount | 58,235 | Now with a pre-tax bid-YTW of 5.73% based on a bid of 23.00 and a limitMaturity. |
| GWO.PR.I | PerpetualDiscount | 54,725 | Desjardins crossed 15,000 at 20.85, then Nesbitt crossed 30,000 at 21.00. Now with a pre-tax bid-YTW of 5.47% based on a bid of 20.86 and a limitMaturity. |
There were nineteen other index-included $25-pv-equivalent issues trading over 10,000 shares today.
“Brokers are using the “anonymous” function on the TSX to do much of their selling, . . .”
———————
As you know, this so-called “function” on the TSX is not just a minor annoyance. It is unethical, and since only select TSX participants have access to it, it provides for an uneven playing surface, one that is already heavily skewed in favour of the so-called “institutional investor”.
It would be very, very nice if the OSC, or perhaps Regulation Services would finally do the right thing, and either provide a function for all traders to have access to this tool, or abolish it altogether.
The concept of “anonymous” trading, although not on par with insider trading, as it exists now is very, very close.
It is outrageous that this concept is allowed to exist on the TSX.
madequota
“Unethical” is a serious word. It is not a word I use lightly; I do not like to see unethical conduct being accepted as a normal part of business (as is the case with the Willis piece); it is not a word I like to see used without good reason.
Kindly explain your use of the word “unethical”.
very well; as you know, I’ve been consistent in my feeling that “professional” traders, institutional investors, mutual fund managers, etc. (basically, everyone other than the “retail, DIY investor”), has a number of advantages in the area of trade execution. We’ve discussed items such as “iceberg” orders, frontrunning, computer buy/sell programs, as well as the “anonymous” order-cloaking tool. All of these items are routinely used by the aformentioned group, and as such, consistently dealt with by the latter.
It is my belief that in any competitive situation, whether it be a hockey game, poker game, cross-country race, olympic competition, or stock market trading scenario, the rules cannot favour one competitor over another. If that happens, then the game has been corrupted, and hence, the outcome rendered meaningless. Look at drug use in amateur sport, and what that’s done to the entire competitive situation there.
Since stock market trading involves real people, investing real money; to me, the idea that a select group of these people should have such a variety of tools at their exclusive disposal is unjust. Perhaps we should not be able to do anything about that; after all different brokerages offer different tools to their clients, and everyone has the right to chose. I can accept that.
However, the identities (via brokerage codes only) of all traders must be available on an equal, and unbiased basis. As a retail investor, I do not have the right to make this choice, therefore concealing one’s identity in a trading situation is not only disadvantageous to those in competion with that trader . . . it is unethical. It is all about the fact that the retail investor has no choice on this issue.
It should not be allowed.
madequota
Your complete ignorance of the meaning of the word “unethical” first came to my attention in the comments to February 15, in which you asserted it was unethical for somebody to bid a penny more than you.
You have previously brought up this canard about anonymous trading not being available to Retail (in the thread David Berry Catfight Spreads, for some reason) and you have been advised that this service is available via Interactive Brokers.
Further, you are screaming “unethical” when – as far as I can tell – you merely disagree with the rules of the game and the choices available to you. There’s nothing unethical about rules that are out in the open. When you scream “unethical” you are putting yourself in the position of a six-year-old screaming “Fuck!” because he likes the reactions he gets.
You are deliberately ignoring the opportunity you have to trade anonymously through Interactive Brokers, and claiming that this opportunity does not exist. In doing so, you are lying. The only unethical conduct I see here is yours.
Grow up, clean up your act and stop using words you don’t understand. Or get off the blog.
No, not this time. You are the one screaming, and not listening to my point.
If you get caught with a radar-detector in your car by a police officer attempting to use radar, you will be convicted of a crime. It is a crime because speed limits are set up to protect other motorists, and by using a radar detector you are attempting to circumvent the law, with the effect of possibly hurting other motorists.
Level II has been set up to give retail investors the clarity of seeing who they’re trading with. Traders using the “anonymous” tool are attempting to circumvent this clarity by concealing their identity. This can hurt other traders. It too, should be against the law. Since it is not, it is merely unethical behaviour at this point.
Mr. Hymas, I thorougly enjoy this blog; I find it highly informative, and for the most part I enjoy discussing issues here with you, and those who have knowledgeable comments to contribute.
The last time you came up with a similar response, it was equally vulgar and insulting, and yes, I did get off this blog because of it. For about a week. Then I returned.
My mistake.
madequota is, I believe, referring to the exchange on New Issue: TD 5.60% Perps.
[…] were misled by governments … but in these days of heroic investor advocacy, it’s very fashionable to claim that anything not to one’s liking is […]
This sounds more like a discussion confusing “unethical” and “unfair”. It may be unfair that institutions have these tools, but the rules seem to allow it — explicitly. Some rules are/seem to be unfair to one group and other rules could be unfair to a different group, but at least there are rules.
An ethical person tries to follow the rules. In golf, taking an allowed free drop sometimes makes us to better off but it is not unethical (like not counting a penalty would be cheating).
When madequota is passionate about “unethical” conduct, it seems that he may really mean conduct he thinks is “unfair”. Mr. Hymas, on the other hand, is more precise, so gets excited about the red flag of the word “unethical”.
So, from my perspective, if I subsitute “unfair” for “unethical” in these comments you both make interesting points.
“Unethical” in my book is worse than “criminal” – because there are a lot of things in the Criminal Code I can’t get too excited about (e.g. marijuana) and a lot of things that are simply too complex to be slapped with a one-word label (e.g., Robert Latimer).
Unethical behaviour is underhanded, sneaky and involves a breach of trust by definition.
Should one choose to crusade against unethical behaviour in the securities industry, there are many black and white examples from which to choose. There’s no shortage of genuine bad guys! ‘Lack of ethics’ is absolutely the worst charge that can be made in the industry and is not one that should be made lightly.
The gravity of the charge also means it should not be made anonymously or pseudonymously. One should always be willing to stand up for one’s beliefs, particularly when discussing something as basic as ethics. And of course, once that word is said, the speaker better be well prepared to back it up with particulars and be prepared to show that so-and-so had an obligation to do X but instead did Y.
In this particular case, all the rules are well laid out in advance and madequota has not been misled in any way. He knows perfectly well that some players have access to iceberg orders and anonymity – techniques he would like to use himself, but doesn’t. He could have anonymity by trading through Interactive Brokers, but apparently has chosen not to do this. I frankly do not know the cheapest manner in which he could gain access to iceberg orders, but have no doubt but that it is available to him for some standard price.
Whatever! The fact of the matter is that he knows the rules and he has three choices: he can play, he can not play or he can hire somebody (*cough, cough*) to play for him. Nobody is lying to him, nobody is promising one thing and doing another. The word “unethical” simply does not apply.
Unfair? Well, I don’t think so, but this would represent a legitimate difference of opinion. Should the OSC & RS micro-manage the industry to the extent of mandating that anonymous and iceberg order types should be available to all players, or to no players, or either way as long as it’s 100%? I don’t think so, but that again can represent a legitimate difference of opinion.
For the record, I think they’re not offered simply because there’s no – or infinitesimal – demand. I think the major discounters have – perhaps simply by default – taken a position something like … “We have 500,000 clients. If we offer it, there are 10 people who (in our judgement) have a reasonable purpose in using it; 1,000 people who don’t really need it but will like it because it makes them feel like big shots; and 200,000 people who don’t need it and don’t want it, but will spend an hour on the ‘phone with our staff trying to figure it out.” So it doesn’t get offered. Players who need it and want it can get institutional service by paying institutional fees on their institutional-size custody and trading.
Banks, as I have often generalized (over-generalized, to some extent), don’t make money selling superb service at a premium price. They make money offering plain vanilla services and producing them cheaply.
Legitimate differences of opinion do exist! And disingenuous arguments – like banks, for instance, making arguments for rule changes that will favour very large and well capitalized players – are also legitimate. This is not Romper Room with Barney. This is business. The purpose is to make some money. Arguments must be made that are clear and logical – screaming that anybody with different views, or anybody who doesn’t give you the service you want at the price you want to pay is a crook is counter-productive. It belongs on washroom walls and discussion forums, not on PrefBlog or any other site with pretentions to being a serious resource for serious investors (as well, of course, as being an advertising vehicle!).
So far, I have not had to delete any legitimate comment. Obvious spam gets deleted – there are about 100 spam posts per day (over a thousand each on Christmas and Boxing Day!) – and it’s possible that on occasion I’ve deleted something that was legitimate, but never intentionally. I hope I never have to, but I will if I find something particularly offensive.
What I will do, however, is attempt to call commenters to account. Anybody who says ‘Everybody in the industry except me is a crook’ is going to get ripped a new one, and anybody who says ‘X is a crook’ had better back it up pretty well. That shit belongs on the discussion forums, where any number of know-nothing sycophants will be only too happy to nod wisely in agreement.
Anybody who says ‘I don’t agree with this rule, it has this effect; it would be better to have that rule, which will have that effect’, on the other hand, will, I hope, find that his ideas are discussed, scrutinized and perhaps accepted, perhaps rejected or perhaps refined. I will attempt to assist in the process – even if merely determining whether a particular state of affairs is due to regulations or merely business policy (which will be made by players as free to offer services as their potential clients are free to walk away), as I did in the case of iceberg orders.