June 29, 2009

Bernanke roughly handled by the House Oversight Committee:

Republican lawmakers who have consistently opposed government rescues of financial companies have accused the central bank of overstepping its authority in pressuring Bank of America to absorb Merrill Lynch.

Republican congressional staff wrote in a memo on documents received by the House panel from the Fed through a subpoena that a “gun placed to the head of Bank of America” forced the Charlotte, North Carolina-based bank to go through with the merger, which was announced in mid-September.

but has found defenders in Econbrowser‘s James Hamilton’s post On Grilling the Fed Chair:

It is one thing to have different views from those of the Fed Chair on particular decisions that have been made– I certainly have plenty of areas of disagreement of my own. But it is another matter to question Bernanke’s intellect or personal integrity. As someone who’s known him for 25 years, I would place him above 99.9% of those recently in power in Washington on the integrity dimension, not to mention IQ. His actions over the past two years have been guided by one and only one motive, that being to minimize the harm caused to ordinary people by the financial turmoil. Whether you agree or disagree with all the steps he’s taken, let’s start with an understanding that that’s been his overriding goal.

and in a somewhat more lukewarm manner by Accrued Interest’s Ben Bernanke: Smooth Criminal:

Now the morons in congress are coming for Ben Bernanke for how he handled the Bank of America/Merrill Lynch merger. Seriously? Now, let there be no doubt. Ken Lewis was pressured by the Fed in a way that should leave a bad taste in the mouth of any free citizen. But we were in the middle of an economic war. Sometimes some bad shit happens on the battlefield and sometimes its OK if we look the other way.

Willem Buiter remarks that Too Big to Fail is Too Big (emphasis added):

In banking and most highly leveraged finance, size is a social bad. Fortunately, there is quite a list of effective instruments for cutting leveraged finance down to size.
  • Legally and institutionally, unbundle narrow banking and investment banking (Glass Steagall-on-steroids).
  • Legally and institutionally prevent all banks (narrow banks and investment banks) from engaging in activities that present manifest potential conflicts of interest. This means no more universal banks and similar financial supermarkets.
  • Limit the size of all banks by making regulatory capital ratios an increasing function of bank size.
  • Enforce competition policy aggressively in the banking sector, by breaking up banks if necessary.
  • Require any remaining systemically important banks to produce a detailed annual bankruptcy contingency plan.
  • Only permit limited liability for narrow banks/public utility banks.
  • Create a highly efficient special resolution regime for all systemically important financial institutions. This SRR will permit an omnipotent Conservator/Administrator to financially restructure the failing institutions (by writing down the claims of the unsecured creditors or mandatorily converting them into equity), without interfering materially with new lending, investment and funding operations.

The Geithner plan for restructuring US regulation is silent on the too big to fail problem. That alone is sufficient to ensure that it will fail to result in a more stable and safer US banking and financial system.

Of the laundry list, Assiduous Readers will know that I am most in favour of making regulartory capital requirements an increasing function of bank size: it requires the least judgement by regulators and politicians, is the most transparent and allows the highest degree of forward planning by the banks and by the investors in those banks.

I also want to see an unbundling of narrow banking and investment banking, but preferably not by legislative fiat. I want to see the regulations altered to recognize that there is a difference in institutional culture between these two activities and offer institutions a choice between capital requirement regimes. Those opting for Narrow Banking will find they can lever up their buy-and-hold holdings of consumer loans a little more, but find their trading activities require more capital to cover; those opting for Investment Banking will find it relatively easier to lever up a trading operation, but when paper stays on the books for more than a few months it requires progressively more capital.

I recently read a fascinating paper on the origins of corporate boards; Franklin A. Gevurtz’s The Historical and Political Origins of the Corporate Board of Directors:

Prompted by the litany of complaints about corporate boards – as once again highlighted by recent corporate scandals – this paper seeks to add to the literature on why corporation laws in the United States (and, indeed, around the world) generally call for corporate governance by or under a board of directors. Moreover, this paper takes a very different approach in searching for an answer. Instead of theorizing, this paper examines historical sources in order to look at how and why an elected board of directors came to be the accepted mode of corporate governance. This will entail a reverse chronological tour all the way back to the antecedents of today’s corporate board in fourteenth through sixteenth century companies of English merchants engaged in foreign trade. The central insight of this chronology is that the corporate board of directors did not develop as an institution to manage the business corporation. Rather, it is an institution the business corporation inherited when the business corporation evolved out of societies of independent merchants. This paper also shows how these merchant societies based their adoption of the antecedents of today’s corporate board on widespread political theories and practices in medieval Europe that, although hardly democratic, often called for the use of collective governance by a body of representatives. The discovery of the historical and political origins of the corporate board, besides being interesting in its own right, suggests that the current frustration with corporate boards may arise from confusing an institution designed to achieve political legitimacy through consent of the governed, with the goal of assuring efficient management of a business on behalf of passive investors.

A good solidly strong day for preferreds as FixedResets continued to rock ‘n’ roll on continued heavy volume. I will be most interested to see what tomorrow brings, given the DBRS Mass Downgrade of Bank Prefs & IT1C … probably not much effect, but the banks that got downgraded two notches (HSB, NA, LB) rather than just one (BMO, BNS, CM, RY, TD) might see some effects.

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 -1.4702 % 1,188.7
FixedFloater 7.09 % 5.51 % 35,562 16.31 1 0.0000 % 2,126.6
Floater 3.20 % 3.59 % 76,896 18.30 3 -1.4702 % 1,485.0
OpRet 4.94 % 3.47 % 121,412 0.89 14 0.2391 % 2,210.2
SplitShare 5.74 % 6.31 % 69,731 4.20 3 0.2717 % 1,900.6
Interest-Bearing 5.99 % 0.35 % 22,795 0.08 1 0.2000 % 2,021.1
Perpetual-Premium 0.00 % 0.00 % 0 0.00 0 0.2709 % 1,744.9
Perpetual-Discount 6.32 % 6.37 % 161,445 13.41 71 0.2709 % 1,607.0
FixedReset 5.63 % 4.64 % 486,697 4.35 40 0.3178 % 2,029.1
Performance Highlights
Issue Index Change Notes
BAM.PR.K Floater -2.25 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-29
Maturity Price : 10.86
Evaluated at bid price : 10.86
Bid-YTW : 3.62 %
MFC.PR.C Perpetual-Discount -2.01 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-29
Maturity Price : 17.54
Evaluated at bid price : 17.54
Bid-YTW : 6.48 %
TRI.PR.B Floater -1.63 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-29
Maturity Price : 15.05
Evaluated at bid price : 15.05
Bid-YTW : 2.61 %
BAM.PR.O OpRet -1.26 % YTW SCENARIO
Maturity Type : Option Certainty
Maturity Date : 2013-06-30
Maturity Price : 25.00
Evaluated at bid price : 23.51
Bid-YTW : 6.76 %
CM.PR.D Perpetual-Discount -1.07 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-29
Maturity Price : 21.95
Evaluated at bid price : 22.26
Bid-YTW : 6.45 %
HSB.PR.D Perpetual-Discount 1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-29
Maturity Price : 19.52
Evaluated at bid price : 19.52
Bid-YTW : 6.45 %
SLF.PR.B Perpetual-Discount 1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-29
Maturity Price : 18.50
Evaluated at bid price : 18.50
Bid-YTW : 6.54 %
CU.PR.A Perpetual-Discount 1.11 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-29
Maturity Price : 23.42
Evaluated at bid price : 23.71
Bid-YTW : 6.18 %
PWF.PR.E Perpetual-Discount 1.12 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-29
Maturity Price : 21.60
Evaluated at bid price : 21.60
Bid-YTW : 6.50 %
GWO.PR.F Perpetual-Discount 1.35 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-29
Maturity Price : 22.38
Evaluated at bid price : 22.56
Bid-YTW : 6.58 %
GWO.PR.G Perpetual-Discount 1.38 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-29
Maturity Price : 20.51
Evaluated at bid price : 20.51
Bid-YTW : 6.39 %
BAM.PR.H OpRet 1.39 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2010-10-30
Maturity Price : 25.25
Evaluated at bid price : 25.50
Bid-YTW : 4.94 %
GWO.PR.H Perpetual-Discount 1.41 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-29
Maturity Price : 18.66
Evaluated at bid price : 18.66
Bid-YTW : 6.55 %
BAM.PR.J OpRet 1.59 % YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2018-03-30
Maturity Price : 25.00
Evaluated at bid price : 22.40
Bid-YTW : 7.06 %
CU.PR.B Perpetual-Discount 2.17 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-29
Maturity Price : 24.71
Evaluated at bid price : 25.00
Bid-YTW : 6.06 %
HSB.PR.C Perpetual-Discount 3.54 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-29
Maturity Price : 20.45
Evaluated at bid price : 20.45
Bid-YTW : 6.28 %
Volume Highlights
Issue Index Shares
Traded
Notes
GWO.PR.X OpRet 208,558 Nesbitt crossed blocks of 150,000 and 25,000 shares, both at 26.00; RBC crossed 30,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2010-10-30
Maturity Price : 25.67
Evaluated at bid price : 26.00
Bid-YTW : 3.69 %
GWO.PR.F Perpetual-Discount 203,313 Nesbitt crossed 160,000 at 22.20 and another 40,000 at 22.40.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-29
Maturity Price : 22.38
Evaluated at bid price : 22.56
Bid-YTW : 6.58 %
TD.PR.M OpRet 125,600 RBC crossed three blocks, 49,000 and 30,000 and 19,000 shares, all at 26.16; Desjardins crossed 25,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2010-05-30
Maturity Price : 25.75
Evaluated at bid price : 26.20
Bid-YTW : 3.47 %
BMO.PR.P FixedReset 114,910 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-29
Maturity Price : 23.22
Evaluated at bid price : 25.32
Bid-YTW : 4.90 %
GWO.PR.J FixedReset 81,700 Nesbitt sold 33,900 to RBC at 26.25, then crossed 43,500 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-30
Maturity Price : 25.00
Evaluated at bid price : 26.25
Bid-YTW : 4.80 %
TD.PR.S FixedReset 72,875 RBC bought 18,800 from Anonymous at 24.95, then crossed 26,000 at 24.94.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-29
Maturity Price : 24.86
Evaluated at bid price : 24.91
Bid-YTW : 4.37 %
There were 44 other index-included issues trading in excess of 10,000 shares.

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