PrefBlog

AIG Chairman Harvey Golub says pay restrictions hurt the company. Bloomberg reports:

“While we can pay the vast majority of people competitively, on occasion, these restrictions and his decisions have yielded outcomes that make little business sense,” Golub, 70, said of Feinberg. “In some cases we are prevented from providing market-competitive compensation to retain some of our most experienced and best executives. This hurts the business and makes it harder to repay the taxpayers.”

Feinberg, the Obama administration’s special master on executive pay, has instituted a $500,000 base salary cap for most AIG employees. He has made exceptions for those deemed necessary for the insurer’s success, including Chief Executive Officer Robert Benmosche, who secured a $7 million salary and $3.5 million in long-term incentive awards.

Is it true or is he just pointing a finger? Well, we’ll never know, will we? That’s the trouble with dotted-line responsibility.

The Greece/Goldman/Eurostat kerfuffle is getting funnier by the minute:

Goldman Sachs did consult European statistics agency Eurostat on currency swaps traded with the Greek government, which allowed the sovereign to reduce the size of its reported debt, Gerald Corrigan, a managing director and chairman of Goldman Sachs Bank USA, told a House of Commons Treasury Select Committee hearing this afternoon. It is the first public comment to come out of a Goldman official since the currency swaps controversy reignited two weeks ago, and directly contradicts Eurostat’s claim the agency had no knowledge of the trade.
…
Eurostat, however, has denied knowledge of the trades, saying it was alerted only when the story hit the headlines two weeks ago. “Greek authorities have not informed Eurostat about this kind of swap operation. It is only recently that Eurostat has heard from the press about this individual operation. Eurostat has requested information from the Greek authorities and will only give further comment on the issue when it has received the information,” said a Eurostat spokesperson.

Note that the lawyers have carefully worded Eurostat’s hairsplitting “Greek authorities” and “this individual operation”.

But does it matter? They were encouraging this type of deal!

Before 2002, deals of this kind occupied a grey area in European accounting rules, according to a 2001 report written for the US Council on Foreign Relations and the International Securities Market Association by Italian academic Gustavo Piga. In his report, Piga noted the inability of European authorities to decide whether the deals were permissible or not, and called for “a firm national accounting framework to deal with these window-dressing transactions” – citing as an example a swap put in place on a 1995-vintage three-year bond by the Italian government in 1996. In May 2002, the publication of ESA95 accounting rules answered Piga’s concern by explicitly permitting the transactions and providing a worked example of how to calculate the apparent reduction in national debt – not, perhaps, the reaction Piga had expected.

But, as Felix Salmon points out:

This is a failure of European transparency and coordination; Goldman is a scapegoat.

Of course, getting cash up front is hardly limited to European governments. US municipalities also liked the idea of cash upfront:

JPMorgan lured municipalities into derivative deals by offering upfront cash payments in exchange for a pledge by the local government to agree to enter interest-rate swaps with the bank at a future date.

In these deals, which were rarely put out for public competitive bidding, the bank said its clients would come out ahead if interest rates increased in the future.

JPMorgan and competitors routinely didn’t disclose their fees for these contracts, public records show. In some cases, the bank made more money than it paid out. In Erie, Pennsylvania, JPMorgan gave the school district $755,000 upfront and collected $1.2 million in fees.

The bank was able to lock in its income by selling a mirror-image swap contract on the open market for the higher amount. The transactions involved derivatives, which are unregulated contracts tied to the value of securities, indexes or interest rates.

The deals JPMorgan arranged used floating-rate bonds and interest-rate swaps. The swaps required a municipality and the bank to exchange payments as frequently as every month. The amounts that changed hands were based on various global lending rates.

One of the great joys of investing in US Treasuries is the occasional spike in demand for specific short-term issues due to municipal defeasance – which generally happens during a period of declining rates. That game isn’t being played much this time ’round:

Brill, 47, is caught in an unintended consequence of the Federal Reserve chairman holding overnight rates near zero to ease the worst recession since the 1930s. The city, facing a $212 million budget deficit for the current fiscal year, could sell tax-exempt obligations yielding less than 4 percent to retire 5 percent debt sold seven years ago. To do so, Brill would first have to park the proceeds of the new bonds in an escrow account investing in U.S. government securities that under Bernanke pay as little as 0.53 percent.

Local governments and other borrowers in the municipal market sold a record $378 billion of tax-exempt bonds in 2009, when yields fell to the lowest in at least 40 years. At the same time, so-called advance refundings of existing notes shrank to $48.1 billion in 2009 and $28.9 billion the year before, from $82.4 billion in 2003 when municipal yields were at a then-record low, though Treasury yields were higher than today, according to data compiled by Bloomberg.
…
If Los Angeles were to advance refund $151.7 million of 5 percent bonds sold in 2003, new debt would be invested in the low-yielding Treasuries until the 5 percent issues are eligible for repayment on Sept. 1 of 2011, 2012 and 2013, according to bond documents.

While Brill estimates the city could sell new bonds at less than 4 percent, that cost would be higher than the rates of 0.53 percent to 1.62 percent the Treasury pays on special securities with maturities matching the earliest dates the 5 percent issues can be repaid.

The Bloomberg article quoted discusses SLGSs, but any Treasury obligation will do.

Moderate volume today, as PerpetualDiscounts fell 4bp while FixedResets gained 19bp. A very well-behaved market with only one entry in the performance highlights.

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	2.76 %	2.91 %	36,753	20.51	1	0.7389 %	2,000.9
FixedFloater	5.24 %	3.35 %	41,453	19.77	1	1.1702 %	3,016.7
Floater	1.93 %	1.68 %	48,306	23.36	4	0.6913 %	2,380.9
OpRet	4.87 %	1.38 %	106,876	0.24	13	0.1675 %	2,312.4
SplitShare	6.40 %	6.42 %	130,620	3.73	2	-0.1543 %	2,131.9
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.1675 %	2,114.5
Perpetual-Premium	5.86 %	5.75 %	135,166	6.91	7	0.1527 %	1,899.2
Perpetual-Discount	5.86 %	5.90 %	173,953	14.04	70	-0.0408 %	1,801.1
FixedReset	5.41 %	3.56 %	324,444	3.73	42	0.1945 %	2,188.5

Performance Highlights
Issue	Index	Change	Notes
BAM.PR.G	FixedFloater	1.17 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-03-01 Maturity Price : 25.00 Evaluated at bid price : 20.75 Bid-YTW : 3.35 %

Volume Highlights
Issue	Index	Shares Traded	Notes
IAG.PR.F	Perpetual-Discount	53,110	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-03-01 Maturity Price : 24.41 Evaluated at bid price : 24.62 Bid-YTW : 6.03 %
TRP.PR.A	FixedReset	41,946	YTW SCENARIO Maturity Type : Call Maturity Date : 2015-01-30 Maturity Price : 25.00 Evaluated at bid price : 26.00 Bid-YTW : 3.62 %
RY.PR.T	FixedReset	40,500	TD crossed 40,000 at 27.88. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-09-23 Maturity Price : 25.00 Evaluated at bid price : 27.89 Bid-YTW : 3.55 %
CM.PR.I	Perpetual-Discount	33,563	RBC crossed 12,700 at 20.15. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-03-01 Maturity Price : 20.14 Evaluated at bid price : 20.14 Bid-YTW : 5.91 %
SLF.PR.A	Perpetual-Discount	33,267	TD crossed 25,000 at 19.75. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-03-01 Maturity Price : 19.75 Evaluated at bid price : 19.75 Bid-YTW : 6.02 %
BMO.PR.L	Perpetual-Discount	32,637	RBC crossed 11,900 at 24.82. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-03-01 Maturity Price : 24.55 Evaluated at bid price : 24.77 Bid-YTW : 5.89 %
There were 33 other index-included issues trading in excess of 10,000 shares.

This entry was posted on Monday, March 1st, 2010 at 8:12 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.