Category: Market Action

There has been a lot of yammering about income inequality in the past few years, as I mentioned on March 15. I’ve found some more source data:

In the next calculation, the world Gini index is recalculated by weighting countries by their population size. This means that countries with large populations have a larger impact on the Gini index than do countries with smaller populations. The population-weighted Gini index was calculated by Branko Milanovic and published in his book Worlds Apart: Measuring International and Global Inequality.13 The chart below compares the population-weighted Gini index (red line) with the unweighted Gini index shown in the previous chart (black line).

This weighted world Gini index declines almost consistently from 1962 onward. This is mainly due to the phenomenal economic growth in China and India relative to richer countries. Because China and India together account for over one-third of the world’s population, these two countries have a very strong impact on the population-weighted Gini results. But if China and India are removed from the calculation, the population-weighted Gini index trends upward after 1982 (as does the unweighted Gini index), meaning that overall income inequality is increasing in the rest of the world.

There’s a great graph, but it’s Flash (Wow! Way cool!), so go look for yourself. I like the last sentence from the quoted verbiage – ‘if we remove enough data, we can prove our point!’

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums up 15bp, FixedResets down 9bp and DeemedRetractibles gaining 8bp. Volatility was average. Volume was low.

Hurray for Rick Waugh!

“I understand why the finance minister is concerned about the Canadian economy, but I just philosophically don’t think” government should be setting product pricing, Waugh said yesterday in an interview in Halifax, Nova Scotia, where the bank held its annual shareholders meeting. “Despite the difficulties of central banks to use interest rates, the alternative of trying to manage specific products or prices, to me, is fraught with difficulty.”

The article did not address Mr. Waugh’s views on auctioning off CMHC mortgage insurance, rather than allocating it from an enormous supply at a cheap price.

Toron Investment Management has hooked up with AMI Partners:

Toron Investment Management and AMI Partners have agreed to combine to create a pre-eminent, privately-owned Canadian investment management firm with unique expertise and top-tier track records in global and domestic investing. The firm, once unified, will serve clients who have entrusted more than $3.5 billion of assets in Canadian and global mandates.

The combined firm will operate as Toron Asset Management International (Toron AMI), will be based in Toronto, and will continue to serve clients in Canada and abroad. Toron AMI’s professionals will be shareholders and the firm will operate as a partnership.

Founded more than 50 years ago, AMI specializes in Canadian equity, fixed-income and balanced mandates for institutional clients. Toron Investment Management began operating 25 years ago as a risk management consultancy; for the past 15 years it has focused on global investment management, serving a growing client base of private clients and select institutions.

Today’s report will be delayed. Why? I’ll tell you why! Later.

Update, 2013-4-12

Nothing happened today.

It was a mixed day on the Canadian preferred share market, with PerpetualPremiums gaining 7bp, FixedResets off 2bp and DeemedRetractibles up 13bp. Volatility was minimal. Volume was average.

The times, they are a changin’:

Primary dealers, the select group of banks and brokers that have held a seat at the center of the U.S. government debt market since 1960, are losing influence.

More than 20 percent of the $538 billion of Treasury notes auctioned this year have been awarded to bidders who bypassed the dealers by using a website to place their orders, according to U.S. Treasury Department data compiled by Bloomberg. That’s almost double the 2011 level and up from 5.6 percent in 2009.

In the same way technology eroded the middleman role once played by travel agents and stock-market specialists, increased use of the direct-bidding system threatens government-bond traders at firms ranging from Bank of America Corp. to UBS AG. (UBSN). It also has eaten into profits from a business that’s among the least affected by the regulatory changes and new capital requirements reshaping the industry.
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Traders at primary dealers have complained to the Treasury and the Federal Reserve Bank of New York about direct bidding, which they say is reducing their profitability, according to seven government-bond traders who requested anonymity because they weren’t authorized to comment publicly. Their job is becoming more frustrating, and sometimes money-losing, now that they’re competing in auctions against anonymous investors who can show up at any time and at any price, the traders said.

I’m sure we’ll all shed a tear for the poor traders who are finding that being the guy who answers a particular telephone isn’t as good a job as it used to be.

Here in Canada, the bond business is pretty good:

Royal Bank of Canada (RY), the top underwriter of Canadian corporate bonds for the past decade, is predicting record issuance this year led by a surge in high- yield debt.

Bond sales in Canadian dollars will reach C$95 billion ($94 billion) this year, on pace to shatter 2006’s record C$93 billion, said Altaf Nanji, senior credit-research analyst at RBC Capital Markets in Toronto. Issuance in the first quarter, typically the busiest of the year, was C$30 billion, according to RBC data. The firm’s forecast in December was for C$92 billion, including about C$5 billion of junk sales.

“The revised forecast puts issuance on pace to surpass our 2006 record year, based on the health of the high-yield sector, an increase in mortgage securitization and a more-active-than- expected first quarter for Maple issuance,” Nanji said in a phone interview.

Investors are snapping up the riskiest debt to meet annual return targets as central banks hold down borrowing costs to stave off recession. Sun Life Financial Inc. (SLF) altered its investment mandate to add high-yield bonds to the C$115 billion of assets it oversees to offset falling interest rates.

Issuance of high-yield bonds climbed 32 percent to C$1.14 billion in the first quarter, compared with an increase of 11 percent to $109 billion in the U.S. speculative market, according to data compiled by Bloomberg. RBC expects the junk market to grow to C$35 billion of bonds outstanding by 2016, up from C$11 billion currently.

The Bank of Canada has released a paper by Carlos de Resende, Ali Dib, René Lalonde and Nikita Perevalov titled Countercyclical Bank Capital Requirement and Optimized Monetary Policy Rules:

Using BoC-GEM-Fin, a large-scale DSGE model with real, nominal and financial frictions featuring a banking sector, we explore the macroeconomic implications of various types of countercyclical bank capital regulations. Results suggest that countercyclical capital requirements have a significant stabilizing effect on key macroeconomic variables, but mostly after financial shocks. Moreover, the bank capital regulatory policy and monetary policy interact, and this interaction is contingent on the type of shocks that drive the economic cycle.

Finally, we analyze loss functions based on macroeconomic and financial variables to arrive at an optimal countercyclical regulatory policy in a class of simple implementable Taylor-type rules. Compared to bank capital regulatory policy, monetary policy is able to stabilize the economy more efficiently after real shocks. On the other hand, financial shocks require the regulator to be more aggressive in loosening/tightening capital requirements for banks, even as monetary policy works to counter the deviations of inflation from the target.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums up 14bp, FixedResets down 14bp and DeemedRetractibles off 4bp. Volatility was muted. Volume was very low.

The US jobs number was disappointing:

Payrolls grew by 88,000 workers last month, the smallest in nine months, after a revised 268,000 gain in February that was higher than first estimated, Labor Department figures showed today in Washington. The median forecast of 87 economists surveyed by Bloomberg projected an advance of 190,000. The jobless rate fell to 7.6 percent from 7.7 percent.

The US is looking serious on Too-Big-To-Fail:

The largest U.S. banks, including JPMorgan Chase & Co. (JPM) and Bank of America Corp., would have to hold capital in excess of Basel III standards under a proposal being drafted by Senate Democrats and Republicans to curb the size of too-big-to-fail banks.

The current draft of the legislation would require U.S. regulators to replace Basel III requirements with a higher capital standard: 10 percent for all banks and an additional surcharge of 5 percent for institutions with more than $400 billion in assets. Senators Sherrod Brown, a Democrat from Ohio, and David Vitter, a Republican from Louisiana, have said they intend to introduce the bill this month.

Some US politicians are trying to ban hedging:

State Senator Mike Folmer, a Republican, in February introduced a bill that would bar publicly funded entities from engaging in the derivatives, which can be used to protect against swings in interest rates. The ban would deny Philadelphia, which had entered into $3.5 billion of swaps, access to a useful tool, said Rob Dubow, finance director of the fifth-most populous U.S. city.
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The Pennsylvania State Association of Boroughs supports a ban on swaps, said Christopher Cap, executive vice president. Elam Herr, assistant executive director of Pennsylvania State Association of Township Supervisors, said it may back Folmer’s bill.

The best known example is Oakland’s attempt to effectively default on what was effectively a loan:

Between debating the location of a proposed dog park and discussing taxi permit fees one night last month, the city council in Oakland, California, turned to severing ties with Goldman Sachs Group Inc. (GS)

The vote for the city administrator to begin the process of firing the fifth-biggest U.S. bank by assets came during an eight-hour meeting Dec. 18. It culminated months of efforts by the city to exit a 1998 interest-rate swap without paying a $14.8 million termination fee. Goldman, which underwrote $83 million of Oakland debt last year, has denied the request.
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Oakland entered into a so-called synthetic fixed-rate swap with the bank in 1998. It issued bonds to help finance pension obligations and used variable-rate instead of fixed-rate securities, according to reports filed with the city council.

The city was lured by the prospect of upfront cash, said Zennie Abraham, economic adviser to then-Mayor Elihu Harris. California voters had just approved Proposition 218, which limited cities’ ability to raise taxes, said Abraham.

“A lot of the city staff got enamored with the city getting a huge check,” Abraham said. “That was dangled in our face.”

The city realized a $15 million windfall from entering the contract. Oakland agreed to pay a fixed 5.6775 percent until 2021, while the bank was on the hook for a variable rate equal to the Bond Markets Association Index — 3.09 percent at the time the bonds were issued in 1998.

Nothing wrong with swaps or any other derivatives. But when they’re used to cover up borrowing, a la Greece … well, somebody should get fired.

The feds are continuing to explain bail-in bonds:

While the term “bail-in” has been used in both cases, Canadian officials are now scrambling to distance their plan from any that would use consumer deposits for capital. Amid questions about the plan, a spokeswoman for Finance Minister Jim Flaherty said in a statement that no consumer bank deposits – of any kind – would be drawn upon in the Canadian bail-in scenario.

“The ‘bail-in’ scenario described in the budget has nothing to do with consumer deposits and they are not part of the ‘bail-in’ regime,” Department of Finance spokeswoman Kathleen Perchaluk said.
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Sources familiar with the plans say the Canadian bail-in scenario will rely on a specific class of new investments: subordinate bonds and deposit notes. The latter acts similar to bonds, where a large depositor such as an institutional investor or corporate customer with several hundred thousand dollars or more to deposit, buys a deposit note in order to get a slightly better return. It is similar to a contractual arrangement.

Analysts, however, say it would take extreme circumstances for the concept of a bail-in to ever come into play.

These deposit notes and bonds are not financial products available to the average investor or depositor, and do not include funds held in consumer deposits.

This may turn out very well for the preferred share market; it is impossible for the bar to be set any lower for deposit notes and bonds than it is for preferred shares, so what’s the difference? I mean really? An announcement of intention from OSFI that it will seek to convert preferred shares first in the event of non-viability?

This simply shows up the moronic nature of OSFI’s decision to go for a “low trigger” on preferred share contingent capital conversion … if they were high trigger, then the bonds could be low trigger (preferably lower trigger, rather than non-viability trigger) and then the bonds would be clearly senior and there would be a clear hierarchy. However, this would lower the importance of OSFI’s discretion when the next crisis occurs, and hence lower the importance of OSFI officialdom.

I have long argued, for instance, that all contingent capital should convert upon the common stock price breaching a certain level (taken as a VWAP over a period of time). For instance, let us assume RY’s common share price is $50. Then preferred shares should convert when the common trades below $25, at a conversion price of $25. The bonds could convert with a trigger price = conversion price = $10-15. This would be a much better system than the current mess.

With excellent timing, DBRS Requests Comments on Rating Subordinated, Hybrids and Preferred Bank Capital Securities:

DBRS is requesting comments on a proposed methodology released today that would be used in the rating of capital securities issued by banks that are either subordinated or that have unique convertibility terms (including contingent capital features). Market participants are asked to submit comments on the proposal to DBRS_Bank_Methodology_Comments@DBRS.com on or before May 10, 2013. Following the review and evaluation of all submissions, DBRS will publish a final version of this methodology.

Note that the proposed criteria as titled represents a merger of three outstanding DBRS banking criteria: (i) Rating Bank Subordinated Debt & Hybrid Instruments with Discretionary Payments; (ii) Rating Bank Subordinated Debt & Hybrid Instruments with Contingent Risks; and (iii) Rating Bank Preferred Shares & Equivalent Hybrids.

While we are open to any comments, we draw attention to three major areas, two of which are written as changes in the proposed document and one consideration for change, which has not been included in the document at this time:

(1) Present criteria dictate that bank preferred shares are typically rated three to five notches below the issuer’s intrinsic assessment. Based on further assessing the impact of notching versus POD (“probability of default”) levels, the request for comment document changes this to a standard three notches. We are also asking for comments on whether DBRS should retain the flexibility to have certain bank preferred ratings notched up by one notch versus the standard notching where there are unique positive characteristics for individual banks, or if this ability should be removed. The wording in the proposed criteria as released still provides this ability.

(2) A second change relates to the notching process that DBRS would use for contingent capital instruments. The proposed criteria within this April 5th, 2013 document provide more detail relative to the current DBRS criteria.

(3) As is the case with the present criteria, the request for comment document continues to present that normal subordinate debt instruments issued by banks that are defined by DBRS as systemically important would generally receive the identical notching benefit of typically a one-notch uplift due to external / government support that is given to deposits and senior unsecured debt. In recent times, there appears to be growing skepticism regarding governments’ willingness to support subordinated debt when dealing with systemically important banks. Our final decision on this issue could maintain the status quo; or it could result in all subordinate debt being notched from the intrinsic assessment level; or there could be a combination of the above based on the relevant legal framework, resolution schemes, and government policies for each country and banks involved.

BBO.PR.A was placed on Review-Negative by DBRS last September; the rating has now been affirmed at Pfd-2(low) and the Review removed:

DBRS has today confirmed the rating of the Class A, Preferred Shares (the Preferred Shares) issued by Big Bank Big Oil Split Corp. (the Company) at Pfd-2 (low) and has removed the rating from Under Review with Negative Implications.
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On September 6, 2012, DBRS placed the rating of the Preferred Shares Under Review with Negative Implications, primarily due to the drop in downside protection below required levels in the prior months. However, since then, downside protection has recovered and stabilized, fluctuating between 49% and 51%, and the dividend coverage ratio has improved. As a result, the Preferred Shares have been confirmed at Pfd-2 (low) and removed from Under Review with Negative Implications.

Complicating matters is the fact that BBO reports its NAV per Capital Share, rather than per Unit, which is made clear by their January Fact Sheet.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums off 3bp, FixedResets down 9bp and DeemedRetractibles gaining 2bp. Volatility was minimal. Volume was above average.

Enbridge Inc., proud issuer of many preferred shares, is issuing equity:

Enbridge Inc. (TSX:ENB) (NYSE:ENB) today announced that it has entered into an agreement with RBC Capital Markets and Scotiabank (“the Underwriters”) to sell 10,850,000 treasury common shares, on a bought deal basis, at $46.11 per common share for distribution to the public. Closing of the offering is expected on or about April 16, 2013.

Enbridge has granted the Underwriters an option, exercisable at any time up to 48 hours prior to closing of the offering, to purchase up to an additional 2,170,000 treasury common shares at $46.11 per common share.

“Since the long-term funding plan discussed at our investor conference last fall we have achieved greater than expected progress in the development of attractive new growth opportunities, including those already announced and those yet to be” said J. Richard Bird, Enbridge Executive Vice President, Chief Financial Officer & Corporate Development. “An update to our funding plan now indicates an incremental equity requirement over the 2012-2016 period. The common share offering today continues our practice of maintaining a very manageable forward funding requirement. After the common share offering, and our recent preferred share issue, our net forward equity requirement stands at $1.9 billion through 2016, which we expect to accommodate through additional preferred share issues and asset monetizations. The additional growth investments will contribute to sustaining Enbridge’s industry-leading EPS growth rate through 2016 and well beyond.”

Today’s prize for precious handwringing goes to The Chartered Institute for Securities & Investment:

Thousands of financial sector workers risk being frozen out of the industry unless they pass mandatory tests measuring their personal ethics and integrity.

The Chartered Institute for Securities & Investment (CISI), a London-based professional body for individuals working, or seeking careers in wealth management and capital markets around the world, wants all of its members to undergo integrity screening or face losing their membership, as it battles to restore public faith in finance.

Until now, only individuals offering financial advice had to take such a test as a condition of their CISI status and to comply with U.K. rules on how investment funds are sold to savers.

Bankers working in areas like corporate finance and mergers and acquisitions, and traders in bonds, shares and derivatives have no such regulatory requirements imposed upon them.

But CISI said on Tuesday that systematic checks on the ethics and integrity of workers across the entire financial services industry were long overdue.

Sadly, it is impossible to determine integrity through a test. Ten percent of any population will cheat as soon as they think they can get away with it. Ten percent will not cheat, no matter what happens. The rest might cheat, given the right combination and severity of circumstances. And you cannot tell in advance who is who. The instigators of this paperwork exercise recognize this, but are doing it anyway:

Martin Wheatley, head of Britain’s Financial Conduct Authority, welcomed the CISI initiative but skeptics said the test would only prove that bankers know how they should act, not whether they actually would apply those ethics on a daily basis.

“No test can guarantee how someone will behave subsequently. But our aim is to make people aware of how they should behave when faced with difficult situations,” Mr. Culhane said.

There was a wide disparity among type in the Canadian preferred share market today, with PerpetualPremiums up 7bp, FixedResets winning 20bp and DeemedRetractibles flat. Volatility was on the low side, but comprised entirely of winning FixedResets. Volume was high and all top-six places were held by FixedResets.

Europeans are encountering Money Market angst:

Investors in Europe risk losing a haven as Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM) and Morgan Stanley break a taboo that’s stopped 88 billion euros ($113 billion) of money-market funds from ever losing principal.

The banks are preparing to abandon the policy that investors get one euro back for every one they put in as government bond yields near record lows make it harder for the funds to generate returns.

A money-market fund failing to repay investors in full is said to “break the buck” and is forced to shut down. To avoid this, banks propose to change rules governing the investment vehicles so they can pass on losses to investors by reducing the number of shares outstanding in a fund, without closing.
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Benchmark German bond yields are close to record lows, with the rate on Germany’s two-year bond at minus 0.001 percent, up from minus 0.023 on March 28, data compiled by Bloomberg show. France’s two-year security is yielding 0.145 percent, up from a record-low 0.03 percent in December.

Since the ECB cut the deposit rate to zero in July, money- market funds that are restricted to buying short-term debt generated almost no extra cash, putting pressure on their goal to provide a sanctuary for investors. The seven-day yield on funds that buy euro government securities was zero percent for the week ended March 22, according to research firm iMoneyNet Inc.

Prime funds, which take more risk and can also invest in bonds issued by the highest-rated banks and companies, made 0.02 percent. Since Jan. 4, euro money funds have seen assets under management fall by 7.1 billion euros to 87.9 billion euros, Westborough, Massachusetts-based iMoneyNet data show.

Here’s some good energy business news, amidst all the unhappy headlines:

Canada is pulling ahead of the U.S. in a contest to be the first exporter of liquefied natural gas from the North American shale bonanza to Asia’s $150 billion LNG market.

An LNG terminal being built at a cove north of Vancouver financed by a Houston private-equity firm is scheduled to begin shipping the fuel across the Pacific Ocean in mid-2015, eight months before the first continental U.S. plant is slated to start. Canada’s government has approved twice as much LNG export capacity as its southerly neighbor, evincing a friendlier attitude toward selling domestic gas to the highest bidder and positioning the nation as the go-to source of gas in North America for overseas buyers.
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After issuing the first permit to export continental U.S. gas to nations without free-trade agreements almost two years ago, the federal government suspended reviews of all other applications so it could study the potential impacts of overseas sales on domestic energy prices. There are now 19 proposed U.S. LNG projects awaiting export permits, with the longest on hold for 28 months.

In contrast, Canada, which has seen a similar surge in gas production, issued its third LNG export license in February for a project led by Royal Dutch Shell Plc (RDSA) in British Columbia. All together, the trio of approved Canadian projects will have the capacity to ship 4.66 billion cubic feet of gas a day, more than double the 2.2 billion cubic feet of capacity that has been permitted in the U.S., according to data compiled by Bloomberg.

This is better than the usual story:

Canada stands to lose out on more than $50-billion over a three-year period because of oil pipeline constraints, one of the country’s major banks projected today as it urged President Barack Obama to approve the controversial Keystone XL project.

That figure from CIBC World Markets represents lost opportunities, in terms of producer revenues and government royalties.

Economist Peter Buchanan forecasts that this “money left on the table” will be about $20-billion this year, $15.2-billion in 2014 and $16.5-billion a year later.

DBRS updated its report on Husky, proud issuer of HSE.PR.A:

DBRS has today updated its report on Husky Energy Inc. (Husky or the Company). Husky’s credit quality is supported by its: (1) conservative financial profile, (2) integrated operations and (3) medium- to long-term exploration and production (E&P) growth potential.

Husky’s financial profile remained stable in 2012. Husky maintains debt-to-capital and debt-to-cash flow ratios below its targets of 25% and 1.5 times (x), respectively. Integrated operations provided a partial natural hedge against pricing volatility in North American upstream operations. A modest free cash flow deficit in 2012 was largely a result of increased capex spending. Similar free cash flow deficits are anticipated until 2014, when cash flow contributions from growth pillars – namely, the oil sands, Atlantic Canada and Asia-Pacific – commence. DBRS believes the Company’s current liquidity is sufficient to fund cash flow shortfalls over the near term, with minimal impact on credit metrics.
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DBRS also notes that the Company has updated its financial and operational targets from those initially set out in December 2010. DBRS believes that these targets are largely achievable, contingent upon Husky’s ability to execute its medium- to longer-term growth projects. DBRS expects that the Company will continue to manage its financial profile conservatively, in order to achieve the stated targets.

It was a slow drift upwards for the Canadian preferred share market, with both PerpetualPremiums and FixedResets gaining 3bp and DeemedRetractibles up 4bp. Volatility was low. Volume was a hair below average, with low-Issue Reset Spread BNS FixedResets seeing a fair bit of shuffling.

PerpetualDiscounts now yield 4.86%, equivalent to 6.32% interest at the standard equivalency factor of 1.3x. Long Corporates now yield a bit below 4.2%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 210bp, a slight (and perhaps spurious) increase from the 205bp reported March 27.

This may sound like a joke, but it’s actually a big deal:

The Securities and Exchange Commission today issued a report that makes clear that companies can use social media outlets like Facebook and Twitter to announce key information in compliance with Regulation Fair Disclosure (Regulation FD) so long as investors have been alerted about which social media will be used to disseminate such information.
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Regulation FD requires companies to distribute material information in a manner reasonably designed to get that information out to the general public broadly and non-exclusively. It is intended to ensure that all investors have the ability to gain access to material information at the same time.

Previously, you had to issue a press release; in Canada, that generally (maybe always?) means you have to go through MarketWire or NewsWire, the two major agencies that distribute press releases.

Those two companies – the list is probably a little longer in the States! – have a history: if you issue through these places, you know you’re not going to get in trouble with the regulators for selective disclosure, whereas if you go to Honest Jimmy’s Press Release Distribution Service … you might. So what the established companies are really selling is safe harbor …. and boy-oh-boy, do they ever charge through the nose for it!

Now there are more safe harbours … FREE safe harbours! In the great scheme of things, potential savings from reduced press release costs probably won’t boost Royal Bank’s stock price much … but for smaller companies, every penny counts!

The feds have clarified the budget’s bail-in musings that were mentioned here yesterday:

“The bail-in scenario described in the Budget has nothing to do with depositors’ accounts and they will in no way be used here,” Finance Minister Jim Flaherty’s press secretary Kathleen Perchaluk said in a statement Tuesday. “Those accounts will continue to remain insured through the Canada Deposit Insurance Corporation, as always.”
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“The [Canadian] bail-in regime is to protect both taxpayers from having to bail out banks and depositors from having to take a financial hit like we’ve seen in Cyprus,” Ms. Perchaluk said. “If a bank is having severe difficulties, the bail-in regime would force certain debt instruments to be converted into equity to recapitalize the bank.”

It’s a pity that the Globe’s reporter, Grant Robertson, has no idea of what bank regulation is all about and didn’t speak to anybody who does – he perpetuates the following confusion:

Under the proposed Canadian plan, banks would set aside contingent capital, such as shares, which could be quickly converted to cash to provide liquidity and stabilize their operations should a crisis hit.

However, it is charming that Spend-Every-Penny’s mouthpiece, Kathleen Perchaluk, has such faith in the CDIC. As mentioned on March 27 (and on other occasions!) the CDIC’s reserves are far too small to even begin to cope with the collapse of a major bank.

John Greenwood of the Financial Post not only knows more about bank regulation, but actually talked to people who knew more than him:

According to one senior fixed-income analyst, Ottawa has its eye on senior unsecured debt issued by banks. Popular with institutional fixed-income investors, the product is widely traded and makes up a big chunk of the domestic bond market.

So far it’s only a proposal in the budget and a vaguely worded one at that, but “everyone is taking the government at their word and hence the market is coming to terms with whether or not to buy it and at what price,” said the analyst, who asked not to be named.
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Critics worried that investors may not buy it at a price that the banks consider affordable and the banks themselves have said they have reservations. In any case, the banks haven’t issued any yet. One interpretation of the budget is that Ottawa is looking to nudge the process forward.

The last one probably won’t be a big worry. The bank-owned TMX will be “encouraged” by the bank regulator to include the so-called bonds in the index which will virtually guarantee a market.

It was a day of modest losses for the Canadian preferred share market, with PerpetualPremiums losing 5bp, FixedResets off 1bp and DeemedRetractibles down 3bp. There was no volatility – none. Volume was below average.

Assiduous Reader KL was intrigued by my note on OSFI’s target for depositor recovery on March 27 and passed along a few links.

A US stockbroker pointed out (with assistance from a goldbug) that the federal budget contained (pages 154-155 of the PDF) the following:

The Government also recognizes the need to manage the risks associated with systemically important banks—those banks whose distress or failure could cause a disruption to the financial system and, in turn, negative impacts on the economy. This requires strong prudential oversight and a robust set of options for resolving these institutions without the use of taxpayer funds, in the unlikely event that one becomes non-viable.

The Government intends to implement a comprehensive risk management framework for Canada’s systemically important banks. This framework will be consistent with reforms in other countries and key international standards, such as the Financial Stability Board’s Key Attributes of Effective Resolution Regimes for Financial Institutions, and will work alongside the existing Canadian regulatory capital regime. The risk management framework will include the following elements:

• Systemically important banks will face a higher capital requirement, as determined by the Superintendent of Financial Institutions.
• The Government proposes to implement a ―bail-in‖ regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital. This will reduce risks for taxpayers. The Government will consult stakeholders on how best to implement a bail-in regime in Canada. Implementation timelines will allow for a smooth transition for affected institutions, investors and other market participants.
• Systemically important banks will continue to be subject to existing risk management requirements, including enhanced supervision and recovery and resolution plans.

This risk management framework will limit the unfair advantage that could be gained by Canada’s systemically important banks through the mistaken belief by investors and other market participants that these institutions are “too big to fail”.

Both commentators assumed that the word “liabilities” in the second point means “deposits”, which could ultimately be the case, of course (particularly for uninsured deposits), but for now can be taken to mean “contingent capital” – Garth Turner has it right, just as a change of pace.

While there is no clarity yet, the budget announcement is probably a signal that the feds have bought into the Ban the Bond Movement and that soon all bank bonds will be contingent capital; hey, who needs bankruptcy law anyway?

The first and third points of the three-part process refers to OSFI’s inadequate provision for D-SIBs.

Speaking of totally inadequate government agencies, the Toronto Transit Commission’s CEO Report for 12Q4 just came to my attention, with the following commentary regarding streetcar service:

The last two weeks of Period 12 (December Board) saw high levels of insufficient workforce due to vacation, resulting in numerous cancellations due to no Operator. The resulting cancelled service contributed to delays, longer trip times, and ragged headways.

Is there any doubt but that the TTC is grossly mismanaged? Is there anybody employed at the TTC who could run a three-house paper route?

DBRS confirmed CU at Pfd-2(high) [Stable]:

DBRS has today confirmed the Issuer Rating and the ratings of the Unsecured Debentures, Cum. Preferred Shares and Commercial Paper of Canadian Utilities Limited (CU or the Company) at “A,” “A,” Pfd-2 (high) and R-1 (low), respectively, all with Stable trends. The confirmations reflect CU’s relatively stable business risk profile, strong financial profile and the credit quality of its primary subsidiary, CU Inc. (CUI; rated A (high)). The one-notch differential in the ratings of CU and CUI reflects structural subordination at CU.
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DBRS assesses CU’s financial profile based on a non-consolidated basis. CU is expected to continue to support the significant capital expenditure program at CUI (approximately $2 billion annually from 2013 to 2015) with debt and preferred shares issuances over the medium term. As of March 25, 2013, the Company has approximately $900 million of preferred shares outstanding (including a $175 million issuance in March 2013). Pro forma the $175 million issuance, $145 million of CU’s outstanding preferred shares are treated as debt by DBRS in the adjusted debt-to-capital calculation (with a pro forma adjusted debt-to-capital ratio of approximately 9%). In the adjusted debt-to-capital calculation, the amount of preferred shares over the 20% preferred shares-to-equity threshold (defined as the percentage of preferred shares outstanding divided by total equity, excluding preferred) is treated as debt. DBRS expects the Company to continue to maintain its non-consolidated adjusted debt-to-capital ratio in line with the 20% threshold on a non-consolidated basis. Should CU exceed the 20% threshold, this could result in negative rating implications

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums up 9bp, FixedResets down 23bp and DeemedRetractibles off 1bp. Volatility was average. Volume was low.

A bit of good news on the regulatory extortion front – a US judge is questioning the SEC / SAC Capital settlement:

SAC Capital Advisors LP will have to wait to learn if its $602 million insider trading settlement with the Securities and Exchange Commission can go forward, after a Manhattan judge raised questions over a provision that allows SAC to avoid admitting it did anything wrong.

SAC and the agency asked Marrero today to approve the agreement, which is the SEC’s biggest insider trading settlement in history. It would resolve SEC claims that SAC and its CR Intrinsic Investors LLC unit profited from illegal tips about an Alzheimer’s drug received by a former portfolio manager, Mathew Martoma.

U.S. District Judge Victor Marrero today expressed concern about the SEC’s use of the provision, which was questioned by a different judge who rejected an SEC settlement with Citigroup Inc. (C) in 2011. Marrero said today he may condition approval of the SAC deal on a ruling in the Citigroup case by the U.S. appeals court in New York. Marrero also asked what would happen if Martoma, who has pleaded not guilty to related criminal charges, is convicted.

There’s some new progress on atmospheric carbon dioxide extraction:

“What this discovery means is that we can remove plants as the middleman,” said Adams, who is co-author of the study detailing their results published March 25 in the early online edition of the Proceedings of the National Academies of Sciences. “We can take carbon dioxide directly from the atmosphere and turn it into useful products like fuels and chemicals without having to go through the inefficient process of growing plants and extracting sugars from biomass.”

The process is made possible by a unique microorganism called Pyrococcus furiosus, or “rushing fireball,” which thrives by feeding on carbohydrates in the super-heated ocean waters near geothermal vents. By manipulating the organism’s genetic material, Adams and his colleagues created a kind of P. furiosus that is capable of feeding at much lower temperatures on carbon dioxide.

The research team then used hydrogen gas to create a chemical reaction in the microorganism that incorporates carbon dioxide into 3-hydroxypropionic acid, a common industrial chemical used to make acrylics and many other products.

It’s tough to get ahead in the investment business. Talent isn’t enough. Hard work isn’t enough. You’ve got to have that little extra something:

Wells Fargo & Co. (WFC), the most valuable U.S. bank, paid a board member’s son about $1.4 million last year for his work in a unit responsible for investing deposits.

Scott P. Quigley, 44, received the compensation as a manager in the principal investments group, according to the San Francisco-based lender’s most recent proxy filing. His father, Philip J. Quigley, a Wells Fargo director since 1994, is retiring from the board in April. Scott Quigley declined to comment, and his father didn’t respond to messages seeking comment. The bank declined to make them available.

Canadian inflation remains low:

The country’s consumer price index rose 1.2 per cent in February from a year earlier, quickening from a 0.5-per-cent increase in January, Statistics Canada said Wednesday. It also climbed 1.2 per cent from a month earlier, the fastest monthly pace of inflation since 1991.
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Transportation costs led the annual increase, advancing 2 per cent, spurred by higher costs at the pump, and as rebates disappeared at car dealerships. Food prices accelerated to 1.9 per cent after a 1.1-per-cent gain in January as consumers paid more for meat and fresh fruit. The cost of fuel oil also rose.

OSFI has come out with another Planning Report Produced Because It’s Expected Of Us Because Of Some Kind Of Governance Thingy. Of great interest is their targetted depositor recovery on default:

I wonder if anybody’s told the CDIC that OSFI will give itself a pat on the back if depositor recoveries in the event of the failure of a major bank exceed 90%? Hmm … CDIC has about 2.4-billion in cash and investments on the books … the smallest of the Big Six Banks, National Bank, has about 93-billion in deposits on its books … well, let’s just hope that none of the big six fail, that’s all!

Regulatory lawyers are continuing their campaign to destroy the corporate bond market:

Are there steps that can or should be taken to facilitate exchange trading of corporate bonds and other fixed income securities? Were ATSs required to disseminate pre-trade pricing information, would there be an impact on exchange trading of corporate bonds? If so, what would be the impact?

Should the Commission consider regulatory initiatives that would encourage the use of transparent execution venues, such as exchanges or ATSs that publicly disseminate trading interest on their systems? For example, what would be the benefits and drawbacks of requiring brokers to affirmatively offer retail customers the option of exposing their orders on one or more of these transparent execution venues? Are there better ways to foster price transparency in these markets?
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Better Investor Information

Should investors be provided more information about the compensation of broker-dealers trading in a principal capacity? What would be the benefits and burdens of requiring the disclosure of dealer markups to customers? Are certain types of transactions more suited for markup disclosure, such as riskless principal transactions? How should a riskless principal transaction be defined for corporate bond or other fixed income transactions? What would be the most effective way to provide markup disclosures to customers?

Do steps need to be taken to help assure that investors know about the various execution options available to them and the potential advantages and disadvantages of each? What would be the relative merits of requiring broker disclosure of those options at the time of the transaction, as compared with periodic disclosure (e.g., at account opening and annually thereafter), or general investor education efforts?

Do steps need to be taken to help assure that investors have pricing information relevant to their fixed income security transaction?

All the questions assume that corporate bond financing exists in some kind of bubble world, unaffected by competition from other venues and private placements.

Lauren Lambie-Hanson at the Boston Fed asks the question When Does Delinquency Result in Neglect? Mortgage Delinquency and Property Maintenance:

Studies of foreclosure externalities have overwhelmingly focused on the impact of forced sales on the value of nearby properties, typically finding modest evidence of foreclosure spillovers. However, many quality-of-life issues posed by foreclosures may not be reflected in nearby sale prices. This paper uses new data from Boston on constituent complaints and requests for public services made to City government departments, matched with loan-level data, to examine the timing of foreclosure externalities. I find evidence that property conditions suffer most while homes are bank owned, although reduced maintenance is also common earlier in the foreclosure process. Since short sales prevent bank ownership, they should result in fewer neighborhood disamenities than foreclosures.

“Disamenities”?

Nice perspective on Cyprus:

For Cypriot banks, particularly Laiki Bank, at the center of the current storm, however, these conclusions foretold a disaster: Altogether, they lost more than 4-billion euros, a huge amount in a country with a gross domestic product of just 18-billion euros. Laiki, also known as Cyprus Popular Bank, alone took a hit of 2.3 billion euros, according to its 2011 annual report.

[Kikis] Kazamias, the finance minister at the time of the Greek bond write-down, said he had little idea of just how badly the move would hurt his country’s banks.

“We worried but we never received any information that this was a red line” that should not have been crossed, he said. The Cypriot government, he added, initially calculated that “we were in a position to cover the losses,” and it was only later, after depositors began to flee and the Cyprus economy stalled, that “we found out that this was impossible.”

Spend-Every-Penny’s going to start choosing his new lap-dog next week:

Finance Minister Jim Flaherty should receive a short list of candidates to replace Bank of Canada Governor Mark Carney after a meeting of the central bank’s board of directors next week, said two people familiar with the plans.

Flaherty will get the list after the two-day meeting in Ottawa, said the people, who asked not to be identified because the discussions are private. Flaherty, who has said that the announcement could be made in April, will then interview the people on the short list, with the appointment to be approved by Prime Minister Stephen Harper and his cabinet.

The bank’s outside directors have been reviewing candidates after posting the job Jan. 7, following Carney’s surprise November announcement he would leave his job June 1 to take over the Bank of England. Analysts at JPMorgan Chase & Co. have said the most likely replacements are Senior Deputy Governor Tiff Macklem and Export Development Canada Chief Executive Officer Stephen Poloz.

Want the job, boys? Roll over! Beg! Copy the highlights from my next speech into your next speech!

It was a modestly positive day for the Canadian preferred share market, with PerpetualPremiums winning 6bp, FixedResets gaining 2bp and DeemedRetractibles up 5bp. Volatility was reasonably good. Volume was heavy.

And that’s it for another month! Malachite Aggressive Preferred Fund is now 12 years old – Happy Birthday!