Category: Market Action

It will be interesting to learn all the unintended consequences:

As France begins collecting its financial-transactions tax this month, it is becoming evident that President Francois Hollande’s levy is hitting all but the people it was aimed at: speculators.

Hollande, who called finance his “main adversary” during his election campaign, pushed through in August a 0.2 percent transaction tax on share purchases, making France the first and only country so far in Europe to have such a levy. Many investors have been escaping the tax using so-called contracts for difference, or CFDs, offered by prime brokers that let them bet on a stock’s gain or loss without owning the shares.

“The target was supposed to be finance with a capital F, which is sort of a black box,” said Jacques Porta, who helps manage $627 million at Ofi Patrimoine in Paris. “Instead, we are punishing small investors who aren’t to blame and already are frightened off by losses in the market.”

How about an update on bank bonds?

Case in point: a new report from Moody’s Investors Service found that bank debt issues around the world have been chopped in half since the onset of the financial crisis. After peaking at roughly $2.4-trillion (U.S.) a quarter in 2007, banks globally are now issuing unsecured debt that amounts to just half that.

First it was North American issues – chiefly the U.S. – that plummeted in 2008 and 2009, and more recently it’s been European banks, particularly those on the periphery of the euro zone. The only area of the world seeing an uptick in issuance right now is Asia, where long-term bank debt issues are up 6 per cent over the 12 months ended Sept. 30. (Canada on its own is also faring well.)

The drop-off has a few implications. Chiefly, it affects how much money the banks can lend. For that reason, it’s sparked a push for deposits as a cheap source of funds.
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The slowdown also gives the banks an incentive to ramp up their covered bond offerings.
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To understand just how much covered bond spreads have tightened, making them more favourable, in 2009 they blew out to roughly 240 basis points in the U.K. Now they’re back to about 60 basis points.

With the election out of the way, the Keystone pipeline of TCA and TRP is in the news again:

Environmentalists are reviving their noisy 2011 anti-pipeline campaign, with a demonstration scheduled for Sunday outside the White House, and they have pointed to the decision on the Keystone pipeline as a key test of the President’s resolve to battle climate change during his second term. Former U.S. vice-president Al Gore this week urged Mr. Obama to kill the Keystone XL project.
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On Thursday, TransCanada got a boost when the Building & Construction Trades and the American Petroleum Institute each called on Mr. Obama to move quickly to approve the controversial project, which will carry 1.1-million barrels per day of oil-sands bitumen from Alberta and lighter oil from North Dakota’s Bakken fields to the U.S. Gulf Coast.

Julie Dickson gave a speech titled Substance over Form at the 2012 Life Insurance Invitational Forum, but there wasn’t much in it:

Just as many now recognize that it was a mistake to believe that low rates would be a short-term, transitory phenomenon, it would also be a mistake to assume that we could never again be faced with very high interest rates.

Insurers will remember what happened in the 1980s, when rates spiked to historically high levels and the insurers’ business model came under pressure, as policyholders found life policies with savings features unattractive and decided to turn to banks for savings products. (You may recall that this led to the expression, “Buy term and invest the rest.”)
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Let me switch to banking for a minute to expand on this point. Lately, I have seen a number of articles suggesting that Basel III is too complex and that Basel III capital calculations cannot be relied upon. I think such thinking is misguided. OSFI’s view is that Basel III can be relied upon – if proper risk management and governance at financial institutions is in place, and if supervisors are active and diligent in their work of overseeing Basel III implementation. Combined with a leverage ratio, Basel III, properly implemented, will fundamentally enhance financial stability. It might be better for people to focus more on the quality of supervision, and focus less on Basel III complexity.

As we point out in the Life Insurance Regulatory Framework, OSFI expects to consult significantly with industry over the coming years so that major regulatory capital changes can be implemented by 2015. Risk management will form a big part of that consultation.

Naturally, future employment prospects of OSFI personnel are not forgotten:

OSFI recognizes that small- to medium-sized companies, or those of less complexity with predictable and diversifiable risk, may not be able to afford a dedicated CRO to lead the risk management function. In these cases, we accept that the individuals responsible for risk management can also be performing other functions. But even in small, less complex businesses, we want to see a risk management process on which the board of directors, the CEO, senior management team, and policyholders can rely. As an example, we would want the board to meet in camera with the person who owns the risk management role as part of his or her responsibilities.

It was another mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 2bp, FixedResets off 2bp and DeemedRetractibles down 5bp. Volatility was low. Volume was low.

There’s an interesting straw in the wind for junk bonds:

Investors yanked a record volume of cash from BlackRock Inc.’s exchange-traded fund that buys junk bonds as the notes lose value for the first month since May.

The $16.3 billion fund reported an outflow of 2.4 million shares yesterday, equal to about $218.9 million, according to data compiled by Bloomberg. That’s the biggest daily withdrawal in the five-year history of the iShares iBoxx High Yield Corporate Bond Fund, the largest of its kind.

The five largest junk-bond ETFs, which allow investors to speculate on the securities without actually owning them, have lost $1.97 billion of assets since Sept. 20 as investors wager that a four-year rally in the debt is running out of steam. High-yield bonds in the U.S. are losing 0.14 percent this month after posting 12.9 percent returns this year through October, according to Bank of America Merrill Lynch index data.

Regulation is wonderful:

Since 1998, ABS [the non-profit American Bureau of Shipping] has hired four former Coast Guard admirals as executives. They include retired Admiral Robert Kramek, who led the Coast Guard as commandant from 1994 to 1998. It was Kramek who signed an agreement with ABS in 1995 that expanded the nonprofit’s powers to inspect independently owned ships on the Coast Guard’s behalf.

In June 1998, three years after Kramek signed that inspection agreement, ABS hired him as president of its Americas division.

Jack Devanney, a retired executive of companies that own ships that used ABS services, says this revolving door is bad for ship safety.

“When you give Kramek a nice job, you’re sending a message to all the Coast Guard guys that they’ve got a second career at ABS,” says Devanney, who has a Ph.D. in management science from the Massachusetts Institute of Technology. “If you rock the boat, that opportunity’s not going to be available to you.”

S&P has released a fascinating report titled A Tale Of Two Countries: U.S. And Canadian Banks’ Contrasting Profitability Dynamics:

Profit dynamics for a company or an industry are highly sensitive to shifting operating and regulatory conditions and, as a result, are likely to change over time. Profits are important because they can be a significant generator of capital–for the companies that retain them in a meaningful amount. A careful review of bank profitability in both the U.S. and Canada indicates that Canadian banks have been more profitable than their U.S. counterparts in recent years. This gap has widened in the postcrisis years. This is partly because of Canadian banks’ higher leverage that largely arises from structural differences. We also note that the leverage ratio gap between the U.S. and Canada is sensitive to definition. Alternative definitions of leverage ratio for U.S. banks, for example using Standard & Poor’s adjusted common equity to adjusted assets, also show that U.S. banks have lower leverage than Canadian banks, but the gap is much smaller.
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As for Canada, the Office of the Superintendent of Financial Institutions (OSFI) will issue a new Basel III capital guideline before the end of 2012–for implementation in the first fiscal quarter of 2013. Of the 29 G-SIBs that the Financial Stability Board (FSB) identified in November 2011, none were Canadian banks. However, there are plans to identify domestic systemically important banks (D-SIBs) and recommend that a capital surcharge be applied to them. But Canadian banking regulators have not offered any detailed views on this yet. Therefore, we anticipate Canadian banks, on average, will continue to have higher leverage than U.S. banks, particularly the largest and most complex. We believe that at least part of the tolerance for higher leverage may be due to the accumulation of relatively low-risk weighted assets, like government-insured mortgages

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It was another mixed day for the Canadian preferred share market, with PerpetualPremiums up 3bp, FixedResets gaining 2bp and DeemedRetractibles off 1bp. Volatility was non-existent. Volume was low.

PerpetualDiscounts now yield 4.91%, equivalent to 6.38% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.2%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 220bp, a slight (and perhaps spurious) increase from the 215bp reported November 7.

Today’s inspiring photograph has been taken from the website of a company owned by a distant relative.

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It was another mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 1bp, FixedResets off 5bp and DeemedRetractibles gaining 3bp. Volatility was low. Volume was relatively heavy, with quite a few issues breaking the 100,000 barrier as the RBC desk did land-office business.

Bloomberg has an interesting bit of gossip about algorithmic trading:

Wall Street’s credit-derivatives traders, who before the financial crisis commanded $2 million of annual pay, are being replaced by machines as banks cut costs and heed new regulations.

UBS AG (UBSN), Switzerland’s biggest bank, fired its head of credit-default swaps index trading, David Gallers, last week, with no plan to fill the position, according to two people familiar with the matter. Instead, the bank replaced Gallers with computer algorithms that trade using mathematical models, said the people, who asked not to be identified because moves are private.

UBS joins Barclays Plc (BARC), Credit Suisse Group AG (CSGN) and Goldman Sachs Group Inc. (GS) in using computer programs to trade financial instruments that once generated some of their biggest fees. With regulators preparing rules under the 2010 Dodd-Frank financial reform that will push swaps toward exchange-like systems to improve transparency, credit dealers are going digital as automated trading makes humans too expensive.

What makes the trend so interesting is that there should be an equilibrium reached at some point. Most – not all – traders know nothing about the markets and they’re not paid to know anything about the markets. They’re paid to know lots of people who trade and who will give good old Bob the order because Bob made a really good point about that story in Wall Street Journal the other day.

But one thing that’s happening is the buy-side culture is shifting – slowly – to electronic execution. So the old-line salesmen are losing clients to the electronic execution vendors. There will be some disruption as all this plays out, but sales (as opposed to technical wizardry) will be as important in the future as it has been in the past.

I’ve complained in the past that the concept of “first mover advantage” as it relates to hedge fund returns is a red herring … there’s at least one guy who agrees with me:

Investors and other industry observers say that for perhaps the first time since the phrase hedge fund entered the lexicon, hot or gimmicky strategies aren’t worth investing in at all. It’s the manager that counts.

“It’s a return to the roots of the hedge-fund industry, when it was a small group of highly talented stockpickers and fundamental investors,” says John Bailey, founder and chief executive of Spruce Private Investors, which invests in 30 different hedge funds for foundations and endowments.

It’s not so much “first mover advantage” in this or anything else, really: it’s more that some smart guys found a niche, made stupid amounts of money … and were promptly copied by every glib smiley-boy in town.

It was stunning when European corporates started trading through sovereigns. This is gobsmackery on a grand scale:

Bonds of Exxon Mobil and Johnson & Johnson are trading with yields below those of comparable Treasurys, a sign that investors perceive them as a safer bet. It is a rare phenomenon that some market observers said could be the beginning of a new era for debt markets. It could ultimately mean some companies will borrow at lower rates than the U.S. government.

For now, just a handful of relatively short-term bonds yield less than comparable Treasury bonds.

The banks’ role as secret policemen is causing problems:

U.S. banks in Colorado and Washington state, where voters last week legalized recreational marijuana use, shouldn’t disregard federal laws that consider pot sales criminal, a bank regulator said today.

“I think institutions have to protect themselves,” said Daniel Stipano, acting chief counsel of the Office of the Comptroller of the Currency, at an anti-money laundering conference today run by the American Bankers Association. “The problem is that it remains a crime under federal law.”

The Bank Secrecy Act requires banks to file suspicious- activity reports if they suspect customer’s involvement in federal crimes. It’s meant as a protection against U.S. financial institutions being used to launder illegal gains from criminal activity.

It was another mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 7bp, FixedResets up 6bp and DeemedRetractibles off 6bp. Volatility picked up a little, with IAG on the downside (although both issues made the “Wide Spreads” report and all trades were well above the closing bid) and PWF on the upside. Volume was ridiculously pathetic.

We’ll probably never know just what the rights of the matters are … but it sure is entertaining!

Weber, who was chief investigator in the inspector general’s office, raised allegations in March that H. David Kotz, the agency’s former inspector general, may have had personal relationships that tainted reports on the SEC’s failure to catch the Bernard Madoff and R. Allen Stanford Ponzi schemes.

Weeks later, a number of Weber’s co-workers submitted complaints that he was creating a hostile work environment through his suggestions that he and others should be able to carry guns on the job. The SEC used an external security consultant to review whether Weber was a threat and then placed him on administrative leave in May.

Weber also reported to the SEC that he found evidence of possible espionage by foreign nationals related to a case he was investigating. The matter involved unencrypted computer hard drives that contained sensitive stock exchange information.

Cary Hansel, Weber’s lawyer, said that Weber received a letter from the SEC last week informing him he had been fired.

So up to now, it looks like the Lone Loony-Toon, right? But:

Weber’s original complaints prompted the SEC to bring in David Williams, the inspector general of the U.S. Postal Service, to conduct a review. Williams concluded that Kotz violated ethics rules by overseeing probes that involved people with whom he has “personal relationships.” Kotz resigned in January amid questions about his tactics and conduct.

Williams also said in his report that he didn’t find any evidence that indicated Weber’s conduct was improper or raised security concerns. Based on the report, Weber asked the SEC to reinstate him.

Humans are complex! When will we realize that an insistence on perfection in every area deprives us of talent? There’s Petraeus:

CIA Director David H. Petraeus, the retired four-star general widely commended for his oversight of the U.S. wars in Iraq and Afghanistan, resigned from his position due to an extramarital affair.

“After being married for over 37 years, I showed extremely poor judgment by engaging in an extramarital affair,” Petraeus wrote in a letter today to Central Intelligence Agency employees. “Such behavior is unacceptable, both as a husband and as the leader of an organization such as ours.”

… and Kubasik:

Christopher E. Kubasik, who was to become the next chief executive officer of Lockheed Martin Corp. (LMT), resigned after the company discovered he had a “close personal relationship” with a subordinate.

The company’s board elected Marillyn A. Hewson president and chief operating officer effective immediately. She is to become CEO on Jan. 1, Lockheed said today in a statement.

Robert Stevens, chairman and CEO of Lockheed, the world’s largest defense contractor, said he asked for Kubasik’s resignation after ascertaining Kubasik had a “lengthy, close and personal relationship with a subordinate who worked for him.”

It would be most interesting to get the inside dirt on these affairs. Not the “affairs”, I mean (as far as I can tell, that’s the business of exactly three people), but the decisions to “resign”. Are Obama and Stevens weeping crocodile tears over the necessity of firing fatally flawed employees? If they had been more cooperative, would they have got one of the special Get Out of Jail Free cards like a certain French politician I remember?

Guess what? An Income Trust is not an equity (according to Octagon Capital):

By letters dated June 27, 2008 and January 23, 2009, Octagon responded saying: … Regarding suitability, it is not unreasonable for a retired person who does not derive much of their income from their investments to split their investments into 50% equities (common shares) and 50% income producing securities (like income trusts).

For all it’s tough talk about “Naming and Shaming”, OBSI doesn’t identify the broker involved: it appears to be Randal William Harding. So nice that all responsibility is corporate, isn’t it? Personal responsibility is so … distasteful. For instance, there aren’t any NAMES of actual PEOPLE making the decisions at Octagon; “Octagon points out …” and “Octagon argues …” The closest is actually gets to actual naming and shaming is:

We discussed the complaint with Octagon’s Chief Compliance Officer, Mr. L.

“Mr. L.”?

Small brokerages are having a tough time:

GMP Capital Inc. has had another rough quarter, and its chief executive can’t pinpoint when things will turn around.

But Harris Fricker hopes a top-to-bottom review of Canada’s second-largest independent brokerage will spur “significant initiatives” that will pay off in 2013.

“Make no mistake, the goal is to increase the torque of our business, the financial benefit of which will become obvious in better market conditions,” Mr. Fricker said on the company’s third-quarter earnings call Friday after GMP reported a net loss of $358,000. “We remain confident we have the right people, platform and global market capabilities to make it happen,” he said.
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Canada’s largest independent brokerage, Canaccord Financial Inc., also reported earnings this week, and it is finding ways to retool its own business to get through the persistently poor economic conditions. Canaccord posted a net loss of $14.8-million for its second quarter of fiscal 2013, as compared to a loss of $5.3-million in the same quarter in 2012.

The company said that the plan to close underperforming branches of its wealth management business (predominantly in smaller markets) is coming along well. “To date, seven branches have already been closed, with the remainder to close before the end of December,” said Canaccord CEO Paul Reynolds. He indicated this would allow the company to invest more heavily in the unit.

It was another mixed day for the Canadian preferred share market, with PerpetualPremiums off 1bp, FixedResets gaining 12bp and DeemedRetractibles up 20bp. Lots of volatility, with insurance issues notable on the upside. Volume returned to well below average levels.

There’s a bit more gossip on the Rochdale Securities fiasco:

The president of Rochdale Securities said the firm was nearing a rescue deal Wednesday, and its star analyst told potential investors he planned to stay on board if the life line panned out, according to a person familiar with the talks.

When reached by phone Wednesday, firm President Daniel Crowley said he was close to finalizing a deal to bolster Rochdale’s balance sheet. He declined to comment further. The Stamford, Conn. brokerage, a relatively small stock-trading and research firm that serves only institutional clients and doesn’t trade its own money, is best known for employing prominent bank analyst Dick Bove.
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The stock purchase allegedly took place Oct. 25, just ahead of Apple’s quarterly earnings release. Mr. Miller bought 1,000 times the number of Apple shares a client requested, the person familiar with the rescue talks said, making the trade worth roughly $1 billion. Rochdale had about $3.4 million in capital at the end of 2011, according to a filing with the Securities and Exchange Commission. After the purchase, the person familiar with the talks said, Mr. Miller shut down his computer and left the office. He hasn’t returned calls from firm executives since, according to this person.

Mr. Miller has said the trade was an accident, according to two people familiar with the transaction.

Recent softness in the equity market may well be related to capital gain realization:

President Barack Obama’s re-election means his administration will push to let tax cuts enacted during the George W. Bush era expire for high earners, as scheduled, at year-end. Obama wants to increase the top federal income tax rate to 39.6 percent from 35 percent, boost rates on long-term capital gains to as much as 23.8 percent, and shrink exemptions from estate-and-gift taxes.
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An investor who sells $100 of stock with a cost basis of $20 in 2012 would see proceeds — after capital gains taxes — of $88, according to an analysis by J.P. Morgan Private Bank. Next year, if Congress doesn’t act, earnings from the sale would drop to $80.96 if rates rise to 23.8 percent. That means the stock price would need to rise by at least 9 percent for an investor to be better off selling in 2013.

It was another mixed day for the Canadian preferred share market, with PerpetualPremiums up 11bp, FixedResets off 5bp and DeemedRetractibles gaining 1bp. Volatility was muted. Volume was average.

With the US election over, the equity boys suddenly remembered that “fiscal cliff” thingamajig:

U.S. stocks slid, sending the Dow Jones Industrial Average to its biggest drop in a year, oil sank and Treasuries surged the most in five months as President Barack Obama’s re-election set up a budget showdown with the Republican-controlled House.

The Dow tumbled 312.95 points, or 2.4 percent, to 12,932.73 for its worst drop since Nov. 9, 2011. The Standard & Poor’s 500 Index, which is up 64 percent since Obama took office in 2009, lost 2.4 percent to 1,394.53, its lowest level since August. Ten-year U.S. yields sank 12 basis points to 1.64 percent. Oil slid almost 5 percent in its biggest decline of the year.

Obama now faces negotiating with Congress to avoid the so- called fiscal cliff of more than $600 billion in tax increases and spending cuts next year that threaten to slow U.S. growth. European stocks erased early gains as concern grew that the debt crisis was hurting Germany’s economy, while Greek police beat back anti-austerity protesters outside parliament.

“It’s a rush to safe haven,” said James Paulsen, the chief investment strategist at Minneapolis-based Wells Capital Management, which oversees about $325 billion. “We’re selling off further on rising fears about what a fiscal cliff negotiation is going to mean here. People bring all their worst fears in. At the end of the day, you have the fiscal cliff, Europe and you see a risk-off trade.”

Ooh! “risk-off trade”! What a totally cool portfolio management concept!

S&P upgraded CI Financial Corp. (a fundco) today – not a preferred share issuer, but there were some nuggets of interest:

• •In our view, CI Investments Inc. (CII) does not face any material regulatory barriers in making payments to its holding company, CI Financial Corp. (CI). Structural subordination exists when there are regulatory restrictions on the operating subsidiary’s ability to upstream dividends to the holding company.
• •CII is only required to maintain positive working capital plus $100,000 to remain registered as an investment manager, which is not much of a hurdle and is really intended to keep very small firms in line.

You have no idea how much it annoys me to kept “in line”.

As of Sept. 30, 2012, CI’s tangible equity was negative C$500.8 million, the consequence of goodwill and intangible assets, which the company generated by several of its acquisitions in the recent past, the most recent being Hartford Investments Canada Corp. in December 2010. But, in our view, asset managers having negative tangible equity is not a primary concern because we focus our analysis on the predictability and sustainability of cash flow generation.
That being said, we believe a minimum of positive tangible equity is necessary to absorb unexpected losses.

It was a mixed day for the Canadian preferred share market,with PerpetualPremiums down 11bp, FixedResets gaining 4bp and DeemedRetractibles off 5bp. Volatility was minimal. Volume was slightly below average.

PerpetualDiscounts (all THREE of them! From BOTH issuers!) now yield 4.93%, equivalent to 6.41% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 4.25%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 215bp, a slight (and perhaps spurious) rise from the 210bp reported October 31.

It’s not a preferred share issuer – but it’s a sign of the times:

DBRS has today downgraded the Issuer Rating of Torstar Corporation (Torstar or the Company) to BBB (low) from BBB. The trend is Stable and the rating is no longer Under Review with Negative Implications. The downgrade reflects DBRS’s view that Torstar’s earnings profile has been structurally affected by a consumer shift to digital forms of media as the Company has struggled to sustain organic revenues and profitability. The new rating also reflects DBRS’s view that weakening demand will continue to place pressure on the Company’s revenues, margins and cash flow generation going forward. DBRS’s concern is not based primarily on the Company’s debt level, as Torstar has remained prudent in terms of financial management, but rather the Company’s income and cash-generating prospects.

There’s an interesting conflict of trends in consumer borrowing:

Overall non-mortgage debt loads continued to increase during the third quarter, up 1.8 per cent from the same quarter of last year, the credit-monitoring firm [Equifax Canada] said in its latest Quarterly Credit Trends Report released Tuesday. However, only 1.22 per cent of debts were unpaid after 90 days or more in the July-September quarter.

That’s down sharply from 1.37 per cent in the previous quarter and the lowest delinquency rate on record going back to early 2007, before the recession began.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 13bp, FixedResets off 1bp and DeemedRetractibles winning 15bp. Volatility was average. Volume was average.

The US Treasury’s divestment of AIG is proceeding rapidly:

American International Group (AIG), the bailed-out insurer/ex-pyromaniac at the epicenter of the global financial meltdown, just posted a $1.86 billion quarterly profit, compared with the $4 billion loss it registered last year. The stat that most matters: Uncle Sam now owns just 16 percent of the company, with a complete disposal of its stake likely by the end of the year. The U.S. Treasury Department has recently been offloading hundreds of millions of shares—it sold $20.7 billion worth in September—after having owned as much as 92 percent of AIG in the wake of a government bailout that ballooned to $182 billion, including aid from the Federal Reserve Bank of New York.

If you’re to believe Treasury’s math—no small controversy there—taxpayers actually are in the black from the bailout. The U.S. profits off anything sold above its stated bailout per-share cost basis of $28.73, according to bank Drexel Hamilton. AIG stock now changes hands at $33, having surged 43 percent this year. That is less than half its book value (a measure of its assets minus liabilities) of just under $70 a share. The more of itself AIG repurchases from the government—and the more its business evolves back into bread-and-butter property-casualty, life insurance, and investing—the more it is thought its stock will approximate that book value. “The government ownership has been a real overhang for the company,” said Josh Stirling of Sanford Bernstein (AB), ahead of the quarterly earnings report.

Mind you, there are significant gimmicks in the numbers:

One point of contention is Treasury’s decision to allow AIG—along with TARP recipients Citigroup (C) and Ally Financial—to use operating losses from previous years to eliminate taxes on current income. The allowance, which typically does not apply to bankrupt or acquired companies, added $17.7 billion to AIG’s fourth-quarter earnings and will allow the company to shield profits from taxes for many years to come. “It’s important to remember that a substantial portion of AIG’s recent earnings were attributable to Treasury’s unilateral decision to preserve AIG’s net operating losses,” says J. Mark McWatters, a law professor at Southern Methodist University who was a Republican appointee to the TARP oversight committee.
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Barofsky calls the price [that Treasury quotes as its acquisition cost] “a political manipulation of numbers.” He argues the calculation shouldn’t include 563 million AIG shares that Treasury received from the Federal Reserve in January 2011 because the shares were not acquired as part of the TARP program. Removing those shares from the calculation would lift Treasury’s per-share cost to $43.53, which means TARP would show a $16 billion loss if Treasury sold the rest of its holdings at $29.

Still, even if we give full weight to the carping, the AIG bailout has been much less expensive than Government Motors:

U.S. taxpayers kept the nation’s largest auto maker by sales afloat with a $50 billion bailout in 2009 and now own 26.5% of the Detroit company.
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Earlier this summer, GM floated a plan with Treasury officials to repurchase 200 million of the roughly 500 million shares the U.S. holds in the auto maker, according to people familiar with the discussions. Under the plan, Treasury would sell the remaining shares through a public stock offering.

But Treasury officials aren’t interested in GM’s offer at the current price and aren’t in a rush to offload shares, according to people familiar with the matter. The biggest reason: A sale now would leave the government with a hefty loss on its investment.

At GM’s Friday share price of $24.14, the U.S. would lose about $15 billion on the GM bailout if it sold its entire stake. While GM stock would need to reach $53 a share for the U.S. to break even, Treasury officials would consider selling at a price in the $30s, people familiar with the government’s thinking have said.
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Last month, the Obama administration increased the estimated loss on the $85 billion auto industry bailout, which also included aid to crosstown rival Chrysler Group LLC and auto parts suppliers, by $3 billion to more than $25 billion. That amount is still smaller than the government’s initial estimate of a $44 billion loss. Chrysler is already free and clear from its government bailout after taking out a loan to pay back what it owed.
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The U.S. is still in the red on its investments in Fannie Mae and Freddie Mac, which have received $188 billion in taxpayer support.

How’s this for bad management? Rochdale Securities levered up 300:1 on Apple common:

Rochdale Securities LLC, the brokerage that employs bank analyst Dick Bove, is in advanced talks to save the firm after unauthorized trades in Apple Inc. (AAPL) went sour, said two people with knowledge of the negotiations

The potential deal to recapitalize Stamford, Connecticut- based Rochdale would be a merger or investment and may be announced as early as today, said the people, who requested anonymity because the talks are private. The deal for the 37- year-old firm could still fall apart, one of the people said.

Rochdale, led by President Daniel J. Crowley, has told potential investors that a trader made an unauthorized purchase last month of $750 million to $1 billion in Apple shares, which dropped in value and depleted capital at closely held Rochdale, the people said.

The firm had $3.44 million of capital at the end of last year, according to a filing with the U.S. Securities and Exchange Commission. Crowley didn’t immediately return phone calls seeking comment on the firm’s status.

There are rumours of naughtiness:

A person familiar with the thinking of Rochdale executives said a trader at the firm received an order for stock in Apple Inc. … but bought 1,000 times the number of shares requested. The trader is saying the extra shares were ordered by mistake, the person said, but the firm is alleging the actions were intentional. The company suspects the trader was working with an outside party to execute the trade and profit at the firm’s expense, according to this person.

Despite all the sound and fury over credit ratings, it looks like the ECB doesn’t do its own credit analysis. What a surprise.

The European Central Bank is investigating claims that it used a high credit rating from a Canadian ratings agency to grant loans to Spanish banks at a sweetheart rate that was not offered to another struggling euro zone country.

An ECB spokesman on Frankfurt, Philippe Rispal, said the bank is “currently investigating this matter” and that the probe would determine whether “the correct haircut has been applied” to the Spanish sovereign bonds that were used as collateral for ECB loans.

The term “haircut” refers to varying discounts applied to the collateral based on its credit quality. On the weekend, the German newspaper Die Welt am Sonntag said that about €80-billion ($102.3-billion U.S.) of Spanish treasury bills posted as collateral received only a 0.5 per cent haircut when a 5.5 per cent haircut would have been more appropriate, given Spain’s rising sovereign risks.

The newspaper said the ECB relied on the relatively high Spanish rating produced by Toronto’s DBRS in determining its collateral requirements. DBRS has assigned an A-low rating, with “negative trend” on all of Spain’s public sovereign debt. The other three ratings agencies – Fitch, Standard & Poor’s and Moody’s – have a lower single-B rating on the 18-month T-bills that were posted as collateral by the Spanish banks (DBRS rates the country, not the individual securities).

DBRS’s rating for Ireland is the same as its rating for Spain. Yet Die Welt said the Irish bonds used as ECB collateral were subject to a 5.5 per cent haircut, meaning the ECB apparently considered them much riskier than the Spanish collateral in spite of the identical country rating.

DBRS has released a new methodology titled DBRS Criteria: Preferred Share and Hybrid Criteria for Corporate Issuers (Excluding Financial Institutions). Not much of interest, but there are a few nuggets:

Rate Reset Preferred Shares
Cumulative redeemable preferred shares featuring rate reset provisions are prevalent in Canada. While having no stated maturity, these securities feature a rate reset mechanism, combined with the option to redeem (both typically occurring every fifth year). The redemption option and rate reset are not viewed as impediments to garnering high levels of equity treatment if (1) the reset spread, set at the time of initial issuance, is not viewed as onerous on a basis relative to market, and would therefore not be expected to be a major incentive to redeem (while this is subjective, as an issuer’s credit spread will change over time due to both market- and company-specific factors, DBRS will compare an issuer’s reset spread to its peer group to assess its potential to impact future actions) and (2) DBRS has a high degree of confidence that the securities will remain a permanent part of the issuer’s capital structure.

Preferred Share Default
A preferred share is only assigned a “D” rating (for default) when the security is in default according to the legal documents. As such, the non-payment of a dividend does not necessarily give rise to the assignment of a default rating. When preferred dividends are not declared, the preferred share rating will likely be downgraded by a minimum of one notch to refl ect the non-payment situation. Further downgrades may occur, should the overall ratings for the organization be downgraded as a result of a negative situation that relates to the decision not to pay preferred share dividends. In addition, DBRS may consider additional downward notching of the preferred share rating to refl ect concerns related to either (1) the expectation that non- payment of dividends may continue for several more quarters or (2) the probability of a future default, as defined in the legal documents, which could occur without any defaults of higher rated securities, including coercive exchange offers.

Cumulative vs. Non-Cumulative
Whether a security is cumulative or non-cumulative does not generally have a large impact on treatment and has no impact on ratings. While a non-cumulative security is more beneficial for an issuer, in that missed payments to do not have to be made up in the future, DBRS views this as a modest factor for equity treatment, as an issuer may be more hesitant to miss a payment on a non cumulative security given potential consequences, as already noted.

Additionally, the rating itself is generally rather indifferent to cumulative vs. non-cumulative, given the minimal difference in expected recovery.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums off 3bp, FixedResets up 6bp and DeemedRetractibles gaining 1bp. Volatility was minimal. Volume was very low.

There was a good US jobs number:

American employers added more workers than forecast in October and a rush of people entering the labor force pushed the jobless rate higher, according to the last report on the labor market before next week’s presidential election.

Broad-based gains in employment — from car dealers and hospitals to factories and construction sites — indicate consumers are likely to spend more freely and shore up the three-year expansion in the face of a global economic slowdown and political gridlock in Washington over taxes and spending.

Hiring increased by 171,000 workers after a 148,000 gain in September that was bigger than first estimated, Labor Department figures showed today in Washington. October’s increase exceeded the most optimistic forecast in a Bloomberg survey with a median projection of a 125,000 gain. Unemployment rose to 7.9 percent.

Federal Reserve Bank of San Francisco President John Williams spoke in defense of QE3 today:

Concern that large-scale asset purchases “might ignite a bout of inflation” are unwarranted because price increases are being held in check by elevated unemployment and an economy that “isn’t operating at full speed,” Williams said.

“Unemployment is — and should be — a central focus of monetary policy right now,” Williams said. “This concentration on getting unemployment down in no way represents a lessening of the importance of price stability,” he said, adding that inflation may slow well below the Fed’s 2 percent goal if the U.S. recovery falters.

Williams said central bank purchases of bonds will help spur U.S. economic growth to 2.5 percent next year and 3.5 percent in 2014 while not fueling inflation.

“Our policy measures are having the desired effects,” Williams said today in remarks prepared for a speech in Salt Lake City. “We have substantial scope to use monetary policy to stimulate the economy without creating too much upward pressure on prices.”

It was a modestly good day for the Canadian preferred share market, with PerpetualPremiums up 9bp, FixedResets flat and DeemedRetractibles gaining 8bp. Volatility was at normal levels, all to the upside with a preponderance of insurance issues. Volume was below average.