Category: Market Action

Bloomberg’s Jonathan Weil points out that the Barclays rate fixing scandal was reported over four years ago.

Barclays was clearly naughty, and there are some tales of twopenny-halfpenny corruption that indicate a few people need to get taken out to the toolshed. But it seems clear to me that the regulators knew all about it but, as I’ve said before, were either willfully blind or grossly negligent. In hindsight, Barclays should have resigned from the BBA panel – but that’s hindsight.

The BoE’s Paul Tucker denies doing anything bad. I’m glad that’s settled!

It was a fine day for the Canadian preferred share market, with PerpetualPremiums up 10bp, FixedResets gaining 7bp and DeemedRetractibles winning 13bp. Enbridge FixedResets got smacked down on news of today’s new issue: could it be that the market is tired of new issues paying 4%? These issues were also well-represented on the volume table; looks like a lot of swapping is going on! Volume overall was very low.

The ECB rate cut is having some immediate effects:

JPMorgan Chase & Co. (JPM), the biggest U.S. bank, closed five of its European money-market funds to new investments after the European Central Bank lowered deposit rates to zero.

JPMorgan notified clients yesterday that it won’t accept new investors or money in five euro-denominated money-market and liquidity funds because the rate cut might generate negative returns for investors, the New York-based company said in a notice to shareholders.

The ECB yesterday reduced its benchmark rate to a record low of 0.75 percent and took its deposit rate to zero, with President Mario Draghi saying the cuts may have only a “muted” economic impact.

The deposit rate cut “will almost certainly move cash bids in short-dated instruments into negative territory, and so we have taken the step to restrict subscriptions and switches into the funds in order to protect existing shareholders from yield dilution,” the company said on its website.

The more things change …:

As Europe struggles to contain its debt crisis, the name of an American dead for more than two centuries is being invoked by those who think euro area nations will have to trade some autonomy for fiscal stability.

Alexander Hamilton, the first U.S. Treasury secretary and the face on the ten-dollar bill, offered cash-strapped states in 1790 a deal they eventually couldn’t refuse: The federal government assumed their debts in return for more centralized power. The alternative risked consigning their creditworthiness to “burst and vanish,” and a breakup, Hamilton warned.

Another solution is asset sales:

Greek Prime Minister Antonis Samaras pledged to bring his country’s economic reform plan back on track, promising sweeping state-asset sales that will boost investment and jobs, and help break the country’s recessionary spiral.

“The first battle this government must give is the battle of the obvious, the self-evident,” Samaras told lawmakers in Athens today, at the start of three days of debate on a motion of confidence in his government. “This is a government that must tell the truth from the very first, such as the truth that, once again, the fiscal adjustment program has genuinely gone off track.”
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Asset sales not already agreed with international creditors, including rail transport and energy, will “bring investments, jobs and growth,” he said.

What about the Elgin Marbles?

Not much joy in US job numbers:

American employers added fewer workers to payrolls than forecast in June and the jobless rate stayed at 8.2 percent as the economic outlook dimmed.

The 80,000 gain in employment followed a 77,000 increase in May, Labor Department figures showed today in Washington. Economists projected a 100,000 rise, according to the median estimate in a Bloomberg News survey. Growth in private payrolls was the weakest in 10 months.

Canada did better – thanks to welfare:

Canadian employment increased by a net 7,300 positions in June and the jobless rate fell unexpectedly to 7.2 per cent, Statistics Canada said Friday in Ottawa.

The gain in jobs exceeded the forecasts of Bay Street analysts, who had also predicted that the unemployment rate would remain at 7.3 per cent. Average hourly wages for full-time workers rose 3.3 per cent from a year earlier, the fastest annual rate since the summer of 2009.

Still, while the June employment increase was fuelled by an impressive 29,000 new full-time positions, much of that hiring was in public-sector jobs in areas like education and health care.

Bankers in Dubai are among those who thank you for donating to UNICEF! There is capital flight in Afghanistan:

Afghan central bank inspector Fahim Satari stands in Kabul airport in front of a local businessman headed for Dubai, counting by hand the stack of $100 bills that police found the passenger carrying to the gate.

Satari declares the cash to be under the $20,000 limit imposed to stem the flood of money leaving through the terminal, which swelled to $4.6 billion in the year to March and equals almost one-fourth of the economy. While Satari’s team has slowed the airborne outflow, Kabul brokers who arrange informal transfers say business has jumped. In a country where only 7 percent of the population has a bank account and 15 percent of the economy depends on opium, cash is fleeing Afghanistan.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums up 10bp, FixedResets gaining 7 bp and DeemedRetractibles losing 16bp. Volatility was minor. Volume was quite low.

The Central Banks are singing Pump up the volume!

Three of the world’s five major central banks moved to lower borrowing costs Thursday, underlining both the fragile state of the global economic recovery and policy makers’ resolve to block a slide back into recession.

In separate decisions that were announced within the span of less than an hour, the People’s Bank of China and the European Central bank cut their benchmark interest rates, and the Bank of England pumped up its bond buying program.

It didn’t do the European market much good:

The euro sank to a one-month low as Spanish and Italian bonds plunged after the European Central Bank disappointed investors anticipating a more aggressive effort to fight the debt crisis. U.S. equities fell as investors awaited tomorrow’s jobs report.

The euro tumbled 1.1 percent to $1.2388 at 3:01 p.m. in New York and the Dollar Index surged the most this year.

This might be relevant to good news from Ireland:

Ireland returned to short-term debt markets on Thursday for the first time since before its bailout in November, 2010, paying less for three-month paper than Spain, which has avoided going to international lenders for a full sovereign rescue .

In a tentative first step following a near two-year hiatus, Ireland sold €500-million ($628-million) of Treasury bills at an average yield of 1.8 per cent and said it hoped to return to long-term debt markets with a syndicated issue later this year or early next at a maturity of two years or more.
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Yields on benchmark Irish 2020 bonds have fallen by almost 100 basis points since the summit and were over 50 basis points lower than their Spanish counterparts at 6.25 per cent after the auction, little changed on the day. (A basis point is 1/100th of a percentage point.)

Spain, whose 10-year yields rose sharply on Thursday, sold three-month debt at an average yield of 2.36 per cent last week while Italy had to pay 2.96 per cent to auction six-month paper a day later.

Well, it’s 11:30pm and TMXDataLinx still hasn’t made Last Quotes for July 5 available, so I’m giving up. I’ll add the tables … sometime.

Update, 2012-7-6: Here are the tables, finally:

It’s a black day for Canadian capital markets – the regulators have approved the bank-controlled monopoly on infrastructure:

Canada’s Competition Bureau said it won’t challenge the proposed C$3.73 billion ($3.68 billion) bid for the owner of the Toronto Stock Exchange by a group of Canadian financial institutions.

The bureau “does not, at this time, intend” to challenge the acquisition of TMX Group Inc (X), the agency said in a statement posted on its website.

The statement says:

Today, the OSC issued final recognition orders regarding the proposed transactions, following its own review. While the Bureau has an independent mandate to review mergers, the Bureau provided input and advice to the OSC for its consideration relating to the potential impact on competition that could result from the proposed transactions.

While the Bureau conducted its own review of the proposed transactions, the measures contained in the OSC’s final recognition orders materially change the regulatory environment sufficient to substantially mitigate the Bureau’s competition concerns. Accordingly, the Bureau is today issuing a No Action Letter (NAL) to Maple Group in respect to the proposed transactions.”

The Regulatory approval is conditional on there being more jobs for regulators:

Regarding complexity, the Commission has imposed terms and conditions that it feels are necessary in order for it to determine that it is in the public interest to make the orders. We acknowledge that the Commission will require an increase in capacity and capability to effectively manage the increased demands of oversight and the Commission undertakes to do so. To the extent that this increase in capacity and capability results in increased costs of oversight, our expectation is that these costs will be borne by Maple and its regulated affiliates, through the imposition of participation fees and activity fees, rather than by market participants more generally. Our intended enhanced oversight program is described in more detail below.
…
Due to Maple’s proposal to own the key market infrastructure entities in Canada, which could concentrate risk in Maple, and the significant amount of conflicts that could result, we will be instituting an enhanced oversight program for the Maple Group. This program will include:

• Regular communication and interaction with board and management
• Regular communication and interaction with relevant users committees
• Periodic reporting of activities and development in businesses
• Periodic oversight reviews
• Prior approval of certain aspects of operations
• Access to all information (both regulated and affiliated businesses )
• External verification of certain information/processes/performance standards
• Review of access to CDS by unaffiliated marketplaces and dealers
• Periodic internal review of certain aspects of businesses as specified by the Commission
• Recovery and resolution plans
• Change in control approvals

In addition, both the Exchange Recognition Order and CDS Recognition Order specify additional reporting that must
be provided to the Commission. In relation to the additional reporting that must be provided under the Exchange
Recognition Order, we also note that this is in addition to the information filing requirements currently imposed on
recognized exchanges under National Instrument 21-101 Marketplace Operation.

But wait! Could it be possible that lalaLand comes to the rescue? Not for any good reason of course – simply because they don’t want Ontario to get more of the lolly than they do:

The British Columbia Securities Commission, late in the game, unveiled a list of demands that the so-called Maple Group of banks and investors is not happy with, sources said. The parties have been talking for weeks, but have yet to reach a deal.

B.C.’s commission regulates the TSX Venture exchange, home to thousands of small capitalization companies. The B.C. regulator wants at least a quarter of the members of the Maple board to have experience running small companies, and is also demanding that Maple commit to keeping senior jobs in Vancouver.
…
Also outstanding is approval from Alberta’s securities commission, which also regulates the Venture exchange.

Alberta’s decision is likely to hinge on the outcome of the B.C. talks.

Save us, westerners, save us!

UK politicians are making desperate efforts to whitewash their regulators:

Robert Diamond, who quit yesterday as chief executive officer of Barclays Plc (BARC), sought to blame other banks for misleading markets about their ability to borrow, and regulators for turning a blind eye.

Ordered to testify to British lawmakers after Barclays agreed to pay a record 290-million pound ($455 million) fine for rigging the London interbank offered rate, Diamond said he was “disappointed” regulators failed to act on repeated warnings from Barclays that competitors had lowballed their submissions. Legislators asked him why he took so long to uncover his own firm’s attempts to manipulate interest rates.

“This isn’t just Barclays,” Diamond, 60, told lawmakers at a three-hour hearing of Parliament’s Treasury Select Committee. “Throughout 2007 and 2008, no institution of the 16 banks reporting three-month dollar Libor was at the higher end more consistently than Barclays. Barclays was getting questions about why it was always high and we were saying, ‘We are high because we were reporting at where we were borrowing money.’”

Tucker has asked to defend himself against charges of sins of commission:

Bank of England Deputy Governor Paul Tucker signaled he wants to defend himself and give his version of what happened on a 2008 phone call with former Barclays Plc (BARC) chief Robert Diamond as the Libor scandal escalates.

Less than 90 minutes before Diamond’s appearance today at a hearing of U.K. Parliament’s Treasury Committee over attempted manipulation of the Libor rate, the central bank said Tucker wants to testify “as soon as possible.” He is “keen” to “clarify the position with regard to the events involving the Bank of England, including the telephone conversation with Bob Diamond on Oct. 29, 2008,” according to an e-mailed statement.

Tucker was drawn into the scandal after Barclays released a note of the 2008 call purporting to show that he hinted the bank could cut its Libor rates.

RIM is losing pricing power:

Research In Motion Ltd. (RIM), the BlackBerry maker whose stock has dropped 95 percent since 2008, is under pressure from mobile phone companies to reduce carrier fees that generate $4.09 billion in annual revenue.

RIM said it faces demands to cut the fees paid by customers such as AT&T Inc. after posting its first loss in a decade last week. The fees account for more than a third of revenue at RIM, which is racing to introduce BlackBerry 10 phones and engineer a turnaround.

How’s your pension?

An analysis by pension consulting firm Mercer shows the funded status, or solvency position, of pension plans declined sharply in the second quarter of 2012. Mercer’s revamped pension health index stood at 77 per cent on June 30, down five percentage points from 82 per cent on March 31.

The index, which tracks the performance of a hypothetical model pension plan with typical investments, was at 76 per cent on Dec. 31.
…
Also Wednesday, an analysis by pension consulting firm Towers Watson showed its pension index fell to 56.3 per cent at June 30 from 57.1 per cent as of Dec. 31, a drop of 0.8 percentage points in the six-month period.

The index also tracks the performance of a hypothetical pension plan that invests using typical asset allocations with 60 per cent invested in stock and 40 per cent in bonds.

The US is getting a lesson on the relationship between paying the piper and calling the tune:

The Church of the Nativity in the Palestinian town of Bethlehem could use a few repairs, but is it in peril? The United Nations Educational, Scientific and Cultural Organization says so, having declared the church an endangered World Heritage site last week.

Palestinians made hay arguing that Israel’s occupation of the West Bank threatened the humble church, said to mark the birthplace of Christ. A UN expert committee disagreed, concluding it faced no danger. The U.S. objected to the “endangered” designation, claiming it was a means to attack Israel, but lost the 13-6 vote.

The episode offers a glimpse of the new Unesco, where the U.S. has diminished clout after having announced its intention to stop funding the organization following Palestine’s admission as a member last October. The U.S. purpose presumably was to punish Unesco. Instead, other countries — notably China and Qatar — have stepped in to fill the 22 percent hole in Unesco’s $325 million annual budget.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums and FixedResets both gaining 5bp, while DeemedRetractibles lost 11bp. Volatility was muted. Volume was very low.

Nada Mora What Determines Creditor Recovery Rates? should be an Interesting External Paper – but I have no time!

There are interesting mortgage bond shennanigans in Europe:

Spanish and Portuguese banks are leading European lenders in buying back their own mortgage- backed securities at distressed prices to bolster capital and stockpile eligible collateral for European Central Bank loans.

Banco Bilbao Vizcaya Argentaria SA (BBVA), Banco Comercial Portugues SA (BCP) and other lenders this year repurchased 6.6 billion euros ($8.4 billion) of asset-backed bonds they issued, more than double the level for all of 2011, according to data compiled by Deutsche Bank AG. Banks buy the debt, packages of loans in which they kept subordinated portions, for less than face value, and book a capital gain similar to the discount.
…
The deals are poised to accelerate after the ECB last month reduced the minimum ratings it will accept for mortgage securities offered as collateral for cheap loans, adding incentive to lenders to buy back debt and pledge it with the Frankfurt-based institution.
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Investors demand 1025 basis points, or 10.25 percentage points, more than interbank rates to hold a senior five-year bond backed by Portuguese home loans, according to JPMorgan Chase & Co. data. That exceeds the 10 percent level considered distressed. The spread for Spanish residential mortgages is 615 basis points compared with 150 for Dutch mortgage backed securities and 132 for British transactions.

There’s an interesting paper on game theory released by the Boston Fed by Michalis Drouvelis and Julian C. Jamison titled Selecting Public Goods Institutions: Who Likes to Punish and Reward?:

The authors extend the standard public goods game in a variety of ways, in particular by allowing for endogenous preference over institutions and by studying the relationship between individual types, their preferences, and later behavior within the various institutional environments. They collect individual data on a variety of demographic factors, in addition to measuring levels of risk aversion and ambiguity aversion (over both gains and losses). The authors then elicit preferences in an incentive-compatible manner over voluntary contribution mechanisms with and without reward and punishment options. Finally, they randomly assign subjects to one of the four institutions and observe repeated play. They find that payoffs are significantly greater when punishment is allowed but that only a small minority of participants prefers such an environment. There is at most a weak link between individual characteristics and elicited preferences over environments. On the other hand, institutional preferences, as well as individual characteristics, are more strongly predictive of behavior in the public goods game. For instance, loss averse individuals preemptively reward more often when that option is available. This result suggests that when studying social interactions, especially if people can choose whether to participate in a sanctions-and-rewards mechanism, it is important to consider individual attitudes toward risk and uncertainty.
…
Our main findings can be summarized as follows. First, our four preference measures are significantly correlated with each other. Second, subjects’ individual characteristics help explain their preferences over risk, loss, and ambiguity. Third, which institutions individuals prefer are, surprisingly, not influenced by preference measures, although other individual traits do have some explanatory power. Fourth, institutions with punishment options are best able to maintain cooperative norms. Fifth, relative to institutions without sanctioning mechanisms, institutions that permit sanctions incur enforcement costs that lower overall welfare in the short run but increase overall efficiency in the long run. Sixth, positive and negative reciprocity are significantly correlated with our preference measures. Seventh, subjects’ individual characteristics account for the way sanctions and rewards are used.
…
Relative to those subjects who declare no political party affiliation, we observe that those who are affiliated with the Conservative party are more ambiguity averse, whereas those who are affiliated with a party other than the four major ones in the United Kingdom (that is, Conservative, Labour, Liberal Democrats, and Green) are found to be less ambiguity averse.

The banks’ “Living Will” joke has reached the punchline:

The Federal Deposit Insurance Corp. posted the public portions of so-called living wills on its website today as required by the 2010 Dodd-Frank Act. The documents outline more detailed proposals submitted privately to regulators describing how the companies can be dismantled if they fail.
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The aim of the living wills is to give regulators a plan for shutting down complex financial firms without taxpayer bailouts or the turmoil that followed the 2008 collapse of Lehman Brothers Holdings Inc.

Ha-ha! They’ll be lucky! If I remember correctly, the politicians always had the choice of whether or not to bail out the banks, and voted in favour because they thought that the alternative was worse. But this sounds tough, anyway. And look at the revolutionary statements in the Bank of America plan:

Bank of America’s Operating Principles

• Be customer-driven
• Manage risk well
• Continue to build a fortress balance sheet
• Deliver for our shareholders
• Manage efficiency well
• Be the best place to work

Pretty radical stuff!

The three top honchos at Barclays have all quit:

Robert Diamond stepped down today as chief executive officer of Britain’s second-biggest bank and Jerry Del Missier quit as chief operating officer, London-based Barclays said in a statement. Chairman Marcus Agius, 65, will quit once he has found a replacement for Diamond, who has worked at the bank for the past 16 years and oversaw its investment banking expansion.

The three are leaving after regulators fined the bank a record 290 million pounds ($455 million) for attempting to rig the London interbank offered rate for profit. With Diamond due to appear before lawmakers tomorrow to answer their questions, Barclays released a note of a 2008 call purporting to show that Paul Tucker, the central bank’s then markets director, hinted the firm could cut its Libor rates.

“Tucker stated that the levels of calls he was receiving from Whitehall were ‘senior’ and that while he was certain we did not need advice, that it did not always need to be the case that we appeared as high as we have recently,” Diamond said in an Oct. 30, 2008 e-mail to then CEO John Varley and Del Missier.

Diamond, 60, didn’t believe he had received any instruction or that he gave any order to Del Missier to lower the bank’s submissions, Barclays said in evidence to lawmakers today. Del Missier, 50, concluded that the Bank of England had instructed the firm not to keep Libor so high and mistakenly instructed employees to lower their submissions, Barclays said.

Whatever. Everybody’s ducking blame. As I stated on June 27, it seems quite clear to me that the regulators were either grossly negligent or willfuly blind. I am pleased to note that I am not the only one who thinks the regulators have some ‘splainin’ to do – in fact, my views are somewhat mild:

If [deputy head of the BoE] Mr. [Paul] Tucker said Barclays’ Libor submissions didn’t need to appear so high, what could he have meant other than that the bank should lower them? And why did Mr. Tucker mention Whitehall if not to legitimize such misstatements? Perhaps there are other explanations, but Mr. Tucker will now have to respond.

Moreover, the Diamond memo potentially contradicts the FSA account of the exchange. The regulator states that “no instruction for Barclays to lower its Libor submissions was given during this telephone conversation.” Well, there’s explicit instruction and implicit instruction. The BoE won’t like being dragged into this. But Mr. Tucker needs to provide some clarity – fast.

Manulife redeemed some Tier 1 Capital:

Manulife Financial Capital Trust (the “Trust”), a subsidiary of Manulife Financial Corporation, today announced that on June 30, 2012, it completed the redemption of all of its outstanding $60,000,000 principal amount of Manulife Financial Capital Securities – Series A and all of its outstanding $940,000,000 principal amount of Manulife Financial Capital Securities – Series B.

These notes had what are now rather generous termsand redemption is no surprise:

On June 30, 2012, the Company will have the right to call the total of $1,000 million of capital notes issued by Manulife Financial Capital Trust, qualifying as Innovative Tier 1 capital under OSFI rules. The amount represents two tranches: $940 million of 6.700% Manulife Financial Capital Trust Securities (“MaCS”) Series A Units and $60 million of 7.000% MaCS Series B Units. Depending on, among other things, capital adequacy assessments and regulatory approval of redemption, management will decide whether or not to exercise the right to call these instruments.
…
On December 10, 2001, Manulife Financial Capital Trust (the “Trust”), a wholly owned open-end trust, issued 60,000 Manulife Financial Capital Securities (“MaCS”) – Series A and 940,000 MaCS – Series B.

Each MaCS – Series A entitles the holder to receive fixed cash distributions payable semi-annually in the amount of $35.00 representing an annual yield of 7%. Each MaCS – Series B entitles the holder to receive fixed cash distributions payable semi-annually in the amount of $33.50 representing an annual yield of 6.70%.

On any distribution date prior to June 30, 2012, the Trust may redeem, with regulatory approval, any outstanding MaCS series, in whole or in part, at the greater of par or the present value of the debt based on the yield on uncallable Government of Canada bonds plus 0.40% in the case of MaCS – Series A and 0.32% in the case of MaCS – Series B. On or after June 30, 2012, the Trust may redeem any outstanding MaCS series at par, together with any unpaid interest.

Each MaCS is exchangeable at the option of the holder into 40 newly issued MLI Class A Shares Series 2, in the case of MaCS – Series A, or 40 newly issued MLI Class A Shares Series 4, in the case of MaCS – Series B, under certain circumstances.

Under certain circumstances, each MaCS will be automatically exchanged, without the consent of the holders, for 40 MLI Class A Shares Series 3, in the case of MaCS – Series A, and 40 MLI Class A Shares Series 5, in the case of MaCS – Series B. The MaCS may be redeemed with regulatory approval in whole, upon the occurrence of certain tax or regulatory capital changes, at the option of the Trust.

On or after June 30, 2051, the MLI Class A Shares Series 2 and Series 3 will be convertible at the option of the holder into MFC common shares. On or after December 31, 2012, the MLI Class A Shares Series 4 and Series 5 will be convertible at the option of the holder into MFC common shares. In each case, the number of MFC common shares is determined by the face amount of the MLI Class A Shares divided by the greater of $1.00 and 95% of the then market price of MFC common shares.

The MaCS – Series A and MaCS – Series B constitute Tier 1 regulatory capital.

BRF.PR.A, proudly issued by Brookfield Renewable Power Preferred Equity Inc., is guaranteed by Brookfield Renewable Energy Partners L.P. Brookfield Renewable Energy Partners L.P.’s acquisition of dams in the US is expected by DBRS to be credit neutral:

DBRS expects that BREP will be able to provide its share of the permanent financing for the acquisition with non-recourse debt and equity capital and achieve a leverage ratio consistent with the Company’s existing capital structure and within the acceptable range of the current rating category. The deconsolidated metrics are expected to benefit from the incremental remitted or distributed cash flow from the assets, although the level of this cash flow would be subject to the regional hydrology and wholesale power market conditions.

It was a strong day for the Canadian preferred share market, with PerpetualPremiums gaining 10bp, FixedResets up 21bp and DeemedRetractibles winning 53bp. The lengthy Performance Highlights table was, unsurprisingly, dominated by Insurer-issues DeemedRetractibles. Volume was a little below average.

The European crisis has come to a satisfactory conclusion: central bureaucrats will gain power:

The European Union’s push to unify bank oversight moved to the euro area after two days of talks in Brussels, putting the European Central Bank at the center of Spain’s efforts to extract its government from its financial- industry rescue.

Euro-area leaders asked for proposals this year to unify banking supervision and soup up the ECB’s powers. They referred to a clause in the EU treaty that allows them to give the ECB prudential oversight of banks and other non-insurance financial companies.

The move paves the way for the European Commission, the EU’s regulatory arm, to augment its proposals on deposit insurance, capital requirements and how to handle failing banks.

Speaking of regulatory mission-creep:

Last week, the Canadian Securities Administrators published for public comment a consultation paper on the potential regulation of proxy advisory firms. The move follows a similar path taken by the U.S. Securities and Exchange Commission, which has spent two years considering ways to regulate proxy advisers.
…
But as shareholder activism has grown, and as mutual funds have been required to step up disclosure of how they vote on corporate matters, the institutional community has increasingly leaned on proxy advisers to help them make their thousands of voting decisions.

That’s not quite right. It is the regulatory requirement to have a solid basis for the vote and to maintain records of that basis that has caused the growth of proxy advisory companies. Very nice and proper in theory, but a PM with – say – 50 stocks can’t do it and won’t do it. There’s only maybe one or two votes a year (tops) that have any meaning anyway. It’s a lot cheaper to hire a proxy advisory company and – presto! – box ticked.

It was a good day for the Canadian preferred share market, with PerpetualPremiums and DeemedRetractibles both up 16bp, while FixedResets gained 8bp. Lots of volatility heavily skewed towards SLF on the upside. Volume was below average.

Europe’s going to solve the crisis by subordinating privately held debt:

Italy today paid the most to sell 10-year debt since December, selling the notes to yield 6.19 percent. Spanish 10- year yields rose to 6.94 percent today. The focus should be on helping Spain’s banks and reducing Italian yields to around or slightly under 4 percent, Irish Finance Minister Michael Noonan said to reporters in Dublin today.
…
“The EFSF or ESM could stand ready to intervene in the primary market to facilitate successful issuance of the covered bonds,” [Finnish Prime Minister Jyrki] Katainen said. “Italy and Spain have lots of state properties they could use in raising money. Selling covered bonds would send a strong message they stand behind their debt.”

Katainen said the proposal is based on Finland’s experience with the sale of covered bonds during its economic troubles in the early 1990s.

It’s odd … when the bank regulators want to boost bank capital requirements, they say it won’t matter since they’ll be able to borrow cheaper and sell equity at a higher multiple, since Modigliani-Miller says enterprise value is constant. This doesn’t seem to apply to sovereigns. Gee, I wonder why that is.

Greece may get bailed out of its bail-out:

An International Monetary Fund team will start negotiating possible changes to the conditions attached to a loan to Greece after a fact-finding mission travels to Athens early next week, a fund spokesman said.

The regulators have released an electronic trading press release

IIROC released a plethora of proposed new rules regarding electronic trading – a request for comments on rules:

The most significant impacts of the Proposed Amendments would be to:

• ensure that Participants and Access Persons adopt, document and maintain a system of risk management and supervisory controls, policies and procedures reasonably designed to manage the risks associated with electronic trading and access to marketplaces;
• ensure that Participants and Access Persons are effectively supervising trading activity and are accounting for the risks associated with electronic access to marketplaces in their supervisory and compliance monitoring procedures; and
• require an appropriate level of understanding, ongoing testing and appropriate monitoring of any automated order systems in use by a Participant, Access Person, or any client of the Participant.

Lots and lots of paperwork! Lots and lots of jobs for regulatory and compliance types! Lots and lots of opportunity to nail people with 20-20 hindsight when things go wrong! Yay!

… and a request for comments on guidance:

At a minimum, the post-order entry compliance procedures for clients who have been provided access to a marketplace should address the procedures for testing:
….
orders that have been entered which may constitute “spoofing” contrary to Rule 2.2 of UMIR (the entry of an order or orders which are not intended to be executed for the purpose of determining the depth of the market, checking for the presence of an iceberg order, affecting an opening price or other similar purpose);

Strikes me that this will be very difficult to enforce.

It was another quiet mixed day for the Canadian preferred share market, with PerpetualPremiums off 5bp, FixedResets down 4bp and DeemedRetractibles gaining 3bp. Volatility was good. Volume was below average.

Appalled by the huge outbreak of suicide bombers in Canadian office buildings, the wise folks in charge of Commerce Court in Toronto judiciously decided a few years ago to institute a visa policy – just like the big shots in New York! If you want to enter the building a tenant has to make an appointment for you with security so you can get a pass – see the February 24, 2010 post for more details. It’s working out as expected:

The four buildings and underground space that make up Commerce Court currently have a 27-per-cent vacancy rate, far above the overall rate in downtown Toronto, which hovers just above 5 per cent, according to commercial real estate company Avison Young.

There’s some cheery news from the breadbasket:

The drought in the U.S. Midwest that has pushed up corn prices 28 percent since June 15 may eventually rival a dry period in 1988 that cost agriculture $78 billion, a government meteorologist said.

This year’s weather pattern, which settled into the Great Plains and the Southwest last year and has spread into the Corn Belt, resembles those of a quarter century ago, Matthew Rosencrans, a drought specialist with the National Weather Service, said today at a forum in Washington. Sparse rainfall may drive crop costs up further, destroying livestock profits and raising food prices, said David Anderson, an agricultural economist at Texas A&M University.

Barclays was naughty during the crisis:

Barclays Plc (BARC) was fined 290 million pounds ($451.4 million), the largest penalties ever imposed by regulators in the U.S. and U.K., after admitting it submitted false London and euro interbank offered rates.
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In February 2007, one of the Barclays traders wrote in an instant message to a trader at another bank:

“If you know how to keep a secret I’ll bring you in on it, we’re going to push the cash downwards on the imm day, if you breathe a word of this I’m not telling you anything else, I know my treasury’s firepower… which will push the cash downwards, please keep it to yourself otherwise it won’t work.”
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“The senior U.S. dollar submitter emailed his supervisor, ‘following on from my conversation with you I will reluctantly, gradually and artificially get my libors in line with the rest of the contributors as requested,” the CFTC said. “I disagree with this approach as you are well aware. I will be contributing rates which are nowhere near the clearing rates for unsecured cash and therefore will not be posting honest prices.”

That’s a hell of a position for a guy to be in, particularly if he knows that at that moment there are NO JOBS anywhere else. But he must have been making enough at the time to make obtaining independent legal advice quite reasonable – maybe he did. Maybe that’s why there’s so much documentation available, with such explicit statements to his supervisor (among others). But look what happens when you’re honest:

He recognized, at times, that if he were to submit higher, accurate LIBORs, then the market or press would report that Barclays was experiencing difficulty in funding itself.

On September 3, 2007, Bloomberg featured Barclays in a news article entitled “Barclays Takes a Money-Market Beating.” The atiicle speculated that Barclays may have been having liquidity problems, because on two occasions Barclays had to borrow Sterling from the emergency lending facility of the Banle of England,2 and because of Barclays’ relatively high LIBOR submissions in Sterling, Euro and U.S. Dollar. The article posed the question, “So what the hell is happening at Barclays and its Barclays Capital securities unit that is prompting its peers to charge it premium interest in the money market?” Other newspapers, including the U.K. Financial Times and the Standard, ran similar articles about LIBOR and Barclays.

On the day of the Bloomberg article, Barclays’ U.S. Dollar LIB OR submissions in at least three tenors were the highest submissions of all panel banks, and were over six to nine basis points higher than the official BBA LIBOR fixing at those tenors. Barclays believed that its high LIBOR submissions caused its financial condition to be misperceived by the public and the media.

The negative media speculation caused significant concern within Barclays and was discussed among high levels of management within Barclays Bank. As a result, certain senior managers within Barclays Bank Treasury (“senior Barclays Treasury managers”) instructed the U.S. Dollar LIBOR submitters and their supervisor to lower Barclays’ LIBOR submissions, so that they were closer in range to the submitted rates by other banl(s but not so high as to attract
media attention.

It gets even more interesting:

One of the senior Barclays Treasury managers called a BBA representative and stated that he believed that LIBOR panel banks, including Barclays, were submitting rates that were too low because they were afraid to “stick their heads above the parapet,” and that “no one will get out of the pack, the pack sort of stays low.” He also relayed his belief that other panel banks relied too much on information from voice brokers to determine appropriate rates in the market, instead of making independent determinations for their own institutions. He encouraged the BBA to react and be heavy handed, suggesting the sanction that banles involved in such conduct be removed from the panel. In apparent response to Barclays’ call, the BBA sent an email to the Steering Committee of the BBA, which is comprised of certain panel bank members including Barclays, requesting views on whether rates were artificially low and how to address this.
…
The Barclays senior compliance officer subsequently had a conversation with the U.K. Financial Services Authority (“FSA”) in which LIBOR was discussed. The senior compliance officer stated in an internal email directed to several levels of Barclays’ senior management that he informed FSA of the following: that Barclays believed that LIBOR submissions by the panel banks were distorted due to market illiquidity; that Barclays had been consistently the highest or one of the two highest submitters but was concerned to go higher given the negative media reporting about Barclays; that Barclays had concerns about the trillions of dollars of derivatives fixed off LIBOR; and that there were “problematic actions” by some banks. However, the Barclays’ senior compliance officer did not inform the FSA that Barclays was making its LIBOR submissions based on considerations of negative market or press perceptions of Barclays or that its LIBOR submitters’ assessments of the appropriate rates for submission were being altered to adhere to the directive to be below “the parapet.” After this conversation, the same Barclays senior compliance officer did not follow up internally with the LIBOR submitters or their supervisor to confirm that Barclays was making its LIBOR submissions properly in accordance with the BBA’s definition and criteria for LIBOR.
…
Throughout the financial crisis period, Barclays’ employees, including the submitters, received routine surveillance telephone calls from staff members of the FSA, the Bank of England and the Federal Reserve Bank of New York. These conversations concerned the deepening global financial crisis and were to gauge the level of liquidity in the markets. These calls increased in frequency as the crisis worsened. In these calls, LIBOR was discussed as a measure of the severe illiquidity in the markets, and in that context, in some calls, Barclays’ employees expressed their opinion that Barclays and other panel banks were submitting rates that were too low given the market conditions. However, in those conversations, the Barclays’ employees did not explain that Barclays was not determining its LIBOR submissions in accordance with the BBA’s definition and criteria for LIBOR but instead was making its submissions in a manner to avoid negative market and media attention.

Helluva situation to be in – remember what happened to the boy who shouted that the Emporor had no clothes? He was instantly executed, his family was imprisoned for life and the village where he lived was burnt to the ground. Despite all the CFTC’s self-serving “Howevers”, it seems clear to me that the regulators were either grossly negligent or willfuly blind.

What should Barclays’ have done? Sitting here and looking at the situation in hindsight, with my own company and my own reputation not at risk in any way (in the same position as a regulator imposing a fine!), I’d guess the most honourable course would have been to have resigned from the BBA panel. And how would the markets have interpreted that? Are you sure? Would you be willing to bet the bank on it – literally?

It wasn’t much of a day for the Canadian preferred share market, with PerpetualPremiums gaining 3bp, FixedResets off 1bp and DeemedRetractibles up 1bp, but there was a surprisingly average amount of volatility considering the lack of excitement in the major indices. Volume was a little below average.

Where’s all those US dollars pulled out of Europe by MMFs gone? Canada and Japan:

The latest survey from Fitch Ratings found U.S. money market exposures to Canadian and Japanese banks in May increased to more than 22 per cent of the $638-billion (U.S.) of assets under management. A year ago, they represented just 13 per cent, and in 2008, less than 5 per cent. Canada’s Bank of Nova Scotia and National Australia Bank made Fitch’s top three list of banks that drink deepest from the money market pool. In 2010, France’s BNP Paribas and Credit Agricole topped the bill, while U.S. behemoths Citigroup and JPMorgan led the rankings in 2007.

It’s possible Europe will get a supranational bank regulator:

Bank supervision in the European Union would be shifted to a European supervisor and government would seek approval from other countries to run budget deficits, according to a broad outline of the plan prepared by European Council president Herman Van Rompuy.

His seven-page report, titled Towards a Genuine Economic and Monetary Union, presents a new design that could prevent another crisis for the euro zone, the embattled 17-member monetary union.

There’s more advocacy of inflation as panacea:

As Mr. Krugman says in his New York Times blog: “What to do? One answer is fiscal policy: let governments temporarily run big enough deficits to maintain more or less full employment, while the private sector repairs its balance sheets. The other answer is unconventional monetary policy to get around the problem of the zero lower bound: maybe unconventional asset purchases, but the obvious answer is to try to create expected inflation, so as to reduce real rates.”

Meanwhile, the Spanish barber is getting a very close shave:

Spain is poised for a downgrade to junk by Moody’s Investors Service, according to investors who sent the cost of default insurance for the nation’s biggest banks and companies close to record highs.

Credit-default swaps on Banco Santander SA (SAN), the country’s biggest bank, jumped 23 percent this quarter to 454 basis points, compared with an all-time high of 474 in November. Banco Bilbao Vizcaya Argentaria SA (BBVA) rose 26 percent to 477, approaching May’s record 516, while phone company Telefonica SA (TEF) surged 70 percent to a record 540 basis points.

Moody’s downgraded 28 Spanish banks yesterday including a two-step cut for Banco Santander and a three-level reduction for BBVA, a week after it lowered Spain’s rating to Baa3, on the cusp of junk. The country remains on review for another cut by New York-based Moody’s after it sought a 100 billion-euro ($125 billion) international bailout for its banks and on speculation losses from its real estate industry will worsen.

Prop traders continue to form hedge funds:

Former Royal Bank of Canada and Bank of America Corp. proprietary traders plan to start a mortgage hedge fund at New York-based Tandem Global Management LP next month, joining at least half-a-dozen money managers wagering that home-loan bonds will rise in value.

Stuart Lippman, 40, chief investment officer of the Tandem Mortgage Opportunity Fund, was formerly a managing director and senior portfolio manager in the non-agency mortgage credit business of Royal Bank of Canada’s proprietary trading group, according to a presentation dated May 25 that was obtained by Bloomberg News. David Liu, 43, chief strategist and portfolio manager at the new fund, managed portfolios in the global proprietary trading group at Bank of America.

Canadian banks didn’t get into much trouble during the Credit Crunch, but they’re working on it:

Bank of Montreal is laying the groundwork for more expansion in the United States, signalling to investors that it may buy more lenders south of the border and build additional branches to feed its massive North American growth spurt.
…
Much as TD has, BMO turned to the U.S. in search of growth as competition for profits in the Canadian market continues to grind away at margins for the country’s biggest lenders.

BMO now has roughly 650 branches in the U.S. to go with about 900 locations in Canada. It has more locations in Milwaukee than in Montreal, and more branches in Chicago than Toronto.

Soon Canada will have the same bank-assets-to-GDP ratio that Iceland had!

I understand a city is building a ferris wheel on its waterfront. What kind of dumb-ass mayor would build a ferris wheel on the waterfront?

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 4bp, FixedResets up 1bp and DeemedRetractibles off 10bp. Volatility was negligible. Volume was average.

Sorry this is so late, folks!