Category: Market Action

OSFI has released new mortgage paperwork creation rules:

Consequently, FRFIs should maintain complete documentation of the information that led to a mortgage approval. This should generally include:
• A description of the purpose of the loan (e.g., purchase, refinancing, renovation, debt consolidation);
• Employment status and verification of income (see Principle 3);
• Debt service ratio calculations, including verification documentation for key inputs (e.g., heating, taxes, and other debt obligations);
• LTV ratio, property valuation and appraisal documentation (see Principle 4);
• Credit bureau reports and any other credit enquiries;
• Documentation verifying the source of the down payment;
Purchase and sale agreements and other collateral supporting documents;
• An explanation of any mitigating criteria or other elements (e.g., “soft” information) for higher credit risk factors;
• A clearly stated rationale for the decision (including exceptions); and
• A record from the mortgage insurer validating approval to insure the mortgage where there may be an exception to the mortgage insurer’s underwriting policies.
The above documentation should be obtained at the origination of the mortgage and for any subsequent refinancing of the mortgage. FRFIs should update the borrower analysis periodically (not necessarily at renewal) in order to effectively evaluate their credit risk. In particular, FRFIs should review some of the aforementioned factors if the borrower’s condition or property risk changes materially.

Lap-dog Carney breathlessly reports that his boss is doing a great job:

The Canadian government’s latest move to tame the mortgage market will support the “long-term stability” of the housing market and guard against the economic risks posed by excessive borrowing, Bank of Canada Governor Mark Carney said Thursday.

Speaking in Halifax just hours after Finance Minister Jim Flaherty announced a series of changes that come into effect next month, Mr. Carney reiterated his concerns about the effects that his ultra-low interest rates have had on the behaviour of both borrowers and lenders, warning the economy cannot “depend indefinitely” on debt-fuelled spending, especially as incomes stagnate.

In a free market economy, the mortgage market would be cooled off by cutting back on government guarantees of mortgage debt (CMHC guarantees have exploded over the past five years) and increasing the risk-weight assessed on the banks for mortgages (which is justifiable as the proportion of bank assets represented by mortgages is way out of whack with historical norms). But it’s more fun to micro-manage. Gets more tough-sounding headlines, too.

Fortunately, there’s some movement on the first point:

The growth of CMHC had understandably worried Canadians who were paying attention. Here was a beast that ranks among the biggest financial institutions in Canada, larger than some of our smaller banks, expanding at an astounding pace with seemingly minimal oversight from regulators and the politicians in charge.

Year by year, it would blow past its sales targets, with the amount of insurance it was writing ballooning. The insurance book at CMHC grew from $345-billion at the end of the 2007 fiscal year to $567-billion in 2011. That’s a compound annual growth rate of a little more than 13 per cent.
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As the insurance book grew, the government steadily raised the cap on what was allowed, in what looked suspiciously like a rubber-stamp process.
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Earlier this year, Mr. Flaherty put OSFI in an official oversight role. He signaled in an interview with The Globe and Mail that the board was likely to be upgraded to something more appropriate for a financial institution of this scale. He refused to raise the cap on insurance in force beyond the current $600-billion.

Now, the move to end insurance for high-ratio mortgages on homes valued at more than $1-million and to further curtail other loans that require insurance by demanding faster paydowns will enable the CMHC to further curtail its growth.

CMHC is actually planning to allow its book to shrink in the current year, to about $557-billion, as mortgages are paid off faster (about $60-billion a year) than new insurance is originated.

But Spend-Every-Penny just can’t resist central planning:

Jim Flaherty is singling out Toronto’s overheated condo market as one of the main reasons Ottawa is tightening the rules for insured mortgages.

Hard on the heels of the BoC paper lauding repo central counterparties comes a BoC Working Paper by Hajime Tomura titled On the Existence and Fragility of Repo Markets:

This paper presents a model of an over-the-counter bond market in which bond dealers and cash investors arrange repurchase agreements (repos) endogenously. If cash investors buy bonds to store their cash, then they suffer an endogenous bond-liquidation cost because they must sell their bonds before the scheduled times of their cash payments. This cost provides incentive for both dealers and cash investors to arrange repos with endogenous margins. As part of multiple equilibria, the bond-liquidation cost also gives rise to another equilibrium in which cash investors stop transacting with dealers all at once. Credit market interventions block this equilibrium.
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In this paper, I take as given the OTC bond market structure. Thus, a question remains regarding the optimal market design, such as whether to introduce a centralized bond market or a set-up to ensure anonymity of cash investors. Also, the empirical implications of the model are yet to be tested. One of the testable implications is that a repo margin is increasing in the difference between the interdealer bond price and the repurchase bond price. Another implication is that spot transactions in a brokered bond market increase if a repo market collapses. Addressing these issues are left for future research.

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Buckyballs are undoubtedly the coolest organic molecule extant. They might even be useful!

Experimental solar cells made with two types of pure carbon absorb infrared sunlight that traditional silicon panels ignore and may eventually be used to improve efficiency, according to researchers at the Massachusetts Institute of Technology.

MIT scientists used nanotubes and spherical molecules known as buckyballs to make the first all-carbon photovoltaic cell, the Cambridge, Massachusetts-based university said today in an e-mailed statement.

Infrared light makes up about 40 percent of the solar radiation that hits the earth. Solar cells that absorb that energy may produce more electricity than conventional panels that don’t, according to Michael Strano, a professor of chemical engineering at MIT.

If we here in Ontario had any brains, we would have been pouring money into solar energy research rather than trying to create an indigenous industry with not-ready-for-prime-time technology so that we could compete with the Chinese on the basis of our lower labour costs. Unfortunately, we don’t have any brains.

Moody’s cut Royal Bank of Canada:

Moody’s Investors Service today repositioned the ratings of 15 banks and securities firms with global capital markets operations. The long-term senior debt ratings of 4 of these firms were downgraded by 1 notch, the ratings of 10 firms were downgraded by 2 notches and 1 firm was downgraded by 3 notches. In addition, for four firms, the short-term ratings of their operating companies were downgraded to Prime-2. All four of those firms also now have holding company short-term ratings at Prime-2. The holding company short-term ratings of another two firms were downgraded to Prime-2 as well.

“All of the banks affected by today’s actions have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities”, says Moody’s Global Banking Managing Director Greg Bauer. “However, they also engage in other, often market leading business activities that are central to Moody’s assessment of their credit profiles. These activities can provide important ‘shock absorbers’ that mitigate the potential volatility of capital markets operations, but they also present unique risks and challenges.” The specific credit drivers for each affected firm are summarized below.
…
Royal Bank of Canada

Long-term deposit rating to Aa3 from Aa1, outlook stable; Short-term P-1 affirmed

… but it was Credit Suisse that hogged the headlines:

Credit Suisse Group AG’s credit rating was cut three levels by Moody’s Investors Service, Morgan Stanley was reduced two levels and 13 other banks were downgraded in moves that may shake up competition among Wall Street’s biggest firms.

Credit Suisse, the second-largest Swiss bank, received the maximum reduction that Moody’s said in February it may make during a review of global banks with capital markets operations. Morgan Stanley and UBS AG (UBSN), the other firms singled out for such a steep cut, were lowered two steps instead.

Capital Power L.P. is the operating subsidiary of CPX, proud issuer of CPX.PR.A:

The Company’s power generation operations and assets are owned by Capital Power L.P. (CPLP), a subsidiary of the Company. As at December 31, 2011, the Company directly and indirectly held approximately 21.750 million general partnership units and 36.924 million common limited partnership units of CPLP which represented approximately 61% of CPLP’s total partnership units. EPCOR (in this MD&A, EPCOR refers to EPCOR Utilities Inc. collectively with its subsidiaries) held 38.216 million exchangeable common limited partnership units of CPLP representing approximately 39% of CPLP. CPLP’s exchangeable common limited partnership units are exchangeable for common shares of Capital Power Corporation on a one-for-one basis. The general partner of CPLP is wholly owned by Capital Power Corporation and EPCOR’s representation on the Board of Directors does not represent a controlling vote. Accordingly, Capital Power Corporation controls CPLP and the operations of CPLP have been
consolidated for financial statement purposes.

CPLP has been confirmed by DBRS at BBB:

DBRS has today confirmed the Senior Unsecured Debt rating of Capital Power L.P. (CPLP or the Partnership) at BBB with a Stable trend. The confirmation reflects (1) the Partnership’s balanced portfolio of contracted and merchant generation with reasonable fuel-hedging positions, (2) high plant availability and (3) increased geographical and fuel diversification.
…
…credit metrics are expected to remain reasonable for the current rating category, barring material debt-funded acquisitions in the foreseeable future. However, DBRS is increasingly concerned about the continued challenging merchant power market environment that could materially add to the Partnership’s existing challenges in the medium term.

Thomson Reuters Corporation, proud issuer of TRI.PR.B, has been confirmed at Pfd-2(low) by DBRS:

Thomson Reuters undertook 39 acquisitions for a total of $1.3 billion in 2011, with approximately two-thirds of investment occurring outside the U.S. Thomson Reuters also repurchased $326 million worth of shares during the period, its first share repurchase since 2008. As such, net debt increased moderately; however, net-debt to EBITDA decreased to 1.83x at the end of 2011, from 1.91x a year earlier.

Going forward, DBRS believes Thomson Reuters’ main challenge will be to achieve revenue and margin growth through the selection and integration of strategic acquisitions. The Company’s ability to grow profitably through this strategy remains to be proven.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums winning 11bp, FixedResets up 5bp and DeemedRetractibles off 4bp. Volatility was almost non-extistent. Volume was pathetic.

The Fed has a new slogan – Twist & Shout!:

The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities. Specifically, the Committee intends to purchase Treasury securities with remaining maturities of 6 years to 30 years at the current pace and to sell or redeem an equal amount of Treasury securities with remaining maturities of approximately 3 years or less. This continuation of the maturity extension program should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.
…
Voting against the action was Jeffrey M. Lacker, who opposed continuation of the maturity extension program.

With any luck, there will be increased pressure to end milkfare:

Canada has set an ambitious trade agenda that includes separate proposed deals with the EU, Japan and South Korea, along with entry into the Trans-Pacific Partnership negotiations. The issues on the table differ from negotiation to negotiation: Japan and South Korea want Canada to reduce or eliminate a 6.1 per cent tariff on imported automobiles and parts; The EU and United States are requesting a change in Canadian intellectual property laws.

One issue, however, is common to all negotiations: Our trading partners want to see an end to supply management of our dairy and poultry industries.

The tariffs that buttress the system range between 200 and 300 per cent on imported dairy products, with milk facing a 241 per cent tax and butter one of 298.5 per cent. These tariffs make foreign products prohibitively expensive and keep domestic prices among the highest in the world.

Spend-Every-Penny continues to micromanage the economy:

The federal government is moving again to tighten the rules on mortgage lending in Canada amid growing concerns that the housing market is overheated and household debt levels are climbing to perilous levels.

The country’s biggest banks were caught off guard on Wednesday night as the Department of Finance confirmed that it is clamping down on mortgages by reducing the maximum amortization for a government-insured mortgage to 25 years from 30.

Ottawa will also limit the amount of equity that can be borrowed against a home to 80 per cent of the property’s value, down from 85 per cent.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 21bp, FixedResets off 1bp and DeemedRetractibles gaining 3bp. There was a good dollop of volatility, with no clear pattern showing up in the Performance Highlights table. Volume was low.

PerpetualDiscounts now yield 5.06%, equivalent to 6.58% interest at the standard conversion factor of 1.3x. Long corporates continue to yield about 4.4%, 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 June 13.

The insurance companies have figured out a new way to sell annuities:

General Motors Co. (GM)’s deal to cut pension obligations by $26 billion and shift plans to Prudential Financial Inc. (PRU) is poised to fuel more transfers as U.S. firms face a retirement-funding shortfall the size of Greece’s debt.

MetLife Inc. (MET) and Prudential are among insurers that expect the GM deal to encourage more corporations to offload plans. Pension liabilities exceed assets by more than $435 billion, according to a Bloomberg review of data disclosed by firms in the Russell 1000 Index of large U.S. companies. Greece, facing demands for austerity measures in exchange for rescue funds, had total debt of about $450 billion at the end of 2011.

Employers who endured two stock-market crashes in a decade and 10-year Treasury yields near a record low may be tempted to follow GM’s lead by paying insurers to take the risk that market returns are inadequate or that beneficiaries live longer than expected. Transferring the obligations can reduce swings in earnings tied to securities and relieve companies of the need to manage large pools of money.

There’s a very revealing quote out about High Frequency Trading:

The advocates argue that “ ‘It’s the way of the world, people who are in denial are Luddites,’ that whole school of thought,” [, chief executive officer of the Investment Industry Regulatory Organization of Canada ] Ms. Wolburgh Jenah says. “Then there’s the school of thought that is ‘We don’t understand the markets any more, this new breed of participant has come in and taken over.’ ”

The wickle boys don’t like the idea that they might have to learn something new, or the young and the hungry will eat their lunch. Boo Hoo Hoo. See the February 8 post for more mockery of the incompetent.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums down 3bp, FixedResets winning 17bp and DeemedRetractibles gaining 10bp. Volatility was minor. Volume was low, but with a few issues showing very good volume.

The Europeans have a grave problem: they’re being criticized by parties they don’t regulate:

Tensions between Europe and the rest of the G20 broke wide open in Los Cabos as the president of the European Commission laid bare his frustration with the constant lecturing from outsiders, including Canada.
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The president of the European Commission, José Manuel Barroso, reacted tersely when asked to respond to recent comments from Prime Minister Stephen Harper that Europe does not need outside help to stabilize its economy.

“Frankly, we are not coming here to receive lessons in terms of democracy and in terms of how to run an economy because the European Union has a model that we may be very proud of,” Mr. Barroso said.

Maybe … maybe the EU should regulate Canadian politicians, as well as the Credit Rating Agencies! Yeah! Yeah, that would be good!

The Greek election has only shifted the focus in Europe:

Spanish bonds slid, propelling 10- year yields to more than 7 percent, after yesterday’s Greek election failed to convince investors that politicians will be able to tame Europe’s financial woes.

Italian debt also fell and German bunds rose, reversing earlier declines. Spain’s yields climbed to euro-era records as a report today showed the nation’s bad loans increased in April. The securities tumbled last week after the bloc’s fourth-largest economy requested as much as 100 billion euros ($126 billion) of aid on June 9 to support its banks. Greek bonds rose after pro- bailout parties won enough seats to control parliament.

The greenback is cementing its status as a reserve currency:

Central banks rebuilding foreign- exchange reserves at the fastest pace since 2004 are crowding out private investors seeking U.S. dollars, boosting demand even as the Federal Reserve considers printing more currency.

After falling to an all-time low of 60.5 percent in the second quarter of last year, the dollar’s share of global reserves rose 1.6 percentage points to 62.1 percent in December, the latest International Monetary Fund figures show. The buying has left the private sector with $2 trillion less than it needs, according to investment-flow data by Morgan Stanley, which sees the dollar gaining 8.2 percent in 2012, the most in seven years.

While the Fed has created more than $2 trillion under its stimulus programs since 2008, the flows signal that there may actually be a shortage of dollars to meet demand as Europe’s debt crisis deepens and the global economy slows.

ING Canada got downgraded:

The cauldron of financial turmoil bubbling over in Europe is now seeing its hot water trickle into Canada. Late Friday, rating agency Moody’s Investors Service announced the downgrade of ING Bank of Canada’s senior deposit ratings from Baa1 from A2.

This comes on the heels of the rating agency’s downgrade of ING’s parent, ING Bank NV, to C- for financial strength.

Small investors prone to panic are reminded that ING Bank Canada is a CDIC member and that:

Up to $100,000 of your savings are eligible for deposit insurance offered by CDIC. Your savings must be:
Held in…
A Eligible deposits—for example, savings, chequing and GICs of 5 years or less
+ Held at…
B Banks and other financial institutions—eligible deposits must be held at a CDIC member.
+ And held in…
C Canadian dollars—U.S. dollar and other foreign currency deposits are not eligible.

Meanwhile, in the True North Strong and Free Google reports:

We received a request from the Passport Canada office to remove a YouTube video of a Canadian citizen urinating on his passport and flushing it down the toilet. We did not comply with this request.

And we have problems even talking about trade:

Canada’s bid to join was hampered by the slow progress it made at enacting stronger prohibitions against the theft of digital intellectual property as well as its staunch protectionism for dairy and poultry producers who are shielded from foreign competition.

Another one of What-Debt’s favourite companies is going to do again what it does best:

Pension woes are back at the top of Air Canada’s concerns as the carrier seeks a new reprieve from retirement funding to avert a looming financial crisis.

Faced with a cash crunch in 2014, the country’s largest airline is preparing to ask Ottawa for another moratorium on company contributions to pensions, and to request other measures to ease the pressure.
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The Montreal-based carrier’s pension solvency deficit stood at $2.1-billion on Jan. 1, 2011, and analysts expect the airline to report a sharply higher deficit for Jan. 1, 2012.

BBD.PR.D got whacked again today, down 1.42 to close at 14.93. Strangely, BBD.PR.B, the RatchetRate issue with which it interconverts effective August 1, was also hammered, down 0.65 to close at 14.30. The interconversion has been discussed on PrefBlog; BBD.PR.D will reset to 255% of GoC5 – which at current levels will be only a hair above 3%.

It was a mildly positive day for the Canadian preferred share market, with PerpetualPremiums winning 9bp, FixedResets up 1bp and DeemedRetractibles gaining 3bp. Volatility was muted. Volume was very low.

The BoC has released a working paper by Donald Coletti, René Lalonde, Paul Masson, Dirk Muir and Stephen Snudden titled Commodities and Monetary Policy: Implications for Inflation and Price Level Targeting:

We examine the relative ability of simple inflation targeting (IT) and price level targeting (PLT) monetary policy rules to minimize both inflation variability and business cycle fluctuations in Canada for shocks that have important consequences for global commodity prices. We find that commodities can play a key role in affecting the relative merits of the alternative monetary policy frameworks. In particular, large real adjustment costs in energy supply and demand induce highly persistent cost-push pressures in the economy leading to a significant deterioration in the inflation – output gap trade-off available to central banks, particularly to those pursuing price level targeting.

Jonathan Weil of Bloomberg decries dynamic provisioning:

Dynamic provisioning is a euphemism for an old balance- sheet trick called cookie-jar accounting. The point of the technique is to understate past profits and shift them into later periods, so that companies can mask volatility and bury future losses. Spain’s banks began using the method in 2000 because their regulator, the Bank of Spain, required them to.
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The danger with the technique is it can make companies look healthy when they are actually quite ill, sometimes for years, until they finally deplete their excess reserves and crash. The practice also clashed with International Financial Reporting Standards, which Spain adopted several years ago along with the rest of Europe. European Union officials knew this and let Spain proceed with its own brand of accounting anyway.

Assiduous Readers with long memories will remember my post titled FRBB Looks at Dynamic Provisioning. The FRBB paper concluded, in part:

We argue that, had U.S. banks set aside general provisions in positive states of the economy, they would have been in a better position to absorb their portfolios’ loan losses during the recent financial turmoil. The allowances accumulated by means of the hypothetical dynamic provision during the cyclical upswing would have reduced by half the amount of TARP funds required. However, the cyclical buffer for the aggregate U.S. banking system would have been depleted by the first quarter of 2009, which suggests that the proposed provisioning model for expected losses might not entirely solve situations as severe as the one experienced in recent years.

So just remember: just because something is good doesn’t mean it’s a panacea. Ain’t nuthin a panacea.

Meanwhile, Spend-Every-Penny wants countries to guarantee deposits in banks they don’t regulate:

Canada is urging the euro zone to embrace a common bank-deposit guarantee as a concrete step to boost market confidence.

The stand – confirmed Friday in a speech by Finance Minister Jim Flaherty – provides the first specifics as to what Canada will push for next week when Prime Minister Stephen Harper and Mr. Flaherty attend the G20 leaders’ summit in Los Cabos, Mexico.

In his speech in Ottawa, the minister praised a proposal from Mario Draghi, the head of the European Central Bank, who has called for a fund to guarantee bank deposits in the 17-member euro zone.

It’s not clear to me why anybody would think that any rational person would base his finances on the word of a European politician anyway. I wouldn’t have any significant money deposited in any of the shaky-country banks anyway … and, if I lived there, would be inclined to be dubious about any European deposits for fear of post-exit confiscation anyway. My preference would be hard assets, by which I mean a box of Krugerrands and a pistol.

Alpha Trading asks the question – can a bank-owned utility do anything useful?:

Alpha, Canada’s newest stock exchange, wants to become the home to the country’s technology sector.

A Deloitte Inc. study commissioned by Alpha found what most observers of the tech sector in this country already know: that the tech industry is stunted. Tech as a percentage of GDP is below the G-20 average and forecast to fall behind Mexico and Saudi Arabia in a few years, the report found.
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The report, which included interviews with 22 tech sector leaders, laid out a five-point agenda for fixing the problem. The proposed solutions include more support for crowdfunding, establishing a pre-initial public offering “grey” market in tech securities and creating an exchange that focuses on tech. Alpha wants to be that exchange.

BBD.PR.D got whacked today after the announcement of the reset rate, closing down 1.40, or 7.89%, on heavy volume (for this issue!) of 32,479 shares. However, even at the quote of 15.90-35, it’s still idiotically expensive relative to BBD.PR.B at 14.95-05, with which it is interconvertible. I’ve been warning of this in PrefLetter for months. With charts and diagrams!

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums off 5bp, FixedResets down 9bp and DeemedRetractibles gaining 15bp. Volatility was average. Volume was very low.

The ECB won’t disclose records of EU collusion with fuzzy Greek bookkeeping:

The European Central Bank said it can’t release files showing how Greece may have used derivatives to hide its borrowings because disclosure could still inflame the crisis threatening the future of the single currency.

Bloomberg News is suing the ECB to provide the documents under European Union freedom-of-information rules. The papers may help show the role EU authorities played in allowing Greece to mask its deficit for almost a decade before the nation’s troubled finances necessitated a 240 billion-euro ($301 billion) bailout and the biggest debt restructuring in history

Disclosing the files when Bloomberg News first sought them in 2010 would have “fueled negative perceptions about Greece’s ability to honor its debt,” ECB lawyer Marta Lopez Torres said at a hearing of the European Union’s General Court in Luxembourg today. “It’s the same now with Spain” which “isn’t able to borrow money,” she said. “Markets are reacting in very volatile ways. It’s affecting the euro economy.”

Sorry this is so late, folks! There were technical difficulties at TMX DataLinx.

I can’t say I’m against this move – but it does open up a can of worms:

Denmark’s government agreed to ease rules for the country’s pension firms to help reduce their liabilities as record-low bond yields inflate the value of their obligations.

Pension companies and life insurers will be allowed to raise the discount rate they use to calculate their liabilities to better reflect long-term growth and inflation prospects, the Business and Growth Ministry in Copenhagen said in a statement late yesterday. The decision sent yields on longer-maturity bonds soaring as the industry’s need to buy up debt assets to match their pension obligations was reduced.
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The Danish move follows similar changes in Sweden, where 10-year yields surged 30 basis points on June 7 after the country’s regulator put a floor on the discount rate pension funds use to calculate liabilities. Nordic pension funds had come under pressure to increase their asset purchases as the region’s haven status from the debt crisis sent bond values higher and swelled the value of their liabilities.

The US housing market has a new kind of problem:

Funds planning to invest more than $6 billion to buy and rent foreclosed homes are finding it easy to raise money. The difficulty is spending it.

The number of low-cost foreclosed homes coming to market has dropped, bulk sales have been slow to materialize and prices are recovering in markets such as Phoenix, making it hard for private-equity firms, hedge funds and pension systems to buy as many homes as they need.
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Investors are trying to spend at least $6.4 billion on single-family rentals, including from funds such as Colony Capital LLC, GTIS Partners, KKR & Co., Oaktree Capital Group LLC (OAK), Och-Ziff Capital Management Group LLC (OZM) and the Alaska Permanent Fund Corp. They want to take advantage of U.S. home prices that are 35 percent below the 2006 peak and growing demand for rentals as the homeownership rate sits at the lowest level since 1997.

There is brinksmanship in Greece:

Alexis Tsipras said he expects the European Union will do all it can to keep Greece in the euro even if he wins elections and carries out his promise to repeal the austerity measures required to receive emergency loans.

“We have no sense that European partners will follow this tactic of blackmail heard from some quarters and stop funding,” Tsipras, whose Syriza party is vying for first place in pre- election polls, said in an interview in Athens today with Bloomberg Television. “Something like that would be catastrophic not only for Greece but for the entire euro area.”

BIS has released a working paper by Mathias Drehmann, Claudio Borio and Kostas Tsatsaronis titled Characterising the financial cycle: don’t lose sight of the
medium term!:

We characterise empirically the financial cycle using two approaches: analysis of turning points and frequency-based filters. We identify the financial cycle with the medium-term component in the joint fluctuations of credit and property prices; equity prices do not fit this picture well. We show that financial cycle peaks are very closely associated with financial crises and that the length and amplitude of the financial cycle have increased markedly since the mid-1980s. We argue that this reflects, in particular, financial liberalisation and changes in monetary policy frameworks. So defined, the financial cycle is much longer than the
traditional business cycle. Business cycle recessions are much deeper when they coincide with the contraction phase of the financial cycle. We also draw attention to the “unfinished recession” phenomenon: policy responses that fail to take into account the length of the financial cycle may help contain recessions in the short run but at the expense of larger recessions down the road.
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Against this backdrop, if the policymakers “overreact” to short-term developments and lose sight of the (medium-term) financial cycle that may lie behind them, they can store up bigger trouble down the road. Arguably, this is what happened both in the mid-1980s/early 1990s and in the period 2001-2007. In both cases, policymakers reacted strongly to collapses in
equity prices – the global stock market crashes of 1987 and 2001, which ushered in slowdowns in economic growth and/or actual recessions. As we have seen, however, equity prices are not a reliable indicator of the medium-term financial cycle. In fact, in both episodes credit and property prices continued to increase, benefiting from a second breath of life. A few years later, the credit and property price booms in turn collapsed, causing serious financial disruptions and dragging down the economy with them. From the perspective of the medium-term financial and business cycles, the slowdowns or contractions in 1987 and 2001 can thus be regarded as “unfinished recessions”.

We might be headed into one of the periodic outbreaks of handwringing about productivity:

Canada can’t live off its resource wealth forever and must get serious about chronically lagging productivity and innovation, says the Organization for Economic Co-operation and Development.
…
“Canada is blessed with abundant natural resources, but it needs to do more to develop other sectors of the economy if it is to maintain a high level of employment and equitable distribution of the fruits of growth,” said Peter Jarrett, head of the OECD’s Canada division and one of the authors of the study.
…
But the 128-page report’s main focus is productivity and innovation policy. The OECD pointed out that while per capita incomes are growing, productivity has stagnated for decades, and has actually declined since 2002.

Canada’s productivity and innovation conundrum isn’t a new theme for Canada. Those challenges were at the heart of last year’s federal task force report on research and development policies, chaired by Open text Corp. chairman Tom Jenkins. Ottawa moved to address several of the report’s recommendations in its March 29 budget.

R&D policies are a joke – they do nothing for productivity, they reward businesses who are willing to jump through the bureaucratic hoops – and reward the specialist lawyers and accountants who help with the application. That’s not productivity, that’s welfare. The three major impediments to Canadian productivity are a coddled financial sector, a coddled transportation sector and a coddled telecommunication sector, but these aren’t the best examples of anti-productive government policy.

I’ll believe that a Canadian government has started to care about about productivity when dairy farmers are told that 50-cow herds, and their massive indirect subsidy granted by import restrictions and dairy quotas, are nothing more than a national cash drain. Dairy farming is the most egregious Canadian example of low productivity.

There’s an interesting funding gap at Deutsche Bank:

Deutsche Bank AG (DBK) has a funding gap of as much as 14 billion euros ($17.5 billion) at its Italian and Spanish units which could reduce capital levels at the firm if those countries leave the euro, according to analysts at Espirito Santo Investment Bank.

Deutsche Bank’s loans amount to 205 percent of deposits at the Italian unit and 314 percent in Spain, according to London- based analyst Andrew Lim, who cited company filings. If those countries exit the euro and the new currencies fall 30 percent, the Frankfurt-based lender could lose as much as 4.2 billion euros of equity as the value of assets at those divisions declines while some funding remains in euros, he said.

Such cross-border funding gaps can be dangerous:

The government forced commercial banks to swallow exchange- rate losses on foreign-currency denominated mortgages by giving borrowers the option to repay their loans in a lump sum at below-market rates. Two-thirds of housing loans were denominated in foreign currencies, mostly in Swiss francs, and installments on them soared as the forint weakened.

Hungarians repaid 170,000 mortgages under the plan in a value of 1.4 trillion forint ($6.3 billion), cutting the total amount of outstanding foreign-currency mortgages by 23.3 percent, the financial market authority said in a report today.

It was a surprisingly uneventful day on the Canadian preferred share market, despite an enormous number of dividends going ex. PerpetualPremiums were off 3bp, FixedResets down 1bp and DeemedRetractibles gained 3bp. Volatility was non-existent, but volume was very high.

PerpetualDiscounts now yield 5.04%, equivalent to 6.55% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.4%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 215 bp, a significant decline from the 225bp reported June 6.

Play the exciting new Spanish Shell Game!

Spanish bond yields surged the most in four months in the first trading after the government in Madrid sought a bailout for its banks. Investors speculated the 100 billion euros ($125 billion) may not be enough.

The lifeline from the euro area, aimed at loosening the connection between banks and the state, risks doing the opposite as foreign investors continue to shun the nation’s bonds and Prime Minister Mariano Rajoy’s government grows increasingly dependent on domestic lenders.

“This 100 billion will be added to the public finances of Spain so it just reinforces the link between banks and the sovereign,” Olly Burrows, credit analyst at Rabobank International, said in a phone interview from London. “Spain is receiving funds to bail out its banks, which have been buying Spanish debt while everyone else has been getting out.”
…
Spanish banks were among the biggest beneficiaries of 1 trillion euros of three-year emergency loans from the ECB, which were recycled into sovereign bonds in a trend Economy Minister Luis de Guindos said in April “increased the correlation between sovereign risk and banking risk.” The ECB may need to offer another round of that financing to ensure local banks can fund the sovereign, [co-chief economist at Deutsche Bank AG in London Gilles] Moec said.

Meanwhile:

French securities slid with benchmark German bunds as Fitch Ratings said it may cut credit grades across Europe because policy makers are failing to demonstrate they can bring the debt crisis under control. The yield on Italian 10-year securities jumped to the most since January as the country prepared to sell bonds on June 14. Germany will offer 10-year bunds, Europe’s benchmark securities, tomorrow, after Austria and the Netherlands auctioned debt today.

Most governments do all they can to attract high-earning migrants. Not the UK:

U.K. lawyers are fielding a flood of questions from multinational firms as a government shake-up of visa rules threatens to cut short the careers of top traders and other executives transferred from overseas.

Changes in the past two years include a five-year cap on how long employees who moved to the U.K. under the Intra Company Transfer system can stay, and the removal of their right to settle permanently. The introduction of a cooling-off period between visa applications means employees have to spend at least 12 months out of the country once their permit expires.

“We’ve seen quite significant panic among a number of clients,” said Ben Sheldrick, a partner with Magrath LLP Solicitors in London. “The government wants to be seen to be tough on immigration and one of the only groups they can be seen to be reducing is the skilled migrants sponsored by multinational firms.”

Canadian banks are worrying about appraisals:

Several Canadian banks have been quietly re-evaluating their appraisal strategies amid increased worries about the accuracy of property values in a market deemed at risk of overheating.

Lenders use a variety of techniques, including full appraisals, so-called “drive-by” appraisals based on the exterior of the home, and databases of market prices, to evaluate homes. The values they arrive at help determine how much money they should lend to mortgage borrowers. They are also key for measures such as the loan-to-value ratio that are used to track the health of loan portfolios and borrowers’ debt loads.

Banks are emphasizing on-site visits to value properties, especially those above a certain price or in rural areas. They are also paying closer attention to who does the appraisal.
…
TD lends 80 per cent loan-to-value up to $900,000, but after that only lends 50 per cent, to protect itself against inflated values on expensive homes.
…
California-based First American Financial Corp. had been selling Canadian banks a “guaranteed valuation” product that guaranteed the valuation of a property was accurate on the day a mortgage was issued. If it turned out later that it wasn’t, the bank could make a claim.

But First American posted a first-quarter loss in 2011 as it took a $45-million reserve strengthening charge relating to this obscure Canadian product.

Policies that were experiencing claims had been written mostly in 2007 and 2008. Sources say the issue stemmed mainly from Alberta, where the housing market underwent a correction starting in 2007, and problems became apparent as default rates increased, leading banks to seize more homes as collateral.

If I were worried about an overheated property market, I’d convert today’s appraisal into 2008’s equivalent and lend against that – which is much the same thing as lowering the LTV ratio.

It was a positive day for the Canadian preferred share market, with PerpetualPremiums gaining 4bp, FixedResets winning 11bp and DeemedRetractibles up 7bp. Volatility was low. Volume was well below average.

Red letter day! For the first time in a long time, somebody’s talking about the flip side of safe banking:

Mr. Flaherty boasts about Ottawa’s strict supervision and holds up the banks’ conservative lending culture as a virtue. What he fails to mention to his audiences in places such as Istanbul, London and Washington is that Canada’s entrepreneurs and smaller businesses are starved for cash.
…
According to the Organization for Economic Co-operation and Development, the outstanding debt of Canadian small and medium-sized enterprises (SMEs) essentially has been unchanged since 2000. Lending to smaller companies decreased 0.1 per cent in 2008, increased 3.7 per cent in 2009 and dropped 0.9 per cent in 2010, the 34-member OECD said earlier this year in its first annual scorecard of financing for SMEs and entrepreneurs.
…
While there is no longer an outright ban on international lenders setting up in Canada, the rules are structured in such a way that there is little incentive to do so. No investor can hold more than 20 per cent of the voting shares in a bank with equity of more than $12-billion and a majority of the directors must be Canadians.

So the lenders that are large enough to shake the Canadian banks’ entrenched position – the Wells Fargos of the world – either stay small in Canada, or avoid the country altogether.
…
There are more than 7,000 banks in the United States insured by the Federal Deposit Insurance Corp. Most of those institutions are small, confining their lending to a specific community. The result is a more competitive credit market. SMEs accounted for 29 per cent of all business lending in the United States in 2010, compared with 18 per cent in Canada.

Canada’s banks were left relatively unscathed by the Credit Crunch and that’s a good thing. But next time you hear a regulator boasting about how wonderful the safe Canadian system is, ask what the costs are. All the costs, all the indirect costs of a comfortable oligopoly, not the relatively trivial direct costs. A Lamborghini is a great car … but I wouldn’t pay $10-million for one.

You can talk about billions, and you can talk about percentages, but sometimes it’s most graphic to talk about the impact on the average guy:

The average American family lost 38.8 percent of its wealth from 2007 to 2010, with the biggest losses concentrated among households with the most assets tied to their homes, a Federal Reserve study shows.

Median net worth declined to $77,300 in 2010, an 18-year low, from $126,400 in 2007, the central bank said in its Survey of Consumer Finances. Mean net worth fell 14.7 percent to a nine-year low of $498,800 from $584,600, the central bank said today in Washington.

I do enjoy taking pokes at CalPERS, the $200-billion+ fund that doesn’t do its own credit analysis! Their ten-year 90bp underperformance vs. their benchmark makes it easy, as the press has noticed:

The California Public Employees’ Retirement System, the largest U.S. pension, has seen its market value decline 4.8 percent this year after stocks fell amid the brewing fiscal crisis in Europe and slowing of the U.S. economic recovery.
…
If the trend continues, it would mark the third time in five years that the fund has lost money, including a 23 percent decline in fiscal 2009, the worst on record. While Calpers spreads its return over 15 years to smooth taxpayers’ burden, another loss may make it hard for the fund to meet its assumption of 7.5 percent earnings annually to cover benefits to 1.6 million retired employees and their families.

It was rather a dull day for the Canadian preferred share market, with PerpetualPremiums down 3bp, FixedResets flat and DeemedRetractibles off 2bp. Volatility was muted. Volume was quite low.

Strains in Greek banking are becoming more obvious:

Credit Agricole SA, the foreign bank with the biggest risks in Greece, reached an accord with Greek authorities that will let its unit in the country access emergency funding should the need arise, two people with knowledge of the matter said.

Emporiki Bank, the Greek unit of Credit Agricole, will be able to tap so-called Emergency Liquidity Assistance from Greece’s central bank under certain conditions, the people said, declining to be identified because the matter is private. Access will probably be restricted to situations where deposits are declining, the people said. Greek banks without a foreign parent already use the facility.
…
Jean-Paul Chifflet, Credit Agricole’s chief executive officer, said on May 22 that his bank renewed a request for access to ELA funding with Bank of Greece’s governor. France’s third-largest bank “can’t increase significantly” exposures to Greece, Chifflet told investors last month at the company’s annual general meeting. Emporiki’s loans exceed deposits, requiring Credit Agricole to provide cross-border funding to help fill the gap.

Credit Agricole reduced that funding to Athens-based Emporiki to 4.6 billion euros at the end of March from 5.5 billion euros in December, partly as deposits rose, the bank said May 11. Credit Agricole also tapped 1.6 billion euros of ECB funding for Emporiki at the end of March.

The problem in Europe is that highly indebted countries owe money in currency they can’t print, right? It’s a good thing we’re smarter than that in Canada:

• New Brunswick’s tax-supported debt as a percent of consolidated operating
  revenues has risen rapidly in the past five years.

• We are lowering our issuer credit and senior unsecured debt ratings on
  the Province of New Brunswick to ‘A+’ from ‘AA-‘.

• The stable outlook reflects our expectation that New Brunswick’s program
  review initiative will be successful at achieving cost efficiencies and that the province will achieve fiscal balance in the next two fiscal
  years as per its budget plan.

…
The ratings on New Brunswick reflect Standard & Poor’s opinion of the
following credit strengths:

• The province’s relatively resilient economic performance since the global economic and financial crisis began in 2008 compared with peers’.
• The province’s sound liquidity support of more than C$700 million in cash and marketable securities available to address potential fiscal pressures. As well, the province has a pool of sinking funds, which
  totaled over C$4.0 billion as at the end of fiscal 2012 that can be used for debt repayment if needed.

Credit concerns include our view of the following:

• New Brunswick’s very high tax-supported debt burden (net of sinking funds), which rose further in fiscal 2012 to 149% of consolidated operating revenues or about 38% of GDP. We expect its tax-supported debt
  burden to peak at 155% of operating revenues in 2014.

• Challenges stemming from long-term demographic trends that are likely to
  affect health care demand and revenue growth.

Fortunately, 38% of GDP is still a lot smaller than 120% of GDP.

There was a modest upward move in the Canadian preferred share market today, with PerpetualPremiums up 9bp, FixedResets gaining 2bp and DeemedRetractibles winning 10bp. Volatility was minimal. Volume was quite low.