Category: Market Action

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.
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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.
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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.
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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.
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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.
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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.
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“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:
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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.
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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.
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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.
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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!

How about those inflation numbers, eh?:

Canada’s inflation rate tumbled to its lowest level in almost two years last month, falling to 1.2 per cent as Canadians paid less for gasoline, video equipment and some types of clothing, while price gains in many other consumer goods moderated.
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May also saw prices fall outright on a month-to-month basis, meaning the basket of about 175 goods and services that Statistics Canada surveys cost 0.1 per cent less overall in May than it had in April.

Bank of Canada governor Mark Carney said this week he expected prices to dip below his two per cent target in the short term, given the recent drop in world oil prices, but that the underlying core rate – which excludes volatile items such as energy – would hover near the target. He was right on both counts, as core slipped to 1.8 per cent from 2.1 per cent in April.

Spain may join the rest of Europe in discarding 500 years of bankruptcy law:

Spanish policy makers are considering forcing investors who hold equity and junior debt in banks to absorb losses in a restructuring, according to a person with knowledge of the plan.

Such burden sharing is among conditions being negotiated with the European Union in a 100 billion-euro ($126 billion) rescue for Spain’s financial industry, said the person, who asked not to be named as the conversations are private. Depositors who bought subordinated instruments such as preferred stock may be partially shielded from losses through a compensation plan being considered, the person said.

I think Credit Rating Agency bashing may become an Olympic sport!:

Moody’s Investors Service suffered a downgrade of its own as markets responded to the company’s rating cuts of 15 of the world’s largest banks by bidding up the value of their stocks and bonds.
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“The ratings agencies themselves are looking for a raison d’etre” as regulations in the U.S. and Europe try to reduce investors’ dependence on the credit assessments, David Zervos, chief market strategist at Jefferies & Co., said in an interview on Bloomberg Television’s “Market Makers.” “They like to be noisy, and this is a way to be noisy. I don’t think the effects are big in the end.”
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“We view the Moody’s downgrade as another overhyped story of 2012,” David Trone, analyst at JMP Securities LLC, wrote to his clients. “The corporate market thinks for itself and credit rating agencies are often lagging indicators.”

I saw a hummingbird moth in my back yard this evening, nectaring on my milkweed. I hadn’t even known there was such a thing!

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It was a mildly positive day for the Canadian preferred share market, with PerpetualPremiums up 3bp and both FixedResets and DeemedRetractibles gaining 9bp. There was a surprising amount of volatility for such a quiet day, with no clear trend readily identifiable. Volume was extremely low.

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.
…
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.
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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.
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…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.
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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.