Category: Market Action

Greece got a a little closer to default:

Greece’s creditor banks broke off talks after failing to agree with the government about how much money investors will lose by swapping their bonds, increasing the risk of the euro-area’s first sovereign default.

Proposals by a committee representing financial firms haven’t produced a “constructive consolidated response by all parties,” the Washington-based Institute of International Finance said in a statement today. Talks with Greece and the official sector are “paused for reflection on the benefits of a voluntary approach,” the group said.

Greek officials and the nation’s creditors agreed in October to implement a 50 percent cut in the face value of Greek debt, with a goal of reducing Greece’s borrowings to 120 percent of gross domestic product by 2020. More than two months after the accord was announced, the two sides still need to agree on the coupon and maturity of the new bonds to determine losses for investors. The IIF has aimed to implement the swap this month.

The entire idea of a voluntary and partial restructuring is hoplessly insane. Let’s hope that this ends with a lot of egg on Merkozy’s face.

Certainly indications are that the politicians have blown it:

France’s AAA rating will fall by one level at S&P, Finance Minister Francois Baroin told France 2 television today. Slovakia, Italy and Austria are among other countries to be downgraded, European officials said. Germany will keep its top rating, a person familiar with the matter said. S&P may release its report later today.

The decisions came at the end of a week in which signs grew that Europe’s woes may be cresting as borrowing costs fell, evidence of economic resilience emerged and the European Central Bank said it had quelled a credit crunch at banks. The immediate impact on French and Italian borrowing costs was limited, with the yield on 10-year government bonds rising 3 basis points and 1 basis point, respectively.

“It’s a reduction of one level, it’s the same level as the U.S.,” Baroin said. “It’s not a catastrophe.”

France was not alone:

France and Austria lost their top credit ratings in a string of downgrades that left Germany with the euro area’s only stable AAA grade as Standard & Poor’s warned that crisis-fighting efforts are still falling short.

France and Austria were cut one level to AA+ from AAA and face the risk of further reductions, the rating company said in Frankfurt late yesterday. While Finland, the Netherlands and Luxembourg kept their AAA ratings, they were put on negative watch. Spain and Italy were also among the nine nations downgraded. The first gauge of the report’s impact will come in two days when France sells as much as 8.7 billion euros ($11 billion) in bills.

“In our view, the policy initiatives taken by European policy makers in recent weeks may be insufficient to fully address ongoing systemic stresses in the euro zone,” S&P said in a statement.

Dimon had some observations on the ECB’s funding initiative:

“It eliminates bank liquidity or funding problems for at least the next year, that’s a pretty powerful statement,” Dimon said today after his company reported a drop in fourth-quarter net income. “That was the biggest single risk of an uncontrollable surprise right there, so if that’s taken off the table, that’s a good thing.”
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Banks in Europe are still shedding so-called risk-weighted assets, or RWAs, because regulators are requiring them to increase their ratios of equity capital to RWAs, Dimon said.

“They’re still reducing RWA by not rolling things over, you can see them selling aircraft loans, trade finance, they’re not participating as much in revolvers, there are certain conduits they’re not doing anymore,” Dimon said. “But that’s now just to create capital, not because they have a funding problem.”

It was a relatively quiet day for the Canadian preferred share market, with PerpetualDiscounts up 4bp, FixedResets down 2bp and DeemedRetractibles losing 9bp. Volatility was low, with SLF FixedResets doing a bit of catch-up. Volume was above-average.

The ECB actions are working:

Spain sold 10 billion euros ($13 billion) of bonds, twice the target for the sale, while Italy placed 12 billion euros of bills, easing concerns the countries would struggle to finance their debts and sending bonds higher.

Spain sold a new benchmark three-year note due July 2015 to yield 3.384 percent, the Bank of Spain said in Madrid. That compared with 5.187 percent the last time similar maturity debt was sold in December. Italy’s Treasury sold one-year bills at 2.735 percent, less than half the 5.952 percent paid on similar- maturity securities on Dec. 12.

Italian Prime Minister Mario Monti and Spanish premier Mariano Rajoy are imposing austerity measures to convince investors they can put their nations’ finances in order and avert being engulfed by the sovereign debt crisis. The European Central Banks lent 489 billion euros of three-year funds last month, a move that Madrid-based Banco Bilbao Vizcaya Argentaria SA said would allow banks to buy more government debt.

It’s not clear to me whether they’re doing the right thing or not. If it’s a liquidity crisis – fine. If it’s a solvency crisis – not so fine.

However, capitalism will soon collapse under the weight of its internal contradictions – at least in Europe:

Hedge funds in New York and London are trying to profit from trading Greek government bonds as European banks brace for losses from a debt swap.

Saba Capital Management LP, founded by former Deutsche Bank AG (DBK) credit trader Boaz Weinstein, York Capital Management LP, the $14 billion fund started by Jamie Dinan, and London-based CapeView Capital LLP are among managers that now hold Greek bonds, according to people with knowledge of the transactions who declined to be identified because they weren’t authorized to speak publicly about the trades. Officials at the three firms declined to comment.

They’ve amassed the stakes as the government lobbies investors to accept a swap that would cause losses of more than 50 percent for bondholders. For the deal to avoid triggering credit-default swaps that could cause losses for more of the region’s banks, the agreement has to be voluntary. Hedge funds may not agree to the deal.

And the pressure is ratchetting up in all directions:

Lawmakers from Chancellor Angela Merkel’s party are stepping up pressure on Greece as it struggles to meet the terms of its second bailout, saying that a Greek exit from the euro region would be manageable.

The comments by senior members of Merkel’s Christian Democratic Union, made before a meeting of the CDU leadership that begins today, keep the focus on the Greek government as it strives to reach a debt-swap deal with private creditors that Merkel has said must be struck to win more aid. They are also a challenge to the chancellor’s public stance as she steers European efforts to keep the 17-member single euro area intact.

Remember how obvious it was in 2006 that US housing was about to collapse? Remember thinking to yourself that the only thing keeping it up was evil bonus-seeking bankers? Remember 2006?:

Newly released transcripts of all the Federal Reserve policy meetings in 2006, Ben Bernanke’s first year as chairman, show that the Fed was getting increasingly dire signals about the housing market – right down to anecdotes of builders giving away cars to try to draw reluctant buyers. But the economists around the table were consumed by trying to estimate what (small) percentage of consumer spending that would affect, missing the tremendous structural upheaval that a housing price decline would go on to create, with banks failing, the financial system seizing and job losses soaring.

Brookfield Office Properties, proud issuer of BPO.PR.F, BPO.PR.H, BPO.PR.I, BPO.PR.J, BPO.PR.K, BPO.PR.L, BPO.PR.N, BPO.PR.P and BPO.PR.R, has issued five-year paper at 4.30%:

DBRS has today assigned a rating of BBB (high), with a Stable trend, to the $200 million 4.30% senior unsecured notes due January 17, 2017 (the Notes), issued by Brookfield Office Properties Inc. (Brookfield).

The Notes are direct senior unsecured obligations of Brookfield and rank equally and rateably with all other unsecured and unsubordinated indebtedness of Brookfield. Brookfield intends to use the proceeds from the Notes to repay indebtedness and for general corporate purposes.

S&P comments:

• We assigned our ‘BBB-‘ rating to Brookfield Office Properties Inc.’s C$200 million 4.30% senior unsecured notes due January 2017.
• The company intends to use proceeds from the offering to reduce existing debt.
• Our ratings on Brookfield acknowledge the company’s good-quality office portfolio, long-term leases, and in-place rents that are, on average, below current market rents.

… and 4.30% is pretty close to the Yield-to-Worst on most of those issues. Make of it what you will.

Well, it looks like the party’s over in the Canadian preferred share market, with whoever it was who has been doing all that buying in the past week having achieved his desired position. PerpetualDiscounts were down 9bp, FixedResets off 3bp and DeemedRetractibles lost 19bp. There was significant volatility, with the insurance issues that have done so well lately featuring on the bad side of the Performance Highlights table. Volume was average.

Assiduous Reader BG, who often brings interesting things to my attention unlike the rest of you lazy bums, brings to my attention Goldman Sachs’ real-estate ATM with Canadian financing:

Seven years after paying $215 million for Manhattan’s Park Central Hotel, a venture of Goldman Sachs Group Inc. has sold the 934-room property for $396 million to LaSalle Hotel Properties.

Sounds like a happy ending, right? Well it was for the Goldman venture, but not for some of the lenders that became involved in the deal.

Riding the real-estate boom, Goldman piled $465 million of debt on the 1920s-era hotel near Carnegie Hall. That enabled Goldman to take out all its equity and at least $150 million in profit, people familiar with the deal said.
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The story of the Park Central sale also has an intriguing subplot. One of its junior creditors that is getting paid much less than the face value of its debt, Rockpoint Group LLC of Boston, actually is making more than $70 million on the deal. That is because Rockpoint paid an average of 30 cents on the dollar for its $215 million chunk of debt in 2010. The payoff is over 60 cents.
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Caisse de dépôt confirmed it sold debt in 2010 but declined to comment further.

Who wants to buy an asset management firm?

Deutsche Bank AG (DBK) executives decided yesterday to pursue a sale of asset-management units after they were satisfied with early interest in the business, according to two people with knowledge of the matter.

More than two dozen bidders, including banks, private- equity firms and asset managers, handed in preliminary offers last week, said the people, who declined to be identified because talks are private. Some bidders valued all of the assets between 1.5 billion euros ($1.9 billion) and 2.5 billion euros, while others made offers for pieces of the business, the people said. A selected group of potential buyers will be asked to submit second-round bids in February, one person said.
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The units hold less than 400 billion euros in assets under management, according to estimates from Dirk Becker, a Frankfurt-based analyst at Kepler Capital Markets.
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Europe’s top financial regulator is requiring the region’s banks to bolster their capital levels by mid-2012 to withstand losses on sovereign debt. Deutsche Bank needs to fill a capital gap of 3.2 billion euros after the results of a stress test by the European Banking Authority.

Sears is losing access to credit:

Sears Holdings Corp.’s (SHLD) suppliers will no longer be able to get loans from CIT (CIT) Group Inc. for their shipments to the retailer, according to two people familiar with the situation.

CIT, the largest U.S. company that provides what’s known as factoring, told clients it would no longer approve credit for orders after today, according to the people, who declined to be identified because the information isn’t public.

It was another day of rock ‘n’ roll on the Canadian preferred share market today, with PerpetualDiscounts winning 46bp, FixedResets up 14bp and DeemedRetractibles gaining 24bp. The winnings produced another longer than usual list of performance highlights, nearly all winners and again with insurance issues prominent among the higher returns. Volume continued to be extremely heavy.

The Bozo Spread (Current Yield PerpetualDiscounts less Current Yield FixedResets) is now negative – something that I consider significant, particularly in light of the fact that the last time this happened the credit quality of the PerpetualDiscount index was higher, there weren’t as many low-coupon issues in the FixedReset index, and at that time (February 2011) the PerpetualDiscounts included banks, which were the object of a certain amount of speculation at the time.

PerpetualDiscounts now yield 4.86%, equivalent to 6.32% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.6%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) now stands at about 170bp, a sharp decline from the 195bp reported January 4.

The Median YTW of the PerpetualDiscount index is now less than its Mean Current Yield. There is some distortion of the figures since POW.PR.D, priced at 25.30, is still considered a PerpetualDiscount, as changes due to price and volume are made to index composition only at month-end. POW.PR.D has a Current Yield of 4.94% and a YTW of 4.55% – with only seven issues in the index (soon to be six … if the current situation continues) even one oddity can make relative values a little difficult to understand!

The bloom is off the ETF rose:

As more and more exchange-traded funds enter the market, appetites for new baskets of stocks seem to be diminishing – at least in the United States. According to the Financial Times and XTF, an ETF research firm, 79 per cent of the 190 ETFs launched in the first six months of 2011 failed to attract enough money to make the new funds economical and sufficiently liquid (defined as more than $30-million (U.S.) in assets under management).

And covered bonds are being swept up in the Greek tragedy:

Now National Bank of Greece has invited investors in for a haircut. The country’s biggest bank by assets has offered to buy back €1.5-billion of covered bonds and nearly €400-million of hybrid securities it issued over the past couple of years. It aims to turn debt into core equity capital. Any investors who do not accept the offer are gambling that Greece can manage its way out of its debt spiral.

Will indifference over earnings continue? NBG sold the covered bonds at full face value in 2009, but the market price had fallen to about 55 per cent. The bank is offering to buy the bonds back at 70 per cent. That looks generous: although the bonds are twice collateralized, the prospect that investors will be repaid in full when the bonds mature in 2016 looks remote given Greece’s dire financial and economic prognosis. Private-sector holders of Greek sovereign bonds face a 60 per cent writedown on their investments when (or if) another bail-out is agreed.

Lapdog Carney continues to reap the rewards of toeing the line:

Overseeing his first official meeting as head of the FSB in Basel, Switzerland, Mr. Carney said the FSB’s oversight would be expanded later this year to include big domestic banks and insurers, whose capital may have to be bolstered to protect them from the financial shocks that felled many financial institutions in the 2008 credit crunch.

“We’ve already focused on the big global banks,” Mr. Carney said in an interview after the FSB meetings. “Now we turn to everything else and we say, ‘Do we have institutions that are systemic domestically but don’t have these big global spillovers that would bring everybody else to the edge?’ And if we do have those, what type of approach should we have?”
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Mr. Carney said there are no plans to publish the names of insurers that will be subject to deeper scrutiny. The insurers have argued that they are not the cause of the financial crisis and should not have to sustain expensive capital surcharges.

Hellzapoppin’ on the Canadian preferred share market today, with PerpetualDiscounts winning 78bp, FixedResets up 39bp and DeemedRetractibles gaining 51bp. There is a long list of issues in the Performance Highlights table, all winners, with insurer issues being notable by their preponderance at the high end of the table. Volume was very heavy.

The Bozo Spread (Current Yield PerpetualDiscounts less Current Yield FixedResets) has declined again and now stands at a mere 1bp … will it go negative? Now that the Lapdog’s yapping about insurance, we might see some indication of extension of the NVCC rules. Or we might not. But the last time the Bozo Spread went negative, we saw the NVCC rules introduced for banks shortly thereafter. What makes this even more fascinating is that all the insurance issues have been pulled out of the PerpetualDiscount index and are now sitting in DeemedRetractibles … so if history is repeating itself, it’s only because the PerpetualDiscounts are hanging onto the coat-tails of DeemedRetractibles.

Another negative bill rate for the textbooks:

Germany sold six-month treasury bills at a negative yield for the first time amid demand for the debt securities of Europe’s biggest economy as a haven from the sovereign debt crisis roiling the region.

The government auctioned 3.9 billion euros ($4.98 billion) of securities maturing in July at an average yield of minus 0.0122 percent, the Federal Finance Agency said in an e-mailed statement today. It was the first time it sold the securities at a negative yield, Joerg Mueller, a spokesman in Frankfurt, said in a telephone interview. The Netherlands sold 107-day bills at minus 0.007 percent on Dec. 12.

Merkozy wants to eliminate trading in the EU:

French President Nicolas Sarkozy won the backing of German Chancellor Angela Merkel for a tax on financial transactions, a levy that Britain maintains won’t work unless it’s applied worldwide.

The French government, long a proponent of the tax, stepped up its campaign last week, going so far as to suggest that France would impose the levy even if others didn’t. At a joint press conference in Berlin with Sarkozy today, Merkel threw her weight behind the tax.

“Personally, I’m in favor of thinking about such a tax in the euro zone,” Merkel said. “Germany and France both equally view the financial transaction tax as a correct response.”

The European Commission in September suggested a tax of 0.1 percent on equity and bond transactions, and 0.01 percent on derivatives, which it said could raise 55 billion euros ($71 billion) a year. European Union finance ministers are due to discuss the levy in March.

All the trading will move to London … or Geneva … or Dubai … or Singapore. If they try to apply it to settlement, they’ll lose all their settlement business as well.

It was another strong day for the Canadian preferred share market, with PerpetualDiscounts winning 37bp, FixedResets flat and DeemedRetractibles gaining 30bp. The Bozo Spread (Current Yield PerpetualDiscounts less Current Yield FixedResets) is now at a mere 2bp! There was a good amount of volatility, with insurers again being notable among the winners. Volume remained very light. Enbridge issues were very active, presumably due to portfolio shuffling inspired by the new issue.

It’s not clear to me what has caused this burst of good performance, but it would not surprise me to learn that a decision has been made to apply the NVCC rules to insurers and insurance holding companies, and that word of this decision has been leaked. Pure speculation of course – and I strongly advise against anybody taking a position based on the thought – but … interesting.

Good US jobs number:

U.S. employers added more workers to payrolls than forecast in December and the jobless rate declined to an almost three-year low, showing that the labor market gained momentum heading into 2012.

The 200,000 increase followed a revised 100,000 rise in November that was smaller than first estimated, Labor Department figures showed in Washington. The median projection in a Bloomberg News survey called for a December gain of 155,000. The unemployment rate unexpectedly fell to 8.5 percent, the lowest since February 2009, while hours worked and earnings climbed.

Less rosy is Canada’s employment news:

Canada’s unemployment rate (CANLXEMR) rose for a third month in December, the longest advance in two years, as a gain in jobs trailed growth of the labor force.

The jobless rate increased to 7.5 percent from November’s 7.4 percent and the recent low of 7.1 percent in September, Statistics Canada said today in Ottawa. Employment (CANLNETJ) rose by 17,500, the first gain in three months. Over the past six months, the number of jobs has grown by 7,400, compared with a gain of 191,800 in the first half of 2011.

Fitch has joined the other major agencies – Hungary is junk:

Fitch became the third ratings agency to downgrade Hungary’s debt to “junk” status on Friday, invoking further deterioration in the country’s fiscal and external financing and growth outlook and the government’s “unorthodox” economic policies.

Banks in euro zone countries have significant exposure to Hungary, with Austrian financial institutions having more than $40 billion in the country, Italian banks nearly $25 billion, German banks a little over $20 billion and Belgian banks over $15 billion, according to figures by the Bank of International Settlements and ING estimates.
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Earlier on Friday, controversial Prime Minister Viktor Orban said both his government and the central bank want a fast deal with the International Monetary Fund.

The IMF, the EU and the ECB have criticized the Hungarian government for wanting to curb the central bank’s independence.

Since coming to power in 2010, Orban’s government took over private pension funds, set a fixed exchange rate for loans in foreign currency taken during the boom years before 2008 — forcing banks to take the losses due to the national currency’s depreciation — and imposed the biggest tax in Europe on banks, sparking investors’ protests.

Fitch said the government’s policies, popular with voters but which have prompted foreign investors’ fury and have attracted international criticism, were part of the reason for the downgrade.

Officials at OSFI are taking steps to help their future employers retain hegemony over Canadian financial markets:

OSFI strongly believes additional exemptions from the restrictions on proprietary trading should be given to foreign government securities, at least for banking groups whose parent bank is located outside of the US. Many foreign banks play important market-making roles in the trading of government securities in their home jurisdictions. They also actively rely on government securities of their home jurisdiction to efficiently manage their liquidity and funding requirements at a global enterprise-wide level; a practice that will be further reinforced in the future by new bank liquidity requirements that have been proposed by the Basel Committee on Banking Supervision. Thus, OSFI believes a failure to include these additional exemptions at least for banking entities whose parent bank is located outside of the US would undermine the liquidity of government debt markets outside of the US and could significantly impede the ability of foreign banks to efficiently manage their liquidity and funding requirements at an enterprise-wide level.

It was another very good day for the Canadian preferred share market, with PerpetualDiscounts winning 39bp (won’t be too many of the them left soon!), FixedResets up 10bp and DeemedRetractibles gaining 26bp. I remain on tenterhooks waiting to see whether the Bozo Spread (Current Yield PerpetualDiscounts less Current Yield FixedResets) will go negative! There was good volatility, with insurance DeemedRetractibles doing quite well. Volume remains low after the holiday break.

They don’t issue preferreds, but this is interesting anyway – S&P downgraded Sears by two notches:

• The decline in operating performance at U.S. retailer Sears accelerated in 2011, and we expect operating performance to remain pressured in 2012, potentially resulting in negative EBITDA.
• Sears’ liquidity sources will narrow, given the negative EBITDA we expect and the need to fund operating losses, capital spending, and pension contributions.
• We are lowering our corporate credit rating on the company to ‘CCC+’ from ‘B’ and the short-term and commercial paper ratings for Sears Roebuck Acceptance to ‘C’ from ‘B-2’.
• The negative outlook reflects our expectation that Sears’ liquidity could diminish in 2013.

This means that Eddy Lampert could be in trouble:

Edward Lampert’s hedge fund cut its stake in AutoZone (AZO) Inc. late last month to meet client redemptions amid a series of setbacks at Sears Holdings Corp. (SHLD), one of its biggest and highest-profile investments.

ESL Investments Inc., the firm run by Lampert, distributed about $1.02 billion worth of AutoZone stock to investors in connection with the closing of one investment partnership and the restructuring of another, according to a regulatory filing yesterday. The Greenwich, Connecticut-based firm also used $351.4 million of shares in AutoZone and AutoNation Inc. (AN) as payment in kind to meet year-end redemptions from its main fund, ESL Partners LP, the filing showed.

Lampert has been selling AutoZone and AutoNation shares while holding onto his entire stake in Sears, a strategy that could leave his main hedge fund further concentrated in the Hoffman Estates, Illinois-based retailer. AutoZone rose 19 percent last year and AutoNation shares gained 31 percent, while Sears shares plummeted 56 percent.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 29bp, FixedResets up 7bp and DeemedRetractibles gaining 22bp. For the second successive day there was a lengthy list of issues gaining more than 1% – with SLF issues notable for their presence among the better performers, while Floaters continued to signal retail expectations of inflationary times ahead. Volume remained significantly below average, but it is recovering.

Have we seen this movie before? Esoteric assets are being securitized in volume:

Sales of bonds backed by everything from timeshare rentals to shipping containers to entertainment royalties are poised to rise this year as investors seek to boost returns with interest rates at about record lows.

So-called esoteric asset-backed securities issuance may soar 12.9 percent to $35 billion, compared with debt linked to more traditional collateral such as auto and credit-card loans, which will grow 8.75 percent to $87 billion, according to a forecast from Credit Suisse Group AG.
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Investors willing to hold BBB rated bonds backed by franchise royalty fees of the Sonic Corp. (SONC) fast- food chain may receive as much as 2 percentage points more annually than similarly rated securities tied to auto loans, according to Barclays Capital’s Cory Wishengrad in New York.
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Cronos Containers Ltd. boosted the size of its November offering of bonds tied to shipping container lease payments by $50 million to $200 million, according to data compiled by Bloomberg. An A rated $170 million portion maturing in five years priced to yield 5 percent.

It was quite a good day for the Canadian preferred share market, with PerpetualDiscounts – what are left of them! – winning 53bp, FixedResets up 9bp and DeemedRetractibles gaining 19bp. Floating Rate issues also appear to be celebrating the new year. Good volatility – all winners! Volume was quite low, but better than the comatose levels of the last week.

PerpetualDiscounts now yield 5.08%, equivalent to 6.60% interest at the standard conversion factor of 1.4x. 1.3x. Long corporates now yield about 4.65%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 195bp, significantly narrower than the 205bp reported December 30.

Nothing happened today.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts roaring ahead 34bp, while FixedResets were down 4bp and DeemedRetractibles gained 8bp. Volatility was quite good, with Floaters doing particularly well. Volume continued to be abyssmally low.

A Financial Times article titled Flash Crash Threatens to Return with a Vengeance leads me to a paper by Dave Cliff and Linda Northrop titled The Global Financial Markets: an Ultra Large Scale Systems Perspective. The jargon in the abstract is priceless:

We argue here that, in recent years, the global financial markets have become a complex adaptive ultra-large-scale socio-technical system-of-systems, and that this has important consequences for how the financial markets should be engineered and managed in future. The very high degree of interconnectedness in the global markets means that entire trading systems, implemented and managed separately by independent organizations, can rightfully be considered as significant constituent entities in the larger global super-system: that is, the global markets are an instance of what is known in the engineering literature as a system-of-systems (SoS). The sheer number of human agents and computer systems connected within the global financial-markets SoS is so large that it is an instance of an ultra-large-scale system, and that largeness-of-scale has significant effects on the nature of the system. Overall system-level behaviour may be difficult to predict, for two reasons. First, the constituent (sub-) systems may change their responses over time, either because they involve human agents as key “components” within the system (that is, the system is actually socio-technical), or because they involve software systems that evolve over time and “learn from experience” (that is, the system is adaptive). Second, even when given perfect knowledge of the constituent systems that combine to make up the SoS, the overall system-level behaviour may be difficult or impossible to predict; that is, the SoS may exhibit emergent behaviour. For these reasons, the global financial markets SoS can also rightly be considered as a complex adaptive system. Major failures in the financial markets SoS can now occur at super-human speeds, as was witnessed in the “Flash Crash” of May 6th 2010. Events such as the Flash Crash may become more commonplace in future, unless lessons are learned from other fields where complex adaptive socio-technical systems of systems have to be engineered for high-integrity, safety-critical applications. In this document we review the literature on failures in risky technology and high-integrity approaches to safety-critical SoS engineering. We conclude with an argument that, in the specific case of the global financial markets, there is an urgent need to develop major national strategic modelling and predictive simulation capabilities, comparable to national-scale meteorological monitoring and modelling capabilities. The intent here is not to predict the price-movements of particular financial instruments or asset classes, but rather to provide test-rigs for principled evaluation of systemic risk, estimating probability density functions over spaces of possible outcomes, and thereby identifying potential “black swan” failure modes in the simulations, before they occur in real life, by which time it is typically too late.

To my gratification, the authors highlight the inadequacy of the official SEC report:

The SEC/CFTC report was met with very mixed responses. Many readers concluded that it left more questions unanswered than resolved, and a subsequent much more detailed analysis of the time-series “tapes” of market event data conducted by Nanex Corp.1 offered an alternative story that many market practitioners found more plausible: see Meerman et al. (2010) and Easley et al. (2011) for further details of the extent to which the CFTC/SEC version of events is disputed.

The times they are a-changin’! The Meerman reference is:

M. Meerman, et al., (2011). Money and Speed: Inside the Black Box. Documentary produced by VPRO (Dutch public broadcaster), available as an iPad application. http://itunes.apple.com/us/app/money-speed-inside-black-box/id424796908?mt=8&ls=1#

I don’t recall ever seeing a citation of an iPad application in a scholarly text before! The Easely paper has been previously mocked on PrefBlog.

The Hungarians have nerve, whatever else might be the case!

Hungary’s chances of obtaining a bailout receded after lawmakers approved new central bank regulations that prompted the International Monetary Fund and the European Union to break off talks this month.

Parliament in Budapest stripped central bank President Andras Simor of his right to name deputies, expanded the rate- setting Monetary Council and created a position for a third vice president. A separate law approved earlier today makes it possible to demote the central bank president if the institution is combined with the financial regulator.

Hungary received its second sovereign credit downgrade to junk in a month when Standard and Poor’s followed Moody’s Investors Service in taking the country out of its investment grade category on Dec. 21. The forint has fallen 15 percent against the euro since June 30, making it the world’s worst- performing currency in the period.
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The new central bank regulations “seriously harm” the country’s national interests, allow for political intervention in monetary policy and threaten economic stability, the Magyar Nemzeti Bank said today. The laws have led to the “indefinite postponement” of talks on a financial aid package, the central bank said in a statement posted on its website.

While a possible Hungarian agreement with the IMF and the EU on an assistance package would boost confidence, the Cabinet can do without it, [Prime Minister Viktor] Orban told MR1 radio in an interview today.

“If we have an IMF safety net, then we face the coming period with greater self-confidence and greater security,” Orban said. “If we don’t reach an agreement, we’ll still stand on our own feet.”

It’s always helpful to have your own currency that can be devalued at will!

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts losing 24bp, FixedResets up 5bp and DeemedRetractibles winning 27bp. Volatility was reasonable. Volume was pathetic.

PerpetualDiscounts now yield 5.12%, equivalent to 6.66% interest at the standard equivalency factor of 1.3x. Long Corporates now yield 4.6%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 205bp, unsurprisingly unchanged from the figure reported December 28.

And that’s it for another year!