Category: Market Action

William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York gave a speech titled The national and regional economic outlook providing some colour on the Second Dip:

While there have been indications that home prices in the area have been firming in the past few months, the mortgage crisis continues to take a toll on New Jersey homeowners. As of March of this year, 10 percent of all borrowers in the state were either 90-plus days delinquent on their mortgages or their homes were in foreclosure – above the national rate of 7.7 percent. In Essex County, that rate had reached 16 percent, and in Newark it was 30 percent.

In our recent small business survey, which we conducted in May, we asked firms to report on their first quarter sales and their future outlook. The results were encouraging. Over two thirds of firms told us they had stable or increased sales in Q1, up from 50 percent last year. When asked about their future outlook, while the majority of business owners, 56 percent, were neutral – many more said they were optimistic than pessimistic – 37 percent compared with only 7 percent.

Some will be glad the week is finally over:

Hewlett-Packard Co. (HPQ) plunged 27 percent this week, the most since the October 1987 market crash, after a strategy shift undermined confidence in its managers. Technology, industrial and raw-material companies in the S&P 500 dropped at least 6.9 percent, the most among 10 groups. Caterpillar Inc. (CAT) and Alcoa Inc. (AA) retreated more than 8.4 percent after some of the world’s biggest banks — Morgan Stanley, JPMorgan Chase & Co. and Citigroup Inc. — slashed economic growth forecasts.

The S&P 500 lost 4.7 percent to 1,123.53. It has sunk 16 percent since July 22 as about $3 trillion was erased from the value of U.S. equities, according to data compiled by Bloomberg. The Dow Jones Industrial Average fell 451.37 points, or 4 percent, to 10,817.65 this week, extending its four-week decline to 1,863.51 points.
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Stocks in the S&P 500 are moving in lockstep with each other by the most since at least 1990, a sign that the market’s biggest retreat in three years may not be over, according to MF Global Holdings Ltd. The average correlation coefficient between the 500 companies and the index was 0.8268 yesterday, using 60 days of data, according to MF Global.
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Correlation among S&P 500 stocks exceeded 0.78 twice previously, according to MF Global. After the first time, on Dec. 1, 2008, the S&P 500 declined 17 percent to a 12-year low on March 9, 2009. Correlation peaked again on July 26, 2010, when the benchmark slipped 6.1 percent over the next month, data compiled by MF Global and Bloomberg show.

Others will be hoping for more of the same:

Gold rose to a record above $1,880 an ounce in New York, rallying for the seventh straight week, as concern that the global economy is slowing drove equities lower.

So why not play it safe?

Treasury 30-year bond yields had their biggest weekly drop since the depths of the financial crisis in December 2008 on concern the U.S. economic recovery is stalling and Europe’s sovereign-debt crisis is getting worse.

Yields on five-, seven- and 10-year notes fluctuated a day after plunging to historic lows. Government bonds have rallied since the Federal Reserve pledged this month to keep its target lending rate at virtually zero until at least mid-2013 and Standard & Poor’s lowered the top U.S. credit rating for the first time.
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A gain in 30-year bonds pushed yields down three basis points to 3.39 percent. They had a weekly drop of 34 basis points, the most since tumbling 49 basis points during the five days ended Dec. 19, 2008. Yields on five- and seven-year notes were little changed today after falling yesterday to record lows of 0.79 percent and 1.31 percent.

There are rumblings that Basel III is in trouble:

The 27 member-states of the Basel Committee on Banking Supervision fought over the new regime, known as Basel III, for more than a year before agreeing in December to require banks to bolster capital and reduce reliance on borrowing. Now, as they put the standards into effect in their own countries, European Union lawmakers are revising definitions of capital, while the U.S. is struggling to reconcile the Basel mandates with financial reforms imposed by the Dodd-Frank Act.

“The game on the ground has changed in Europe and the U.S.,” said V. Gerard Comizio, a former Treasury Department lawyer who is now a senior partner at Paul Hastings Janofsky & Walker LLP in Washington. “The realists in Europe realized that their banks cannot raise the capital they’d need to comply. U.S. banks have reversed course and are more assertively fighting against it. The future of Basel III looks less certain now than it did when it was agreed to.

Well, that would be the regulatory standard, wouldn’t it? Do wonderful-sounding things, but do them badly. More particularly:

The European proposal alters the definition of capital that Basel III aimed to tighten when the committee agreed not to allow anything other than common shares to count toward the top- quality bank capital regulators examine.

During the 2010 negotiations, Germany sought to maintain recognition of so-called silent participations — hybrid securities that act like debt and equity at the same time — which some banks rely on for more than half their capital. While Germany lost the battle to exempt silent participations last year, the EU’s implementation proposal was written to allow the securities to be included if they fulfill certain conditions, according to an EU official who asked not to be identified because he wasn’t authorized to speak.
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Italy fought during Basel talks last year to include deferred tax assets — future deductions from tax liabilities resulting from current losses — when calculating top-tier capital. Basel III restricted use of these assets to no more than 10 percent of a bank’s capital. The EU’s proposal would allow unrestricted use of deferred tax assets if they comply with certain requirements. Italy modified its tax laws in February to enable the assets to meet those conditions.

Counting tax assets would raise the capital ratio at Banca Monte dei Paschi di Siena SpA, the oldest bank in the world and Italy’s third-largest, by about 1 percentage point, according to a February Mediobanca SpA report on the benefits of the tax-law change to Italian banks.
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Basel III also sought to put an end to the double counting of capital in insurance subsidiaries, which many European lenders do. The proposed EU rules don’t require banks to deduct investments in these subsidiaries from their capital, which will allow the double counting to continue, said analysts including Andrew Stimpson at KBW Inc. in London. That would benefit banks such as France’s Credit Agricole SA (ACA), whose insurance subsidiary accounts for 10 percent of income.
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European banks had opposed a leverage ratio, arguing that different accounting regimes make the balance sheets of U.S. lenders smaller than those of their foreign counterparts and that restricting leverage would unfairly punish non-U.S. firms. While U.S. banks are subject to a leverage cap, Generally Accepted Accounting Principles allow them to keep more assets off their balance sheets and to net out derivatives more than International Financial Reporting Standards do.

The Basel committee addressed the issue by devising a mechanism for adding total assets that puts aside different accounting standards. Still, the EU proposal doesn’t commit to implementing the ratio by 2018 as required by Basel III. Instead, it asks for a five-year period to review the rule’s effectiveness in curbing risk before deciding whether to make it binding.
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The EU proposal also softens Basel III’s liquidity standards that would require banks to hold enough cash or easily sellable assets to meet short- and long-term liabilities. It omits the rule covering debt coming due in the next 12 months and modifies the one for 30-day obligations to allow counting covered bonds as liquid assets. Denmark, Sweden and Spain lobbied for the modification because their banks have sizeable holdings of those bonds, which are securities backed by the cash flow from a pool of mortgage loans

They don’t have any preferreds outstanding, but many will be interested to note that DBRS has downgraded Canadian Tire:

DBRS has today downgraded the Debentures and Medium-Term Notes ratings of Canadian Tire Corporation, Limited (Canadian Tire or the Company) to BBB (high) from A (low) and its Commercial Paper rating to R-2 (high) from R-1 (low); the trends are Stable. This action follows the Company’s acquisition of The Forzani Group Ltd. (FGL) and removes the ratings from Under Review with Negative Implications.

Andrew Coyne – an old school buddy – has an excellent article about Milkfare in MacLeans, titled The $25,000 Cow.

It was a relatively quiet, mixed day for the Canadian preferred share market, with PerpetualDiscounts winning 8bp, FixedResets losing 9bp and DeemedRetractibles down 7bp. All entries on the Performance Highlights table were losers. Volume was average.

It’s been a bad few weeks for pension plans:

Pension consulting firm Aon Hewitt estimates the average funded position of corporate pension plans in Canada fell from 97 per cent on July 25 to 85 per cent by Aug. 8 after stock markets went into a tailspin. That means plans have slid into a significant deficit after being close to fully funded, based on financial statement disclosure measures.
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The results show pension plans have been “on a roller coaster,” [Aon Hewitt vice-president] Mr. [Tom] Ault said, with high volatility and daily swings of more than two percentage points in their funded position on many of the days in August so far.

There’s at least one European bank with a major funding problem:

The euro zone’s sovereign debt crisis knows no bounds. The European Central Bank’s disclosure that it had provided $500-million to a bank — the biggest sum in two years — shows that one euro zone institution is struggling to raise dollars.
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U.S. money market funds, although a small proportion of overall European bank funding, give an idea of the risk: they have reduced both maturities and funding lines. BBVA and Santander, Spanish banks with U.S. retail units, had a foretaste last year when they struggled to raise dollar funds. This year, as investors fret about Italy’s sovereign risk, it is Italian lenders that are looking for alternative short-term funding as U.S. sources hug the sidelines.

In July alone, their usage of ECB repo lines increased by €40-billion to compensate, Morgan Stanley notes. French banks are also big users of U.S. money funds (perhaps €50-billion for BNP Paribas and €38-billion for Société Générale, the broker estimates) but their ECB usage rose by much less, suggesting they could roll over dollar funding, but perhaps only at shorter maturities.

It was quite a day:

Stocks plunged while Treasuries rallied, pushing yields to record lows, amid growing signs the economy is slowing and speculation that European banks lack sufficient capital. Gold climbed to a record, while oil led commodities lower.

The Standard & Poor’s 500 Index tumbled 4.5 percent to 1,140.74 at 4 p.m. in New York. The Stoxx Europe 600 Index lost 4.8 percent in its worst plunge since March 2009 and Germany’s DAX Index slid 5.8 percent, the most since 2008. Ten-year Treasury yields fell as much as 19 basis points to 1.97 percent as rates on similar-maturity Canadian and British debt also reached all-time lows. The dollar gained versus 15 of 16 major peers, strengthening 0.6 percent to $1.4336 per euro. Gold futures rallied as much as 2.1 percent to $1,832 an ounce, while oil slid 5.9 percent.

Banks led losses a day after the European Central Bank said a lender will borrow dollars for the first time in six months. Lars Frisell, chief economist at Sweden’s financial regulator, said it won’t take much for interbank lending to freeze and the Wall Street Journal reported regulators were scrutinizing the U.S. operations of Europe’s largest lenders to assess their vulnerability. U.S. jobless claims rose and Philadelphia-area manufacturing shrank by the most since 2009, while hopes for more stimulus from the Federal Reserve receded.

Politicians like to pretend they care about productivity, while at the same time forking over millions in milkfare, protecting Air Canada from foreign competition and subsidizing not-ready-for-prime-time solar technology. The latest example is a little more homespun:

A local fruit vendor has been forced to close a popular produce stand after the City of Vancouver decided the operation had grown too large for its streetside space.
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To continue operating the stand at its present size, [Vancouver deputy chief licence inspector] Mr. [Tom] Hamilton said, Mr. Smith would require a farmer’s-market permit.

But such a permit would require Mr. Smith’s suppliers to sell their produce directly to the public at the stand, Mr. Hamilton said.

Quick! Find out who developed the rules and put them in charge of Toronto’s food cart programme! With some help, we can make it even more counterproductive and precious this time ’round!

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts winning 22bp, FixedResets up 5bp and DeemedRetractibles down 14bp. Volatility was quite good. Volume was average.

Both Yellow Media common and Sino-Forest common will be removed from the MSCI world index.

Predictably, it doesn’t look as if the proposed European financial transaction tax is going anywhere:

Banks criticized Franco-German plans for a tax on financial transactions, saying they will jeopardize economic growth and distort markets, as the British, Dutch and Swedish governments distanced themselves from the proposals.
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The British government, which oversees Europe’s biggest financial center, is preparing to clash with its French and German counterparts over the levy, which would be applied in all 27 European Union countries. Finance chiefs failed to agree on a transactions tax in September 2010, amid opposition from nations including the U.K. The Swedish and Dutch governments also said today that they oppose the plans. EU taxation proposals require unanimous support from the bloc’s 27 governments to become law.

We have our first rationale for dissent from the last FOMC statement:

Federal Reserve Bank of Dallas President Richard Fisher said the central bank shouldn’t ease monetary policy whenever there is a big drop in U.S. stock prices, an action he said some traders might view as a “Bernanke put.”

“My long-standing belief is that the Federal Reserve should never enact such asymmetric policies to protect stock market traders and investors,” Fisher said today in prepared remarks in Midland, Texas. “I believe my FOMC colleagues share this view.”

Fisher’s comments offered his first explanation of his dissent from the Federal Open Market Committee decision last week to specify a date for their commitment to low borrowing costs. The Fed said the benchmark interest rate will stay in a range of zero to 0.25 percent at least through mid-2013. The new language replaces a prior promise to keep rates low for an “extended period.”

The shape of the Treasury curve also attracted notice:

The extra yield Treasury investors get to hold 30-year bonds instead of two-year notes shrank to the narrowest in a week on speculation the U.S. economic recovery is stalling.

The long bonds rose as much as two points as stocks pared gains. Federal Reserve Bank of Philadelphia President Charles Plosser told Bloomberg Radio today that policy makers should have waited to see how the economy performed before pledging on Aug. 9 to hold interest rates at record lows for two years.
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The difference between yields on two-year notes and 30-year bonds shrank to 3.37 percentage points at 5 p.m. in New York, from 3.48 percentage points yesterday. The spread was the narrowest since Aug. 10, when it was the smallest since October 2010.

Closet indexing is alive and well:

The study by Lipper and Avana, a German asset management boutique firm, found that portfolio managers started a risk management system that measured relative risk compared to their benchmarks instead of measuring absolute risk in terms of losses.

The new management guidelines did not meet the expectations of private investors and led to the following conclusions:

Relative risk management systems are penalizing fund managers if their risk compared to the benchmark moved above a defined level. The study found that a fund manager was not allowed to hold a high percentage of his portfolio in cash or decrease the weighting of a specific industry to zero, as this would increase the risk of the portfolio relative to the benchmark.

As a result, managers moved their allocations closer to the benchmarks in market downturns to avoid penalties. Conversely, if a fund lost 45 percent, while the respective benchmark had lost 50 percent, for example, the fund manager could be rewarded for his outperformance, even as he lost money for investors.

I don’t see anything wrong with the tendency expressed in the last sentence – or, indeed, with the concept of measuring relative risk compared to benchmarks! But I don’t believe outperformance happens much.

DBRS downgraded Ireland:

DBRS Inc. (DBRS) has downgraded the Republic of Ireland’s long-term foreign and local currency debt to A (low) from “A”. The trend on both ratings remains Negative. In spite of strong political commitment to fiscal consolidation and lower interest rates on official loans, the downgrade reflects weaker than expected growth prospects. As a result, public debt ratios are estimated to peak in 2013 at higher levels than previously anticipated. The Negative trend reflects DBRS’s view that downside risks to Ireland’s export-led recovery persist, particularly given heightened uncertainty over the economic outlook in the United States and Europe and ongoing turbulence in financial markets.
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Weaker than expected growth is likely to push public debt ratios higher than previously anticipated. In our revised baseline scenario, Ireland’s gross general government debt peaks at 120% of GDP in 2013 and gradually declines thereafter. This excludes NAMA bonds and its associated assets.

DBRS also changed the trend on Spain to negative:

DBRS Inc. (DBRS) has today confirmed the ratings of the Kingdom of Spain’s long-term foreign and local currency debt at AA and changed the trends from Stable to Negative.

The ratings balance Spain’s relatively low public-sector indebtedness and its progress in achieving its fiscal targets with high fiscal deficits, high unemployment, a fragile recovery and a weakened financial sector. The Negative trends reflect the potentially adverse effects of the sharp rise in uncertainty in financial markets on economy-wide funding conditions and the increased risks to the growth outlook of the United States that could affect both Europe and Spain’s export-based recovery.

They soon after published a correction which commenced:

DBRS Inc. (DBRS) has today confirmed the ratings of the Kingdom of Spain’s long-term foreign and local currency debt at AA and changed the trend from Stable to Negative.

The ratings balance Spain’s relatively low public-sector indebtedness and its progress in achieving its fiscal targets with high fiscal deficits, high unemployment, a fragile recovery and a weakened financial sector. The Negative trends reflect the potentially adverse effects of the sharp rise in uncertainty in financial markets on economy-wide funding conditions, and the increased risks to the growth outlook of the United States that could affect both Europe’s and Spain’s export-based recovery. This concern goes beyond the direct trade link between the United States and Spain, which is limited, as there may be more widespread consequences on growth and trade in Europe.

It was a very strong day for the Canadian preferred share market, with PerpetualDiscounts up 36bp, FixedResets gaining 34bp and DeemedRetractibles winning 48bp. Volatility was good, as might be inferred from the index performances; volume was average.

PerpetualDiscounts now yield 5.49%, equivalent to 7.14% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 4.9%, so the pre-tax interest-equivalent spread is not about 225bp, a good tightening from the 240bp reported on August 10 derived from movement in both sectors.

Oh joy, oh bliss! US monetary policy is being politicized – and in pretty polemical terms:

Texas Governor Rick Perry, finishing his first full day of campaigning for the U.S. Republican presidential nomination in Iowa, said it would be “almost treacherous — or treasonous” for Federal Reserve Chairman Ben S. Bernanke to increase stimulus spending before the 2012 election.

“If this guy prints more money between now and the election, I don’t know what you would do with him,” Perry said at a backyard appearance in Cedar Rapids, Iowa. “We would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treacherous — or treasonous in my opinion.”

It’s pretty hard to walk away from language like that … even as the US slides slowly towards total dysfunction.

On a cheerier note, France and Germany propose to eliminate the European financial sector, allowing business opportunities for the rest of us:

France and Germany will propose a financial transaction tax in September, President Nicolas Sarkozy said after talks with German Chancellor Angela Merkel.

There were further details:

German Chancellor Angela Merkel and French President Nicolas Sarkozy said they’ll press for closer euro-area economic integration with tougher deficit rules and stricter supervision to stamp out the debt crisis.

Merkel and Sarkozy rejected euro bonds and expanding the 440 billion-euro ($633 billion) rescue fund. A plan to resubmit a financial-transaction tax, which was rejected in 2010, extended declines in U.S. stocks. They proposed debt limits be written into national law and a “euro council” to be headed by European Union President Herman van Rompuy established as part of a planned “economic government” for Europe.

It was a strong day for the Canadian preferred share market, with PerpetualDiscounts winning 40bp, FixedResets up 13bp and DeemedRetractibles gaining 25bp. Volatility was good. Volume was average.

Sorry this is so late, folks! Either PrefLetter weekend causes a lot of dislocation, or I’m getting pretty lazy, one or the other.

S&P revised the outlook on RON from stable to negative:

• We are revising our outlook on RONA Inc. to negative from stable because weak earnings amid difficult market conditions have contributed to higher debt leverage.
• At the same time, we are affirming our ‘BBB-‘ long-term corporate credit rating on the company.
• Fully adjusted last 12 months debt to EBITDA has jumped to 3.8x, which we consider very high for the rating, although reported debt to EBITDA is low at 1.5x and liquidity is strong.
• The negative outlook stems from our view that weak market conditions will make it difficult for RONA to return leverage to below our key 3x threshold in the near term.
• We could lower the rating on RONA if the company’s profitability remains weak enough to keep leverage at about 3.5x through the critical second and third quarters of 2012.

The European Central Bank is taking on a lot of credit risk:

The European Central Bank spent a record amount on government bonds last week as it began buying Italian and Spanish securities to contain the debt crisis.

The Frankfurt-based ECB said today it settled purchases worth 22 billion euros ($31.7 billion) in the week through Aug. 12, more than the 15 billion-euro median estimate in a Bloomberg News survey of 19 economists and strategists. That also surpasses the 16.5 billion euros the ECB spent during the first week of its initial foray into Greek markets in May last year.

Giulio Tremonti has the best line on the crisis so far:

After unveiling tougher austerity plans in return for ECB help, Italian Economy Minister Giulio Tremonti said a common euro zone bond would stop markets forcing high-debt economies in the bloc to the brink. “We would not have arrived where we are if we had had the euro bond,” he said at the weekend.

Think about it. OK, so there wouldn’t be a crisis now, so you wouldn’t have to commence austerity now. Great! Then what happens?

The explanations for the SocGen share price collapse are starting to get silly:

But did a British malentendu over another French summer staple — a fictional series of articles in Le Monde — contribute to a mysterious sell-off in French bank stocks last week?
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The series, “End of the Line for the Euro,” looked at how a collapse of the single currency might play out, against the backdrop of French presidential elections next year. While the 12-part story was clearly labeled as fiction, it named real banks, like Société Générale, whose shares plunged 15 percent last Wednesday, prompting the bank to deny speculation that it was in financial trouble.

As market participants and journalists searched for possible reasons, the trail seemed to lead to London. There, The Mail on Sunday, a tabloid newspaper, had published an article in which it said Société Générale was “on the brink of disaster.” Société Générale and an Italian bank, UniCredit, were in a “perilous” state, the paper added, citing “a senior government source.”

The Sino-Forest saga will continue for a few more chapters:

Sino-Forest Corp. (TRE), the tree- plantation operator accused by short-seller Carson Block of overstating its timberland holdings, said an independent investigation into the allegations will take longer than previously expected.

The independent committee set up by the company to conduct the probe presented an interim report to the board on Aug. 11 and expects to complete its review by the year-end, Hong Kong- and Mississauga, Ontario-based Sino-Forest said yesterday in a statement. Sino-Forest, which has denied the allegations, hired PricewaterhouseCoopers LLP to assist the review and said June 14 the process would take two to three months.

It was a mixed day in the Canadian preferred share market, with PerpetualDiscounts down 5bp, FixedResets gaining 10bp and DeemedRetractibles winning 40bp. There was plenty of volatility, but not much volume.

There’s more information about the attack on the Hong Kong Exchange website:

Hong Kong Exchanges & Clearing Ltd. said it will find new ways of publicizing earnings and other corporate events after hackers jammed its public news website.

The bourse, acting to safeguard communications from listed companies, will use e-mails and newspaper advertisements to back up its central online system, Chief Executive Officer Charles Li said at a press briefing. Trading in HSBC Holdings Plc (HSBA), Cathay Pacific Airways Ltd. (293) and five other stocks was halted on Aug. 10 and access to filings was disrupted again yesterday amid a “sustained and systematic” attack, Li said.
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The assault was a so-called distributed denial of service attack aimed at preventing access to the exchange’s public news feed by overwhelming its capacity to handle website traffic, Li said. Should the hackers change strategies, Li said the bourse may not be able to defend the website and its backup online bulletin board.

I mentioned a paper regarding defense against DDOS attacks on March 7.

The sudden cessation of US MMF fund lending to European banks after the Lehman bankruptcy caused a crisis in itself. This time the process is more selective and graceful, but will the result be the same?

The six largest U.S. money market funds have eliminated their lending to Italian and Spanish banks, reduced investments in French banks and are favoring Swiss securities for their $511 billion of assets.

Holdings of European bank certificates of deposit, repurchase agreements and commercial paper reported by the six largest funds managed by JPMorgan Chase & Co. (JPM), Fidelity Investments, Federated Investors Inc. (FII), Blackrock Inc. (BLK) and the Vanguard Group Inc. show they are shunning euro-region banks, according to data compiled by Bloomberg.

European bank shares tumbled to the lowest since March 2009 on Aug. 10, led by Paris-based Societe Generale SA, amid concern that France’s creditworthiness was in doubt. U.S. prime money funds have reduced European debt holdings by $38 billion to $340 billion in July, according to an Aug. 9 report by JPMorgan.

Dealbreaker has a good piece on the semi-European short selling ban.

Regulators gone wild! An agency of the US Government is investigating as to whether the downgrade of US Government was done properly:

The Securities and Exchange Commission is reviewing the method Standard & Poor’s used to cut the U.S.’s credit rating and whether the firm properly protected the confidential decision, according to a person with direct knowledge of the matter.

SEC inspectors are examining S&P’s policies for conducting such analyses and whether those procedures were followed when the New York-based firm downgraded the U.S.’s credit rating Aug. 5, said the person, who declined to be identified because the inquiry isn’t public.

Free speech? Of course there’s free speech! Just fill out these forms and sit here for a while we check out what you said.

Not to be outdone, French are checking out whether trading in SocGen was done properly:

France’s stock market regulator opened an investigation into speculation that affected trading in shares of Societe Generale (GLE) SA, said the agency’s president, Jean-Pierre Jouyet.

Societe Generale, France’s second-largest bank, on Aug. 10 denied “all market rumors” and asked France’s Autorite des Marches Financiers to open a probe. Speculation that France’s creditworthiness was in doubt sent the shares tumbling 15 percent that day.

“We’re investigating the unfounded rumors that hit specific stocks this week,” Jouyet said in an interview on RTL Radio today. “I can tell you that the secretary general of the AMF, Thierry Francq, has opened an investigation into the rumors that affected Societe Generale.”

It was a very strong day for the Canadian preferred share market, with PerpetualDiscounts up 46bp, FixedResets gaining 32bp and DeemedRetractibles winning 58bp. Volatility was impressive on low volume.

Turkey is deciding whether shorting a stock is like insulting Turkishness:

Turkey is increasing scrutiny of short sales, joining countries from Greece to South Korea that have sought to prevent bearish bets from fueling declines in stocks after the worst global tumble since 2008.

Turkish regulators are investigating whether short sellers manipulated stock trading during the retreat that sent the ISE National 100 Index down 19 percent this month, Huseyin Erkan, chairman of the Istanbul Stock Exchange, said on Bloomberg HT television yesterday, the same day South Korea began a three- month ban on short sales. Greece started a two-month ban Aug. 9, while Italy increased disclosure rules for short sales in July.

Populist idiocy regarding short-sales is gaining ground:

A European market regulator is considering recommending a temporary ban on negative bets against stocks across the Continent in an effort to stop the tailspin in the markets.

The European Securities and Markets Authority, a body that coordinates the European Union’s market policies, has been requesting information from member states about such bets against stocks, known as short-sales.

Reuters says no:

European Union states are unlikely to impose a blanket ban on short-selling of stocks in response to volatile trading in bank stocks, a regulatory source familiar with the situation told Reuters.

… and others say ‘a little bit’:

Senior government sources tell Class CNBC, CNBC’s Italian partner, that a short-selling ban will be imposed in France and Italy after Thursday’s market close.

The report conflicts with what CNBC has been told by the European Securities and Markets Authority (ESMA). The independent European Union body, which provides a forum to national financial European regulators, told CNBC on Thursday that it is increasing its market surveillance following the rumor-led drop in French banks’ shares that took place on Wednesday and then again Thursday.

And, after all all the speculation above, it turned out to be FIBS:

The following countries have today announced or will shortly announce new bans on short-selling or on short positions: Belgium, France, Italy and Spain3. Information on these measures can be retrieved from the websites of the relevant competent authorities. The measures will take effect as of 12 August 2011.

The ESMA notice linked above also took care to deprecate that favoured whipping dog of arbitrary rulers everywhere, “spreading false news”.

A margin hike on gold contracts seems to have taken a bit of froth out of the market … for now:

Gold futures fell the most in seven weeks after CME Group Inc. (CME) boosted margins on Comex contracts, prompting investor sales after a three-day rally to a record topping $1,800 an ounce and as equities rebounded.

CME Group, owner of the world’s largest futures market, raised margins on gold contracts by 22 percent. The minimum amount of cash that speculators must keep on deposit for an initial account increased to $7,425 on a 100-ounce contract from $6,075. The Standard & Poor’s 500 Index rose as much as 3.2 percent after a drop in U.S. jobless claims.
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Gold futures for December delivery declined $27.80, or 1.6 percent, to $1,756.50 at 11:35 a.m. on the Comex in New York. A close at the price would mark the biggest drop for a most-active contract since June 23. Earlier, the metal climbed as much as 1.9 percent to a record $1,817.60.

There has been a sharp decline in US house foreclosures, but that’s not as good a sign as one might think:

U.S. foreclosure filings dropped 35 percent last month to the lowest level in almost four years as lenders and state and federal agencies increased efforts to keep delinquent borrowers in their homes, RealtyTrac Inc. said.

A total of 212,764 properties received default, auction or repossession notices, the fewest in 44 months, the Irvine, California-based data seller said today. Filings fell on a year- over-year basis for the 10th straight month, and were down 4 percent from June. One in 611 households got a notice.

“The downward trend in foreclosure activity has now taken on a life of its own,” RealtyTrac Chief Executive Officer James J. Saccacio said in a statement. “Unfortunately, the falloff in foreclosures is not based on a robust recovery in the housing market but on short-term interventions and delays that will extend the current housing market woes into 2012 and beyond.”

The decline in foreclosure notices began last year when attorneys general across the country began probing a practice known as “robo-signing,” in which lenders and servicers pushed through default documents without verifying their accuracy. Now federal and state officials are also contributing to the slowdown with payment assistance and loan modifications, RealtyTrac said.

There has been a revision to the chatter about SocGen – not French credit at all, never mind:

Societe Generale (GLE) SA, which yesterday plunged 15 percent, is among banks being targeted by investors because of its perceived dependence on short-term funding, according to analysts at Royal Bank of Scotland Group Plc.

“The primary culprit for the share price decline is funding concerns for European banks in general and French banks in particular,” analysts including Stefan Stalmann said in note to clients today. “The mix of euro doubts and rating fears in recent days and weeks may have dented the confidence of funding counterparties, which has then fed back into equity markets.”

… although some beg to differ:

“People are shorting banks as a way of shorting sovereign debt,” Tom Vosa, head of markets economics, Europe at National Australia Bank, told CNBC Thursday. “What we are really seeing is the markets deciding they don’t like the fiscal position in Europe.”

“The best way to get leverage and express that opinion is through shorting the banking system, because they know that the governments have to bail out the banks,” he added.

POW has made a major investment in a Chinese asset manager:

Power Corporation announced today that its bid to purchase 10% of China Asset Management Co. Ltd. (China AMC) from its current owner, CITIC Securities Co. Ltd. (CITIC Securities), has been accepted for an amount equivalent to approximately CDN $276 million. This purchase is the result of a competitive process.

China AMC was established in 1998 and was one of the first asset management companies approved by the China Securities Regulatory Commission. It is recognized as the leading company in the Chinese asset management sector, with approximately US$35 billion in assets under management (excluding annuity and separate accounts) at December 31, 2010.

The Canadian preferred share market had a good strong day, although rather uneven. PerpetualDiscounts gained 24bp, FixedResets were up 1bp and DeemedRetractibles won 76bp. There was a high degree of volatility, with BNA having the honour of having one of its issues ranked second-worst on the day, with another ranked best. Volume was above average.

The Kansas City Fed Stress Index for July was below its long term average … but whether that holds up in August is another matter!

It’s beginning to look as if European prudence is veering into panic:

Societe Generale SA, France’s second-largest bank, issued a blanket denial of “all market rumors” after speculation that France’s creditworthiness was in doubt sent the shares down the most in more than 2 1/2 years.

The bank “categorically denies all market rumors,” Emmanuelle Renaudat, a spokeswoman for the Paris-based lender, said in an interview today. She declined to be more specific. Societe Generale led European bank stocks to the lowest since the aftermath of the credit crisis, tumbling 15 percent to 22.18 euros in Paris, the biggest drop since Oct. 27, 2008.

France’s top credit rating was affirmed by all three major rating companies as speculation Europe’s debt crisis would spread to the region’s second-biggest economy pushed the cost of insuring its government debt against default to a record.

A defense attorney, fresh from defending a little guy accused of mortgage-fraud, makes an interesting point on justice (and, I would say, regulation in general):

In the 1980s, Operation Greylord exposed rampant corruption and bribery in Chicago’s state criminal courts. One side effect of this corruption was that criminal defendants who didn’t pay bribes were given maximum prison time so that the corrupt judges could appear to be tough on crime. A similar thing is happening now in the cleanup of the mortgage mess. The politically powerless are getting clobbered to make it appear that the government is serious about cracking down on fraud.

It’s easy for prosecutors to win convictions by going after the little guys. But this strategy does nothing to punish those most responsible for bad mortgages; nor will it deter future incidents of fraud.

The Hong Kong Exchange was hacked:

Hong Kong Exchanges & Clearing Ltd., the world’s biggest bourse operator by market value, said it suspended trading for companies including HSBC Holdings Plc (HSBA) after its website was hacked.

Europe’s largest bank by market capitalization, Cathay Pacific Airways Ltd. (293) and five other stocks were halted after a “malicious attack” on the exchange’s website for corporate filings, Chief Executive Officer Charles Li said yesterday. The website was partially disabled as companies including Hong Kong Exchanges reported earnings.

This is why it’s good to have central clearing: it makes it easier to take down the entire system.

US equities did not have a jolly time:

Stocks slid, dragging the Dow Jones Industrial Average to the lowest level since September 2010, and Treasuries rose for a third day amid concern the European sovereign debt crisis is worsening. The dollar climbed versus 13 of 16 major peers, with the euro losing 1.3 percent to $1.4190. Gold futures surged to a record above $1,800 an ounce.

The Dow sank 519.83 points, or 4.6 percent, to 10,719.94 at the 4 p.m. close in New York. The Standard & Poor’s 500 Index sank 4.4 percent to 1,120.76 following its biggest jump in more than two years yesterday, when it rebounded from its worst loss since 2008. The Stoxx Europe 600 Index plunged 3.8 percent as Societe Generale SA sank 15 percent. Ten-year Treasury yields, which touched an all-time low yesterday, fell 16 basis points to 2.09 percent after an auction drew a record-low yield. Costs to protect French debt reached a record.

Canadas also did well:

A rally in Canadian government 10-year bonds pushed the yield to 2.31 percent, the lowest level since at least 1989.
…
Government 10-year note yields dropped 12 basis points, or 0.12 percentage point, to 2.33 percent after touching the record low. The price of the 3.25 percent security due in June 2021 increased C$1.11 to C$108.05.

Canada sold C$3 billion ($3 billion) of three-year debt, drawing an average yield of 0.965 percent. The government received bids of C$6.55 billion for the 2.25 percent securities maturing in August 2014, according to a statement today on the Bank of Canada’s website.

Toronto did all right, on the back of greasy rocks:

The S&P/TSX composite index gained 89.63 points, or 0.74%, to 12,198.89. Only four of the 10 sub-indexes advanced but among those were two of the three heavyweights — materials, which rose 3.41%, and energy, up 1.02%. Bank stocks, which led the previous day’s advance, fell on Wednesday, dragging the financials sector down 1.05%.

A US$3.59 jump in the price of oil, to US$82.89 a barrel, combined with another new record price for gold, which closed at US$1,784.30 an ounce, a gain of $41.30, drove the TSX increases on a day when U.S. markets continued to decline.

Gold producers saw significant gains on Wednesday — Barrick Gold Corp. rose 6.15% to $49.72, Goldcorp advanced 6.99% to $50.54, and Kinross Gold saw its share price gain 4.55%, to $16.31.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 16bp, FixedResets up 6bp and DeemedRetractibles down 15bp. Volatility was quite good; volume was average.

PerpetualDiscounts now yield 5.55%, equivalent to 7.22% interest at the standard equivalency factor of 1.3x. Long Corporates now yield a little over 4.8% (!) so the pre-tax interest-equivalent spread is now about 240bp, a sharp increase from the 215bp reported on August 4. Yields have gone in opposite directions over the week … go figure!

The FOMC statment was gloomy:

Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed.
…
The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased.
…
To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

Stock markets responded:

Financial stocks in the S&P 500, which paced a slide that erased $1 trillion in market value yesterday, rallied 8.2 percent. Bank of America Corp. (BAC) and Citigroup Inc. (C) jumped at least 13 percent. Freeport-McMoRan Copper & Gold Inc. (FCX) gained 7.5 percent as gold advanced to a record.

The S&P 500 jumped 4.7 percent to 1,172.53 at 4 p.m. in New York, after falling as much as 1.6 percent. The Dow Jones Industrial Average rose 429.92 points, or 4 percent, to 11,239.77 today. Both gauges had the biggest gain since March 23, 2009. About 16.8 billion shares changed hands at 4:56 p.m., more than twice the three-month average, Bloomberg data show.

And so did bonds:

Treasuries rose, pushing 10 and two- year note yields to a all-time lows, after Federal Reserve officials promised to keep benchmark interest rates at record lows through mid-2013 in a bid to revive economic growth.

U.S. debt rallied as central bank policy makers said economic growth is “considerably slower.” The Treasury’s sale of $32 billion in three-year notes drew stronger-than-average demand in the first note sale since Standard & Poor’s cut the U.S. debt rating Aug. 5.
…
Yields on 10-year notes fell seven basis points, or 0.07 percentage point, to 2.24 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices
…
Two-year note yields fell six basis points to 0.20 percent. The yield touched 0.1568 percent, lower than the previous record of 0.2283 percent yesterday. Thirty-year bond yields fell one basis point to 3.646 percent.

Korea has banned market efficiency:

South Korea banned equity short sales for three months while the two biggest state-run funds said they may boost investments as the government seeks to shore up a market that’s had its biggest six-day drop in three years.

The Financial Services Commission said it will ban short selling on all shares until Nov. 9 from today. The National Pension Service, the country’s biggest investor, said yesterday it plans to buy more stocks this month than it originally targeted. Korea Teachers Pension said it purchased about 70 billion won of stocks amid the sell-off and may buy more.

South Korea joins Greece this week in banning short selling after the Kospi Index (KOSPI) slumped 17 percent in six days. The gauge reached an intraday level yesterday that was 24 percent below its May 2 record close. Domestic institutions should play a bigger role to contain volatility that is often caused by sell- offs by overseas investors, the FSC’s Chairman Kim Seok Dong told lawmakers in parliament yesterday.

TransAlta, proud issuer of TA.PR.D, was put on outlook negative by S&P:

• We are revising our outlook on TransAlta Corp. to negative from stable.
• We are also affirming our ratings, including our ‘BBB’ long-term corporate credit rating, on the company.
• We base the outlook revision on ongoing weaker-than-expected credit metrics and our view that there is a one in three chance that they will not improve in line with our targets of 4x adjusted funds from operations (FFO)-to-interest and 20% FFO-to-debt within the next two years.
• Factors contributing to increased business risk include exposure to current weaker prices in the Pacific Northwest, the possibility of material penalties resulting from arbitration, and fleet renewal requirements that could lead to increasing capital spending.

DBRS has commented on proposed credit rating agency rules:

The first contradiction relates to the mandated rules’ effect on competition. Although fostering competition among rating agencies was a primary goal of both the 2006 Act and the Dodd-Frank Act, the proposed rules will be so costly to implement that additional credit rating agencies are unlikely to register as NRSROs and the existing pool of registrants may contract. According to the Commission’s estimates, the projected initial expense attributable to the Dodd-Frank NRSRO rules for a firm of DBRS’s size would exceed $1.8 million, with annual expenses thereafter of roughly $1.3 million. The cost of complying with the new regulations, when added to the substantial cost of complying with the existing NRSRO regulations, threatens to overwhelm all but the largest rating agencies.

The second contradiction is the fact that although NRSRO registration is voluntary, the rating agency regime created under the Dodd-Frank Act in many respects is more onerous than the mandatory regimes imposed on broker-dealers and investment advisers. For example, under the new rules, an NRSRO will have to disclose up to two dozen specific items of information each time it issues a credit rating. On the other hand, a broker-dealer who publishes a research report on an equity security must disclose only basic information about conflicts of interest and its rating system; while an investment adviser publishing an opinion about a security has only a general fiduciary duty to reveal conflicts of interest. Furthermore, while the chief compliance officers of broker-dealers, investment advisers and NRSROs all must annually review the sufficiency and effectiveness of their compliance programs, only NRSROs must file reports of such reviews with the SEC.

After all this, it is not surprising that the Canadian preferred share market seemed a little confused today, with PerpetualDiscounts winning 43bp, FixedResets up 5bp and DeemedRetractlbles losing 8bp. At least the hammering of Floaters makes sense, with the Fed announcing a two year hold on US policy rates! Volatility was quite good, volume was above average.

It didn’t take long for the Americans to start blaming the messenger:

On one hand, there is a case to be made that the madness of the right has made America a fundamentally unsound nation. And yes, it is the madness of the right: if not for the extremism of anti-tax Republicans, we would have no trouble reaching an agreement that would ensure long-run solvency.

On the other hand, it’s hard to think of anyone less qualified to pass judgment on America than the rating agencies. The people who rated subprime-backed securities are now declaring that they are the judges of fiscal policy? Really?

Just to make it perfect, it turns out that S&P got the math wrong by $2 trillion, and after much discussion conceded the point — then went ahead with the downgrade.

More than that, everything I’ve heard about S&P’s demands suggests that it’s talking nonsense about the US fiscal situation.

I have a question for Mr. Krugman: If S&P had taken this action 10 years ago, would you have gotten this angry? Or would you have laughed?

When you howl, you’re hit!

As always, I will emphasize that I have no faith in the infallibility of credit rating agencies. But I will also point out that they have a track record that is a damn sight better than their vociferous critics (those who have actually done credit analysis, those who have actually plunked money or reputation down on the table due to their own credit analysis, will often criticize – but not so vociferously. Why not? Because once you do the work and see how it turned out, you get a better understanding of how damn hard it is).

The greatest value of credit rating agencies is that they are highly visible and form a touchstone for investors and issuers alike. Lots of people have been decrying US fiscal policies for some time. It took a downgrade from S&P to attract a decent amount of interest.

I continue to believe that the US will not get serious about its fiscal problems until the day when the President gets a call from Treasury saying they’re not sure if they can sell the bonds. Hopefully, it will be a Democrat president who takes the call – he’ll have more political room to cut spending. That’s what it took in Canada … that’s what it took in Greece … that’s what it took in Ireland … Portugal … Italy …

Here’s a more sensible idea:

There is a lot of anger at the moment in the US over the embarrassment of the downgrade, as well as shock. I’m most amused by the shock, to tell the truth. S&P didn’t say anything yesterday that was not common knowledge and common sense.
…
But that fiscal structure far predates Barack Obama, both as President and as human being, and Congresses and White Houses of both parties have done little to address the real problems in Medicare, Medicaid, and Social Security.
Why? Because as soon as people try to do so, demagogues accuse them of wanting to push Grandma over a cliff. Voters respond by punishing the reformers and rewarding the demagogues. If we collectively want to blame someone, we collectively should be looking in a mirror.

But the politicians and their minions are, as I predicted on Friday, focussing on the arithmetical error as the basis for their arguments. Here’s what John Bellows, Acting Assistant Secretary for Economic Policy, wrote in a post titled Just the Facts: S&P’s $2 Trillion Mistake:

In a document provided to Treasury on Friday afternoon, Standard and Poor’s (S&P) presented a judgment about the credit rating of the U.S. that was based on a $2 trillion mistake. After Treasury pointed out this error – a basic math error of significant consequence – S&P still chose to proceed with their flawed judgment by simply changing their principal rationale for their credit rating decision from an economic one to a political one.
…
In fact, S&P’s $2 trillion mistake led to a very misleading picture of debt sustainability – the foundation for their initial judgment. This mistake undermined the economic justification for S&P’s credit rating decision. Yet after acknowledging their mistake, S&P simply removed a prominent discussion of the economic justification from their document.
…
S&P acknowledged this error – in private conversations with Treasury on Friday afternoon and then publicly early Saturday morning. In the interim, they chose to issue a downgrade of the US credit rating.

Independent of this error, there is no justifiable rationale for downgrading the debt of the United States. There are millions of investors around the globe that trade Treasury securities. They assess our creditworthiness every minute of every day, and their collective judgment is that the U.S. has the means and political will to make good on its obligations. The magnitude of this mistake – and the haste with which S&P changed its principal rationale for action when presented with this error – raise fundamental questions about the credibility and integrity of S&P’s ratings action.

I remain true to my conviction that the most sensible words ever spoken by a Canadian politician – or any politician, anywhere, confronted with a debt crisis – were spoken by Jean Chretien. Someday I’ll find the reference and the exact phrase, but it was something like … “We aren’t doing this because this is what the bond market thinks we should do! We are doing it because we don’t want to care what the bond market thinks!”

Dealbreaker comments on one of the interesting knock-on effects of the downgrade:

In other words if you own Microsoft bonds (1) you don’t own Microsoft bonds, DTC does – you just have a certificate from DTC saying that they own those bonds on your behalf, and (2) Microsoft takes no responsibility for DTC paying you any of the interest or principal that it pays DTC. So if DTC decides not to pass the money along to you, you’re out of luck.

This is not a real problem of course as there are a whole lot of systemic/legal/etc. safeguards in place to make sure that DTC doesn’t take its $34 billion in assets to Vegas. But according to S&P, DTC is now more likely to default than Microsoft is – which means that your likelihood of getting paid back on a Microsoft bond is lower than the likelihood that Microsoft will pay you back. (I know!)

Ah, the joys of a world where AA+ is the new AAA …

I am often criticized for not doing on-line banking. But there’s a reason:

When she learned TD Bank was to hold a fraud-prevention seminar on May 13, 2010, in Burlington, Vermont, she hopped on a plane and slipped into the meeting. During the morning presentation, when an expert in wire transactions was talking about ways that small businesses could protect themselves from the dangers posed by cybercriminals, McCarthy raised her hand.

Why wasn’t TD Bank doing a better job protecting its small- business clients, she asked. How had TD Bank allowed $164,000 to be wired out of her account even though she hardly every made wire transfers? As the speaker tried to respond, McCarthy kept peppering him with questions about his bank’s responsibilities to its clients.

Two bank representatives, including TD Bank’s head of corporate security and investigations, walked over to McCarthy’s table and suggested they continue the subject outside. McCarthy told the head of security it was good to meet him finally, since she’d been calling him for weeks following the robbery and had never gotten through.

Jennifer Morneau, a spokeswoman for TD Bank, confirmed that there was such an incident involving a “woman from Long Island” at one of its anti-fraud seminars, and didn’t have any further information.

Looks like Europe will start buying Spanish and Italian bonds:

The European Central Bank said it will “actively implement” its bond-purchase program, signaling it is ready to start buying Italian and Spanish securities to counter the sovereign debt crisis.

In a statement issued in the name of President Jean-Claude Trichet after an emergency teleconference meeting of policy makers, the Frankfurt-based ECB welcomed Italy and Spain’s efforts to reduce their budget deficits. It also called on all euro-area governments to follow through on the measures agreed at a July 21 summit, including allowing the European Financial Stability Facility to purchase bonds on the secondary market.

“It is on the basis of the above assessments that the ECB will actively implement its Securities Markets Program,” the central bank said. “This program has been designed to help restoring a better transmission of our monetary policy decisions — taking account of dysfunctional market segments — and therefore to ensure price stability in the euro area.”

There, you see? The reason Spanish and Italian bond yields are so high isn’t because they’re risky credits – it’s because the markets are dysfunctional.

The European crisis is causing a certain amount of capital flight, with bank depositors looking for the security of US Banks. There’s only one problem – the banks don’t want it:

Cash held by U.S. banks surged 8.4 percent to a record $981 billion during the week ending July 27, the Federal Reserve said in an Aug. 5 report. That’s more than triple the amount firms had in July 2008, before the collapse of Lehman Brothers Holdings Inc. almost froze bank-to-bank lending.

Even more money may be deposited with U.S. lenders if investors pull away from European banks amid concern the Greek debt crisis may spread to Italy or beyond, said Brian Smedley, a strategist at Bank of America Merrill Lynch in New York. Those funds may not be so welcome: With few opportunities to lend them out profitably, U.S. firms may have to slap fees on depositors to keep returns from eroding.
…
Since late 2008, the Fed has been paying interest on deposits placed with the central bank, known as interest on excess reserves, or IOER. That rate is currently set at 25 basis points, or 0.25 percent.

At that rate, banks may struggle to profit from even non- interest-paying deposits, because the companies must pay premiums to the Federal Deposit Insurance Corp. when they route the money to the Fed. On April 1, the FDIC changed its methodology for assessing premiums, resulting in an increased cost for most large banks. Because a deposit at the Fed is technically an asset, taking the money may stretch banks’ capital-to-asset ratios, which are watched by regulators, Joseph Abate, a money-market analyst at Barclays Capital in New York, wrote in an Aug. 5 report.

“The higher deposit cost, the potential need for additional capital and the flight-prone nature of these balances clearly outweigh the 25-basis-point return from IOER that they would earn depositing the money at the Fed,” Abate wrote. Any reduction in IOER — a move Fed Chairman Ben S. Bernanke told Congress in July might be possible — may create a “serial round of deposit fees” since banks would try to “push cash from their balance sheets” like a game of “hot potato.”

It was an interesting day today:

The S&P 500 retreated 6.7 percent to 1,119.51 at 4 p.m. in New York. The gauge slumped 11 percent in three days, the most since November 2008, and fell to the lowest since September 2010. The Dow Jones Industrial Average slid 634.76 points, or 5.6 percent, to 10,809.85. The Russell 2000 Index of small companies slumped 8.9 percent, entering a so-called bear market, down 25 percent from its April 29 high.
…
The downgrade extended a rout that had wiped out $1.94 trillion in market value from the country’s stocks amid concern the economic recovery is at risk. Global equities tumbled and European shares entered a bear market. The Stoxx Europe 600 Index has now fallen 21 percent from this year’s high on Feb. 17. The S&P 500 is down 18 percent since April 29.
…
The Chicago Board Options Exchange Volatility Index, which measures the cost of using options as insurance against declines in the S&P 500, soared 46 percent to 46.80, the highest since March 2009.
…
The KBW Bank Index of 24 stocks slumped 11 percent. Bank of America dropped 20 percent, the most in the S&P 500, to $6.53. American International Group Inc. (AIG), the bailed-out insurer, sued the largest U.S. lender by assets over $10 billion in losses on mortgage-bond investments.
…
Equity indexes extended losses after S&P changed the outlook for Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) to “negative” from “stable.” Berkshire Hathaway Class B shares slumped 6.4 percent to $66.66.

“Our view of these companies’ fundamental credit characteristics has not changed,” S&P said in a statement today as it cut the outlook on Omaha, Nebraska-based Berkshire. “Rather, the rating actions reflect the application of criteria and our view that the link between the ratings on these entities and the sovereign credit ratings on the U.S. could lead to a decline in the insurers’ financial strength.”

Not surprisingly, it was clobberin’ time for the Canadian preferred share market, with PerpetualDiscounts losing 1.94%, FixedResets off 1.30% and DeemedRetractibles down 1.74%. There was not a single winner in the lengthy volatility list – and when each of the three major indices is down more than the threshold for inclusion in the volatility list, you get a very extensive volatility list indeed! Volume was quite high, but block traders were, if anything, less active than usual.