Category: Market Action

Alarms are sounding about a possible Chinese bank crisis:

China faces a 60 percent risk of a banking crisis by mid-2013 in the aftermath of record lending and surging property prices, according to a Fitch Ratings gauge.

The assessment is from a macro-prudential monitor used by the ratings company, Richard Fox, a London-based senior director, said in a phone interview on March 4.
…
The indicator signaled crises in Iceland and Ireland and has been tested back to the 1980s, Fox said.
…
The indicator’s failures have included not sounding an alarm about the banking system in Spain, he added.
…
Banking systems in emerging markets are vulnerable to systemic stress when credit growth exceeds 15 percent annually over two years with real property prices rising more than 5 percent, according to Fitch. Credit growth in China averaged 18.6 percent annually over 2008 and 2009 as house prices jumped, according to the ratings company.

The fallout from China’s lending spree may be bad loans totaling $400 billion, according to Hong Kong-based advisory firm Asianomics Ltd.

Gloominess on Europe:

Some countries in the euro region may have their credit ratings cut further while a Greece debt default is a “possibility,” said Moritz Kraemer, managing director of European sovereign ratings at Standard & Poor’s.

Asked if the worst was over for the region’s sovereign credit-rating outlook, Kraemer said: “I wish I could say yes, but the answer is no.”

“We still have a number of countries with a negative outlook or CreditWatch negative, indicating their credit ratings may be going down further,” Kraemer said in an interview in London. “Trigger points for that could be slippage in fiscal consolidation and structural reforms, but also decisions that will be taken at the European level later this month.”

S&P said on March 1 it kept Portugal’s A-long-term, A2 short-term and Greece’s BB+ long-term ratings on CreditWatch with a negative outlook. It cited Portugal’s “high external financing need and limited funding sources.” Moody’s Investors Service downgraded Greece’s government bond ratings yesterday to B1 from Ba1 , and assigned a negative outlook to the rating.

And more gloom on US mortgages:

Bank of America Corp. (BAC), the biggest U.S. lender by assets, is segregating almost half its 13.9 million mortgages into a “bad” bank comprised of its riskiest and worst-performing “legacy” loans, said Terry Laughlin, who is running the new unit.
…
The legacy portfolio will hold 6.7 million of loans with outstanding principal balance of about $1 trillion, according to a presentation to investors today. The split leaves home loan President Barbara Desoer with about half her previous portfolio, as well as new lending going forward.

Laughlin’s portfolio will include loans that are currently 60 or more days delinquent as well as riskier types of loans the bank no longer originates, such as subprime, Alt-A, interest- only and option adjustable-rate mortgages, he said. He said the portfolios will be completely split by March 31 and that his will be liquidated over time. Of the 13.9 million loans Bank of America services, about 3.5 million are held by the company on its balance sheet. The rest are owned by other investors.

There’s a rather odd perspective on the Charlie Sheen spectacle:

Second, he’s the talent. A hedge fund wouldn’t fire the star trader if he was a drug user or an alcoholic. It would have to get rid of half the staff if it did.

Which is why hedge funds blow up with such amazing regularity. I think it’s just sad: we have a guy who has achieved enormous success and can’t handle it. After pondering whether he was lucky or smart, he’s not just chosen “smart”, but gone beyond, into “completely irreplacable and personally indestructible.” It happens all the time, not just in Hollywood and Wall Street, but everywhere, sometimes with a definitions of “enormouse success” that most of us would consider “a good start”, causing an immense amount of pain and waste of talent.

If any employee of mine were ever to be found doing coke, he’d be out on his ass instantly, lawsuits and employer accomodation of addictions be damned. It’s cheaper in the end, as the Bishop said to the choir-boy.

Here’s some sense:

A top jurist has condemned plea bargaining as a form of coercion that tempts an intolerable number of innocent people into pleading guilty to avoid a harsh sentence.

Mr. Justice Marc Rosenberg of the Ontario Court of Appeal urged a thorough review of plea bargaining – a system that has become so entrenched in the past three decades that 90 per cent of criminal cases result in a guilty plea.

We can get rid of negotiated settlements in the securities industry while we’re at it.

Hats off to the Proceeds of Crime Act! Another way to build up slush funds like Brampton’s:

The Peel Police Services Board has bought tens of thousands of dollars worth of tickets to private mayoral galas in Brampton and Mississauga, using “proceeds of crime” that in Ontario typically go to victim and crime prevention programs.

The tickets were purchased over the years while Brampton Mayor Susan Fennell and a fundraising organizer of Mississauga Mayor Hazel McCallion sat on the board — and with the approval of Peel Region chair Emil Kolb, who also heads the police board.

Minutes show, for example, that the board approved buying a $4,000 table at Fennell’s gala on Feb. 20 last year, on Fennell’s invitation. A month before the gala took place, then-board member Jim Murray put forward a motion to buy a second table. It was approved.
…
[Peel Region chair Emil] Kolb, who has chaired the police board since 1996, acknowledged that the board routinely approves such purchases, but points out that it’s not tax-generated dollars being spent.

“It’s funds that come from crime funds. Not one red cent is taxpayer dollars.”

Kolb should be fired – not just for reckless misuse of funds, but for general stupidity. Once it’s in the coffers, pal, it’s taxpayer’s money. Every goddam penny, regardless of whether it’s taxes, fees, fines, gifts or proceeds of crime. It’s not yours to do political favours for your buddies. Asshole.

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts losing 10bp, FixedResets flat and DeemedRetractibles gaining 16bp. Volatility was subdued with only one entry in the Performance Highlights table. Volume was heavy.

There are threats of inflation in Asia:

The Bank of Thailand and Bank of Korea will each raise key interest rates this week by a quarter percentage point, median estimates in Bloomberg News surveys of economists show. Malaysia may also be approaching the end of its pause in boosting borrowing costs, as four of 12 analysts polled see a March 11 move, the highest such share since the last increase, in July.
….
The region’s economies are strong enough to withstand the impact of faster inflation, the Asian Development Bank said last week.

“The region is particularly prone to food and oil price shocks as a greater percentage of household income is spent on food and transportation,” said Vishnu Varathan, an economist in Singapore at Capital Economics (Asia) Pte.
…
Diminished resistance to currency gains in China may have a knock-on effect throughout Asia as the continent’s biggest economy also seeks to contain price pressures. People’s Bank of China Governor Zhou Xiaochuan said last month in Paris that his nation may use means “including rates and currency” to curb increases in food and home prices.

WordPress.org was attacked by hackers in China recently. I wondered how one defends against this and found a paper by S S Nagamuthu Krishnan and Dr. V. Saravanan titled DDoS Defense Mechanism by applying stamps. Precious in places (‘Oh, do be a good netizen while munching your granola’) and, naturally enough, veering occasionally into jargon, but they do achieve one of their major objectives in the paper addressing a major problem:

This was a major event, covered in the major news media. They have done an excellent job in their coverage; as far as it has gone, their coverage has been accurate. The problem is, their coverage hasn’t been sufficiently detailed to explain why we cannot track down the people committing these attacks, and why we can’t defend against them. There’s a good reason for these omissions: the attack is subtle, and understanding how it works well enough to understand why we can’t cope today, and what will have to change before we can, requires a more detailed explanation of how the Internet is constructed than the mass media are prepared to deliver to their audiences.

It was a mixed day on the Canadian preferred share market, as PerpetualDiscounts gained 6bp, FixedResets lost 8bp and DeemedRetractibles were down 11bp. Volume was average, but there were some nice blocks changing hands – all courtesy of Nesbitt, which shut out the rest of the street on the Volume Highlights table.

The IMF has released the March 2011 edition of Finance and Development. There’s an article by André Meier titled Up or Down:

Some have predicted postcrisis deflation in advanced economies, others high inflation. Worries about either are probably exaggerated.
…
Historical episodes of persistent large output gaps in advanced economies show a clear pattern of disinflation, supported by weak labor markets and low wage growth. However, declines in inflation appear to become more modest when the initial rate of inflation is already quite low, suggesting some combination of better-anchored inflation expectations and downward nominal rigidities, such as resistance to outright wage cuts. Moreover, fluctuations in oil prices and exchange rates can introduce significant shortterm volatility in inflation outturns.

Developments since the beginning of the global financial crisis are consistent with this pattern. Despite large swings in headline rates, underlying inflation in advanced economies has generally declined, with many core measures reaching the very low rates at which disinflation typically petered out during past [persistent large output gap] episodes. Thus, while upside inflation risks should be limited in countries facing continued economic slack, a slide into outright deflation does not seem very likely either.

There’s also a very hopeful article titled Healing Health Care Finances by Benedict Clements, David Coady, Baoping Shang, and Justin Tyson. Hey, here in Canada, no problem! You see, what we’re going to do is keep standards high but costs low through the use of a well-respected technique that has just been approved by an expert group of 23-year-old B.Comms with clipboards: Doing a shitty job. Whenever something goes wrong and this becomes public knowledge, just fire whoever was standing nearest. Works every time. How many voters really have any insights into the public health system, anyway?

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts down 21bp, FixedResets gaining 17bp and DeemedRetractibles losing 16bp. For all that, the market was relatively well behaved, with only one entry on the Performance Highlights table. Volume remained high.

The migration of traders continues:

Guggenheim Partners LLC, the closely held investment bank and asset manager, plans to hire as many as 150 staff being pushed out of banks’ proprietary-trading units because of U.S. financial rules enacted last year.

Loren M. Katzovitz and Patrick Hughes, 49-year-old managing partners who have worked together since 1993, are launching Guggenheim Global Trading LLC in Purchase, New York, with an initial investment of $500 million as soon as June 1, they said yesterday in an interview. The firm plans to hire 100 to 150 traders and manage as much as $2 billion, they said.

Much the same thing is happening in Canada:

The cultural gulf between Canada’s independent securities firms – with their eat-what-you-kill pay structures – and the more staid bank-owned investment dealers is steadily widening. Some of the people who recruit bankers and traders say that the result of a move to more deferred pay and smaller cash bonuses at bank-owned firms means they are attracting a more risk-averse type of person, which is what regulators were seeking.

The pay system at independent firms like GMP Securities remains simple. Bankers and traders get paid for the business they bring in. Base salaries are rare, but bonus payments are regular and in cash. Bonuses are big when business is good, and they can dry up in fallow times.

It will be interesting to see how this plays out. I can tell you that the quality of institutional bond desk personnel has declined over the past 15 years. There’s still lots of the old guys around, but as they retire and move on, they’re being replaced by order-takers.

General Growth, the object of Brookfield’s affections, is taking advantage of better tone in the CMBS market:

General Growth Properties Inc. (GGP), the U.S. mall owner planning to refinance $5 billion of mortgage debt, tapped UBS AG and Morgan Stanley (MS) to fund loans as banks rebuild inventory to back bonds tied to commercial real estate.

UBS agreed to provide a $375 million loan on the 977,000- square-foot Providence Place Mall in Rhode Island, according to a person with direct knowledge of the deal who declined to be identified because the talks are private. Morgan Stanley will lend about $150 million for a Humble, Texas property, according to a person familiar with those negotiations. The banks plan to package the loans for sale as securities, the people said.

General Growth, which emerged from the largest real estate bankruptcy in U.S. history in November after piling up $27 billion in debt, plans to refinance $5 billion in mortgages in 2011, Chief Executive Officer Sandeep Mathrani said during a March 1 conference call with analysts. Property owners nationwide are benefiting as the Federal Reserve keeps its benchmark interest rates near-zero to stimulate economic growth.
…
General Growth buckled under its debt load when the market for commercial-mortgage backed bonds shut down in 2008 and the company was unable to refinance properties. The real estate investment trust has $18.2 billion in outstanding mortgage debt, Mathrani said.

A mixed, relatively quiet day on the Canadian preferred share market, as PerpetualDiscounts lost 5bp, FixedResets were down 7bp, and DeemedRetractibles gained 4bp. There are only two entries on the Performance Highlights table – and neither would have made had their closing bids been a penny lower. Volume remained at elevated levels.

DBRS has released a commentary titled Sovereign Ratings Provide a Benchmark for other DBRS Credit Ratings:

• Sovereign credit ratings serve as a general benchmark for all other DBRS credit ratings. DBRS uses a case-by-case approach when rating non-sovereign entities or transactions, and avoids using a static “sovereign ceiling” concept, because this would imply that ratings are capped at the sovereign rating. DBRS does not institute a maximum number of notches between the sovereign rating and non-sovereign ratings.
• Financial institution and corporate ratings are typically constrained by the sovereign rating, although both could have a higher credit rating that that of the central government, with the level of operations outside of the country of domicile typically being a key consideration. Structured Finance ratings are addressed on a case-by-case basis and in many instances can be higher than the sovereign rating.
• In certain cases, country risks, which do not necessarily result in sovereign rating changes, may also affect non-sovereign ratings.
• Within the Euro zone, non-sovereign ratings may enjoy a lower degree of influence from sovereign-related stresses, since there is far lower exchange rate risk, less regulatory risk and existing support mechanisms from European institutions.

It was a mixed day on the Canadian preferred share market, as PerpetualDiscounts were up 10bp, FixedResets gained 6bp, but DeemedRetractibles got knocked back for 16bp. Not much volatility, with only two issues on the Performance Highlight list. Volume was above average.

PerpetualDiscounts now yield 5.61%, equivalent to 7.28% at the now standard equivalency factor of 1.3x. Long Corporates now yield about 5.5%, so the pre-tax interest equivalent spread is now about 180bp. Given the change in the equivalency factor, this is not really comparable to prior figures; the raw data for February 23 was 5.61% for PerpetualDiscounts and 5.50 for Long Corporates, so the change is really zero.

The Federal Reserve Bank of New York has released a Staff Report by Olivier Armantier, Eric Ghysels, Asani Sarkar, and Jeffrey Shrader titled Stigma in Financial Markets: Evidence from Liquidity Auctions and Discount Window Borrowing during the Crisis:

We provide empirical evidence for the existence, magnitude, and economic impact of stigma associated with banks borrowing from the Federal Reserve’s discount window facility. We find that, during the height of the financial crisis, banks were willing to pay an average premium of at least 37 basis points (and 150 basis points after Lehman’s bankruptcy) to borrow from the Term Auction Facility rather than from the discount window. The incidence of stigma varied according to bank characteristics and market conditions. Finally, we find that discount window stigma is economically relevant since it increased banks’ borrowing costs during the crisis. Our results have important implications for the provision of liquidity by central banks.

Also released was a Staff Report by Maria Kasch and Asani Sarkar titled Comovement Revisited:

We find, unlike earlier studies, that there is no rise in the market betas of stocks that enter the S&P 500 index when the estimated factor model is that of Fama and French (1993). We also find that SMB and HML factor betas decline after the stocks are added to the index. This decline is explained by strong increases in earnings and in the market value of the event stocks in the period around―and, in particular, prior to―their inclusion in the index. We suggest that inclusions to the S&P 500 index are informative events that trigger a reassessment of the risk of newly added firms by drawing the broad market’s attention to their extraordinary growth in size and profitability.

It was a good day in the Canadian preferred share market, with PerpetualDiscounts up 16bp, FixedResets gaining 3bp and DeemedRetractibes winning 11bp. Above-average volume.

No commentary today! Too much going on!

A mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 6bp, FixedResets up 15bp and DeemedRetractibes taking a 15bp loss. Volume was very heavy.

The details remain obscure, but the joke of the day is that BoA will have to pay government agencies a chunk of money for not foreclosing fast enough:

Bank of America’s agreements with Fannie Mae and Freddie Mac “provide for timelines to resolve delinquent loans through workout efforts or liquidation, if necessary,” the Charlotte, North Carolina-based lender said today in its annual report to the Securities and Exchange Commission. “In the fourth quarter of 2010, we recorded an expense of $230 million for compensatory fees that we expect to be assessed by the GSEs as a result of foreclosure delays.”

They’re also having increasing problems with obstreperous securitization holders:

Bank of America Corp. said a bondholder group pressuring the lender to repurchase soured mortgages has almost doubled the number of securitizations on which it is challenging the company.

There are 225 securitizations in dispute with the group, compared with 115 as of Oct. 18, the Charlotte, North Carolina- based bank said today in a regulatory filing. In October, the dispute covered about $46 billion in bonds.

The group includes Pacific Investment Management Co., BlackRock Inc. and the Federal Reserve Bank of New York, people familiar with the matter said in October. The group said then in a letter that the bank failed in its role as a loan servicer to provide required notice of faults in the underlying mortgages.

I’m not a big fan of them in general, but IIROC deserves applause for its short-selling decision:

The Investment Industry Regulatory Organization of Canada (IIROC) has completed two studies examining trends in trading activity, short sales and failed trades between 2007 and 2010. It has concluded that rates of short selling have been relatively constant and that there has been no negative change in the pattern of short selling in Canadian markets.

As a result, IIROC has decided it is safe to eliminate the current rule – known as the “tick test” – that prohibits short selling in a company’s shares at a price lower than the last sale price. The rule has meant short selling is not allowed while a stock is declining in price.

“Studies by IIROC support the premise that the tick test has no appreciable impact on price,” the regulator said on Friday.

It was a strong day in the Canadian preferred share market with all HIMIPref™ indices gaining ground. PerpetualDiscounts were up 13bp, FixedResets gained 20bp and DeemedRetractibles advanced 23bp. Volatility was low, with only three entries in the Performance Highlights table; volume was heavy.

No commentary today! Sorry!

It was quite the day for FixedResets on the Canadian preferred share market, as the issuer bid for NA.PR.N, NA.PR.O and NA.PR.P seems to have ignited some speculative buying. PerpetualDiscounts gained 1bp, FixedResets leaped upwards by 62bp and DeemedRetractibles were basically flat. Volume was heavy.

The Bank for International Settlements has released a working paper by Paolo Angelini, Laurent Clerc, Vasco Cúrdia, Leonardo Gambacorta, Andrea Gerali, Alberto Locarno, Roberto Motto, Werner Roeger, Skander Van den Heuvel and Jan Vlček titled BASEL III: Long-term impact on economic performance and fluctuations:

We assess the long-term economic impact of the new regulatory standards (the Basel III reform), answering the following questions. (1) What is the impact of the reform on long-term economic performance? (2) What is the impact of the reform on economic fluctuations? (3) What is the impact of the adoption of countercyclical capital buffers on economic fluctuations? The main results are the following. (1) Each percentage point increase in the capital ratio causes a median 0.09 percent decline in the level of steady state output, relative to the baseline. The impact of the new liquidity regulation is of a similar order of magnitude, at 0.08 percent. This paper does not estimate the benefits of the new regulation in terms of reduced frequency and severity of financial crisis, analysed in BCBS (2010b). (2) The reform should dampen output volatility; the magnitude of the effect is heterogeneous across models; the median effect is modest. (3) The adoption of countercyclical capital buffers could have a more sizeable dampening effect on output volatility.

The FDIC has released its 4Q10 Quarterly Banking Profile with highlights:

• Banks Earned $21.7 Billion in Fourth Quarter as Recovery Continues
• Full-Year Net Income of $87.5 Billion Is Highest Since 2007
• Asset Quality Improves for Third Consecutive Quarter
• Institutions Set Aside Half as Much for Loan Losses as a Year Earlier
• 157 Insured Institutions Failed During 2010

Former Fed governor Hoenig is taking a hard line on Too-Big-To-Fail:

Federal Reserve Bank of Kansas City President Thomas Hoenig said U.S. regulators should avert another crisis by breaking up large financial institutions that pose a threat “to our capitalistic system.”

“I am convinced that the existence of too-big-to-fail financial institutions poses the greatest risk to the U.S. economy,” Hoenig said today in a speech in Washington. “They must be broken up. We must not allow organizations operating under the safety net to pursue high-risk activities and we cannot let large organizations put our financial system at risk.”

The full speech makes some interesting points:

At the Federal Reserve Bank of Kansas City, we estimated the ratings and funding advantage for the five largest U.S. banking organizations during this crisis. In June 2009, these organizations had senior, long-term bank debt that was rated four notches higher on average than it would have been based on just the actual condition of the banks, with one bank given an eight notch upgrade for being too big to fail. Looking at the yield curve, this four-notch advantage translates into more than a 160 basis point savings for debt with two years to maturity and over 360 basis points at seven years to maturity.
…
So long as we have systemic organizations operating under the government’s protection, we will face the matter of whether we have the will to allow the market and bankruptcy to resolve them. In a major crisis, there will always be an overwhelming impulse to avoid putting such institutions through receivership. Always, it is feared that public confidence will be shattered, creditors or depositors at other institutions will panic, and that there are too many connections that will bring down other institutions. In addition, important services will be lost and the international activities will be too complex to resolve.

Many of these fears are likely overstated. I maintain the view that the long-term consequences are much more severe if we fail to take action to end this cycle of repeated crises. In an environment where market participants are truly at risk, they will be much more likely to take steps to protect themselves, thus reducing the side effects of resolutions, and a failed institution’s essential activities can be continued through bridge banks and other means.

Glad to hear it! Instead of weekend bail-outs, lets have weekend bankruptcies, with governments if necessary, providing Debtor in Possession financing at a punitive interest rate rather than equity infusions.

The Bank for International Settlements has released a working paper by Richhild Moessner, Feng Zhu and Colin Ellis titled Measuring disagreement in UK consumer and central bank inflation forecasts:

We provide a new perspective on disagreement in inflation expectations by examining the full probability distributions of UK consumer inflation forecasts based on an adaptive bootstrap multimodality test. Furthermore, we compare the inflation forecasts of the Bank of England’s Monetary Policy Committee (MPC) with those of UK consumers, for which we use data from the 2001-2007 February GfK NOP consumer surveys. Our analysis indicates substantial disagreement among UK consumers, and between the MPC and consumers, concerning one-year-ahead inflation forecasts. Such disagreement persisted throughout the sample, with no signs of convergence, consistent with consumers’ inflation expectations not being “well-anchored” in the sense of matching the central bank’s expectations. UK consumers had far more diverse views about future inflation than the MPC. It is possible that the MPC enjoyed certain information advantages which allowed it to have a narrower range of inflation forecasts.

I found the charts of consumer expectations enlightening:

Click for Big

An Instinet analyst opines that the TMX-LSX merger will be blocked:

But she argued such positives were outweighed by the fact that LSE would have a slight edge in governance (getting the CEO seat and one more board seat) and that Canada’s influence could be watered down further in coming years.
…
One of the biggest hurdles may be intangible — the symbolic importance of having a national exchange company.

“Canadian policy seeks to ensure Canada’s “ownership” of its culture. As the Toronto and Montreal Exchanges are important at both strategic and symbolic levels, we do not believe that the government will feel comfortable ceding control of either. While the least concrete, this factor may ultimately prove to be one of the most important determinants in Minister Clement’s decision,” [director of global trading research at brokerage firm Instinet] Ms. [Alison] Crosthwait wrote, adding that public opinion will play a big role.

Gee, I’m sure glad business sense doesn’t enter the equation! That would really complicate matters!

It was a gloomy day in the Canadian preferred share market, with PerpetualDiscounts down 17bp, FixedResets losing 15bp and DeemedRetractibles giving up 14bp. Volatility continued to be on the low side, with only five entries in the Performance Highlights table, albeit all negatives. Volume was heavy.

PerpetualDiscounts now yield 5.61%, equivalent to 7.85% interest at the standard equivalency factor of 1.4x. Long corporates now yield about 5.5%, so the pre-tax interest-equivalent spread is now 235bp, a significant increase from the 225bp reported on February 16. It will be remembered that comparability of these levels over the long term has been compromised by drastic changes to index composition necessitated by OSFI’s refusal to grandfather extant preferreds when new capital rules come into force.