Category: Market Action

Americans are paying their bills:

Loans at least 30 days overdue, a signal of future write- offs, dropped for the 13th consecutive month to 4.38 percent, the lowest since December 2007, Moody’s said today in a report. Loans delinquent 30 to 59 days, the earliest sign of trouble, declined to 1.14 percent, near an all-time low. Write-offs for loans deemed uncollectible, a lagging indicator, fell to 8.58 percent from October’s 8.79 percent.

The drop in new delinquencies bolsters the firm’s “expectation that charge-offs will ultimately break below the 7 percent mark later in 2011,” Jeffrey Hibbs, a Moody’s analyst, wrote in the report.

The S&P / Experian indices show the improvement to be broadly based – and dramatic!

There’s an interesting twist in the Goldman / Greece derivative imbroglio:

The notes show how Greece used swaps to hide its borrowings, according to a March 3 cover page attached to the papers obtained by Bloomberg News.

ECB President Jean-Claude Trichet withheld the documents after the EU and International Monetary Fund led a 110 billion- euro bailout ($144 billion) for Greece. The dossier should be disclosed to stop governments from employing the derivatives in a similar way again and to show how EU authorities acted on information they had on the swaps, according to the suit, filed by Bloomberg Finance LP, the parent of Bloomberg News.

Ha-ha! The notes will show, I’ll bet a nickel, that everybody knew about it and ignored it.

TD is still looking for deals:

Toronto-Dominion’s bid for the auto-finance company “doesn’t really alter” the Toronto-based bank’s appetite for smaller transactions, Chief Executive Officer Edmund Clark said.

“We’re not deal junkies, but we keep saying what we’re looking for,” Clark said yesterday in a telephone interview. “We want $10 billion (in assets) or less deals; tuck-ins that add to our franchise and meet our strategy.”

Towers Perrin reports:

Near-zero equity returns and slight increases in interest rates translated into stable pension funding in November. The Towers Watson Pension Index remained unchanged for the month at 68.3. The index remains down 4.6% for the year.

They have also published Towers Watson–Forbes Insights 2010 Pension Risk Survey:

There is a strong desire on the part of plan sponsors to reduce the risk of their pension plans. Many plans are signifi cantly underfunded in the aftermath of the financial crisis, and their sponsors have experienced the resulting pressure on corporate cash flows. Rather than rushing to seek higher investment returns to close this funding gap, however, the majority of sponsors attach greater importance to reducing risk. The most favored strategy is to seek a better alignment of assets with liabilities — for example, through liability-driven investment programs. Executives expect to increasingly utilize swaps, options and other hedging derivatives to achieve better risk management. More plan sponsors today are setting formal funding policies in place of ad hoc decisions. Over time, lump sum payments and annuity purchases are also expected to be vehicles for settling DB obligations on a wholesale basis.

There is trouble in the state of Denmark:

Denmark says the Basel Committee on Banking Supervision’s rules will force the country’s lenders to dump top-rated mortgage debt to meet new requirements on holdings and may destroy the world’s third-biggest covered-bond market.

The Nordic country is planning to challenge the rules, published on Dec. 16. and Economy Minister Brian Mikkelsen has already taken Denmark’s grievances to the European Commission.
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Denmark’s lenders, which hold more than half the country’s $490 billion of mortgage bonds, would be forced to sell off holdings to comply with Basel’s 40 percent cap on using the securities as liquid assets, [director of the Association of Danish Mortgage Banks] Arnth Jensen said.
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Denmark’s mortgage bond market is about 1 1/2 times the size of the country’s economy and more than seven times the size of the government bond market, according to the central bank.

The regulation of Money Market Funds is attracting renewed notice:

Federal Reserve Chairman Ben S. Bernanke said investor speculation over which money market mutual funds are likely to be bailed out by their parent companies during a crisis can undermine the stability of the industry that manages $2.79 trillion.

Bernanke, in a Dec. 9 letter to Anthony J. Carfang, partner in Chicago consulting firm Treasury Strategies, said market developments that reinforce speculation whether money funds may be bailed out are a “concern” and sponsor support should be addressed in the context of planned reforms of the industry.

Carfang in November criticized a proposal by Moody’s Corp. that its ratings of money funds take into account the likelihood of a parent bailout in the event of losses. Bernanke, in the letter, encouraged Carfang to submit his views of the Moody’s proposal to the Securities and Exchange Commission.
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Carfang has called the Moody’s proposal “fundamentally disruptive,” saying the ratings firm would have no objective way of gauging whether a money manager would prop up a fund in trouble.

Well, no. A credit rating is a prediction about probabilities, inherently subjective on two counts. CRAs are paid to use their judgement; and when they’re wrong, all the backseat drivers can point out they’re being paid by the issuers. That’s the way the game is played.

I woule much prefer explicit credit support, but the industry prefers boxticking; regulators so far have endorsed boxticking, becaue it requires more manpower to check.

The rally in the Canadian preferred share market continued today, on easing but still elevated volume. PerpetualDiscounts gained 31bp, while Fixed Resets were up 25bp.

PerpetualDiscounts now yield 5.42%, equivalent to 7.59% interest at the standard equivalency factor of 1.4x. Long corporates yields have plumetted to about 5.4% (maybe just a bit over) so the pre-tax interest-equivalent spread now stans at about 220bp, a significant widening from the 210bp reported on December 15, as the improvement in tone in the bond market has not been matched by the preferred market.

But big rallies can tend to be sloppy affairs, as the guys running the BMO Long Corporate ETF can tell you:

Click for big

The TD / Chrysler deal got done:

Toronto-Dominion Bank agreed to buy Chrysler Financial Corp. from Cerberus Capital Management LP for $6.3 billion in cash, adding an auto-finance company in its second-largest acquisition.

The purchase includes $5.9 billion in assets and about $400 million in goodwill, Canada’s second-biggest bank said today in a statement. Toronto-Dominion doesn’t intend to issue stock.

and Cerberus investors are relieved:

Cerberus Capital Management LP will recoup about 90 percent of its initial investment in Chrysler after the sale of the automaker’s former lending unit to Toronto-Dominion Bank, according to two people with knowledge of the transaction.

Cerberus will get about 75 cents on the dollar in cash when the sale of Chrysler Financial Corp. closes, said the people, asking not to be identified because the New York-based firm is private. Including about $900 million of assets Cerberus is retaining as part of the deal, the company will be left with a loss of 10 percent on the initial investment in the automaker and its finance arm.

So basically, Chrysler was a finance company with a captive manufacturing arm. I love it.

DBRS commented:

that TD Bank US Holding Company’s (TD Bank US or the Company) ratings, including its Issuer & Senior Debt rating of AA (low), are unaffected by its announced acquisition of Chrysler Financial’s U.S. operations. The trend on all ratings is Stable.

DBRS believes the acquisition of Chrysler Financial will not have a material impact on the earnings and only a modest impact on the capital of the Company’s parent, The Toronto-Dominion Bank (TD; Deposits & Senior Debt rated AA with a Stable trend). Specifically, TD’s Tier 1 capital ratio is expected to decline by 55 to 60 basis points on a pro forma basis from the 12.2% TD reported at October 31, 2010. Consequently, the risk profile for TD remains solid, notwithstanding the execution risk concerns of growing in the auto finance business. DBRS notes that TD continues to have the resources, motivation and ability to support the Company, if needed. As such, there are no rating implications at this time.

Ernst & Young’s in trouble over Repo 105:

New York Attorney General Andrew Cuomo sued Ernst & Young LLP, accusing the firm of facilitating a “major accounting fraud” by helping Lehman Brothers Holdings Inc. deceive the public about its financial condition.
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The state seeks to recover more than $150 million in fees collected by Ernst & Young for work performed for Lehman from 2001 to 2008, plus investor damages and equitable relief, Cuomo said. He will be sworn in as New York governor on Jan. 1. His successor will be New York Democratic state Senator Eric T. Schneiderman.
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Lehman, once the fourth-largest investment bank, failed in September 2008 because of risky real estate bets and too much debt, which it tried to hide from investors, partly by using so- called Repo 105 trades, according to bankruptcy examiner Anton Valukas’s report.
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Responding to the Valukas report in March, Ernst & Young said leverage ratios reported in Lehman’s management discussion and analysis “were the responsibility of management, not the auditor. They are not part of the audited financial statements.”
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Responding to one suit, filed in April on behalf of retirement funds including the Alameda County Employees’ Retirement Association in Oakland, California, Ernst & Young said in court papers that even Valukas “did not find that Lehman’s accounting for the Repo 105 transactions was wrong.”

In his report, Valukas faulted the accounting firm because it “did not evaluate the possibility that Repo 105 transactions were accounting-motivated transactions that lacked a business purpose,” and didn’t take a stand on whether Lehman’s extensive use of the device was “material” and should be reported.

“Financial statements may be materially misleading even when they do not violate GAAP,” he wrote in his report.
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Cuomo, who has powers to bring criminal charges, brought a civil suit against Ernst & Young. Arthur Andersen LLP, the accounting firm that was accused of destroying Enron Corp. documents, was convicted of obstructing justice in 2002 and is now largely defunct.

“Regulators are concerned there will be no competitors left” to audit U.S. companies, [accountant Barry] Epstein said.

The Valukas report and Repo 105 was discussed on PrefBlog on March 12, 2010.

Patrick Jenkins of the Financial Times points out a rather obvious knock-on effect about the obsession with bonuses … obvious, that is, to all but politicians:

Many US and Swiss banks are considering paying higher salaries and lower bonuses to top bankers based in the European Union, mostly in London, to ensure they comply with new instructions from the Committee of European Banking Supervisors (CEBS), the pan-EU regulator, limiting cash pay-outs.

Some European politicians had expected that non-EU banks would apply their rules globally on a voluntary basis.

But one senior European banker said: “Politicians are naïve if they think we will impose EU rules on a global basis. The ironic effect will be another hike in salaries, which is a fixed cost, which rather makes a nonsense of the idea of pay for performance.”

Speaking of banks, there is some thought that Deutsche is playing a moral hazard game:

Deutsche Bank’s core capital ratio, a buffer against possible losses, may fall to the lowest level among eight competitors under new Basel III rules in 2012, even after it raised 10.2 billion euros ($13.4 billion) in a share sale in October, according to Christopher Wheeler, an analyst at Mediobanca SpA.

[CEO Josef] Ackermann, who shunned German government aid during the credit crisis, warned at a Frankfurt conference in September against a “dangerous race to the top” among banks seeking to lift reserves above Basel III requirements years before the rules kick in. Deutsche Bank, the largest German bank, may be able to hold less capital than peers, and borrow more to enhance returns, because its clients are convinced the government would never let it fail, analysts and investors said.
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Deutsche Bank also relies more than competitors on borrowed funds, or leverage, to increase returns. Its assets amounted to 51 times shareholders’ equity on Sept. 30, up from 48 times at the end of 2006, based on International Financial Reporting Standards. Only Brussels-based Dexia SA has higher leverage among Europe’s 15 biggest listed banks. Investment banks’ extensive use of borrowed funds, which can exaggerate risks, was blamed by Federal Reserve Chairman Ben S. Bernanke for contributing to the financial crisis.
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Deutsche Bank prefers to use U.S. Generally Accepted Accounting Principles, which net out derivatives positions, to measure its leverage. By that standard, its assets at the end of September matched its goal of 25 times equity, up from 23 times a year earlier and down from 38 times in mid-2008, company reports show. By comparison, Goldman Sachs assets were 12 times capital at the end of September.

And the Canadian preferred share market was on wheels … again! PerpetualDiscounts were up 34bp and FixedResets gained 26bp. Volume eased off a little, but remains elevated.

TD is rumoured to be close to a Chrysler Financial deal:

Toronto-Dominion Bank is near an agreement to buy Chrysler Financial, the lender once owned by the third-largest U.S. automaker, from Cerberus Capital Management LP, said three people with knowledge of the matter.

Toronto-Dominion may announce a deal as soon as tomorrow morning, said the people, who spoke on the condition of anonymity because the talks are private. Toronto-Dominion and Cerberus had been discussing a price of about $6 billion to $7 billion, other people with knowledge of the situation said earlier this month.

There are also rumours of a French downgrade:

Costs to insure French government debt trebled this year, rising to an all-time high of 105.5 basis points today, according to data provider CMA. Credit default swaps tied to Czech securities gained 1 basis point to 91 and Chilean swaps were little changed at 89 basis points.

The credit default swaps tied to the French bonds imply a rating of Baa1, seven steps below its actual top ranking of Aaa at Moody’s, according to the New York-based firm’s capital markets research group.

Contracts on Portugal imply a B2 rating, 10 levels below its A1 grade, while swaps tied to Spanish bonds trade at Ba3, 11 steps below its Aa1 ranking, data from the Moody’s research group show. Derivatives protecting Belgian debt imply a rating of Ba1, nine steps below its current rating of Aa1.

It took a while, but it looks as if the IIROC case against TD-Burlington, discussed in March, 2008, has finally reached a conclusion. Yawn. What an abysmal waste of time. If somebody’s putting in silly bids just before the close, then you just programme an algorithm to hit it instantly. The way to get rid of incompetent fools in the industry is by encouraging market efficiency and competition, not more rules. Just ensure retail has access to algorithms, that’s all … a “pounce” algorithm (that will hit any bid over a given price, with or without showing an offer at a higher price) in the hands of retail would have nipped this nonsense in the bud admirably. Or, by not doing so, have showed the breach of UMIR to be inconsequential.

The Canadian preferred share market was on fire today, with PerpetualDiscounts rocketting up 73bp and FixedResets gaining 28bp. Volume continued to be on the heavy side. All the entries on the Volume Highlights table were PerpetualDiscounts; all entries on the Performance Highlights table were winners. Nesbitt did very well on the block trading, but was not quite able to shut out the competition from the Volume report.

Bank of Montreal is buying Marshall & Ilsley:

Bank of Montreal agreed to buy Marshall & Ilsley Corp. for about $4.1 billion in stock to double its U.S. deposits and branches in the largest takeover by Canada’s fourth-biggest bank.

Bank of Montreal will pay 0.1257 of its own share for each share of Marshall & Ilsley, the Toronto-based bank said today in a statement. The deal values Marshall & Ilsley at $7.75 a share, 34 percent higher than yesterday’s closing price of $5.79 on the New York Stock Exchange.
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Toronto-Dominion Bank, the country’s second-biggest lender, may reach an agreement to acquire Chrysler Financial Corp., the auto-loan company owned by Cerberus Capital Management LP, three people with knowledge of the matter said this month.

Marshall & Ilsley has posted eight straight quarterly losses while Bank of Montreal has reported six consecutive quarters of profit growth, a streak unmatched by Canada’s five other large lenders. Marshall & Ilsley traded as high as $40 in 2007.

The takeover has a price-to-book ratio of 0.61 for Marshall & Ilsley, less than half of the median ratio of 1.4 for 33 regional, commercial bank deals since the start of 2009, according to Bloomberg merger data.

Australian Banc Capital Securities Trust, briefly discussed here on November 30, and best known for having a kangaroo as part of its logo, which is really, like, awesome, you know? has closed its initial public offering:

The Fund raised gross proceeds of $145,815,760 from the sale of 14 million Class A Units and 581,576 Class F Units, respectively, at a price of $10.00 per Unit. The Fund has granted to the agents an over-allotment option, exercisable for a period of 30 days from the closing date, to offer an additional 2.1 million Class A Units.

The Class A Units are listed on the Toronto Stock Exchange (“TSX”) under the symbol AUZ.UN. Class F Units will not be listed on a stock exchange but may be converted into Class A Units on a weekly basis.

$146-million. With total agents’ fees, by my calculation, of nearly $7.5-million. Sometimes all one can do is shake one’s head.

Moody’s downgraded Ireland:

The yield on the Irish 10- year Irish bond rose to 8.60 percent, the highest since Dec. 2, and German bund yields fell. Credit-default swaps insuring Irish debt climbed for a third day, the longest streak this month.
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Portuguese bonds also fell as Ireland’s credit rating was cut five levels to Baa1 from Aa2 by Moody’s, with further downgrades possible, as the government struggled to contain losses in the country’s banking system. European Union leaders are meeting in Brussels after agreeing yesterday to create a permanent crisis-management mechanism.

It was a good day on the Canadian preferred share market today, as preferreds finally caught a bid after a long string of losses. TXPR total return is still down about 1.46% on the month-to-date, though, so don’t upgrade your New Year’s champagne plans just yet. PerpetualDiscounts were up 34bp and FixedResets gained 13bp on continued elevated volume.

Looks like efforts to determine whodunnit have broken down amidst political jockeying:

Democrats and Republicans on the Financial Crisis Inquiry Commission, struggling for months to find consensus behind the scenes, haven’t even been able to agree on whether to include the phrases “Wall Street” and “shadow banking” in the final report. The report is now scheduled to be published in January and is likely to include dissents, FCIC members said yesterday.

The four Republicans on the 10-member panel made their views public in a nine-page document yesterday, saying they place much of the blame for the 2008 crisis on the government and mortgage firms Fannie Mae and Freddie Mac rather than banks.

The dissent itself commences with something sensible:

Bubbles happen. In retrospect, they always seem easy to identify, but as they are building, experts debate whether they exist—and, if so, why. The recent housing bubble was no different. Despite national home price appreciation well above the historical trend for almost a decade, and local markets with even more pronounced price swings, most homeowners and mortgage investors believed there were sound fundamentals underpinning their investments.

… and to a large extent blame the elephant:

There were three important ways that the government pushed investors toward investing in mortgage debt. First, the regulatory capital requirements associated with mortgage debt were lower than for other investments. Second, the government encouraged the private market to extend credit to previously underserved borrowers through a combination of legislation, regulation, and moral suasion. Third, and most important, during the bubble’s expansion, the largest investors in the mortgage market, the government-sponsored enterprises (GSEs)—Fannie Mae and Freddie Mac—were instruments of U.S. government housing policy.

All this is true. I’m disappointed to see that there is no criticism of structural problems in the US mortgage market: 30-year terms with the homeowner able to redeem at par at any time; no recourse to the borrower in the event of default; tax-deductibility of mortgage payments.

The Republicans address tranche retention:

Super-senior risk: The safest, “super-senior” tranches of mortgage-backed structured products were less attractive to investors because they did not provide a sufficient spread above other, safer securities, like U.S. Treasuries.

This looks like it’s glossing over some stuff, to put it mildly. Why is a brokerage creating products too expensive to sell? I don’t think we can paint the brokers as victims on this one.

As I have urged before, I believe there should be not one, but two regulatory regimes: one for banks, expected to buy-and-hold and surcharging trading activities; one for brokerages, expected to trade, surcharging aged inventory.

The Boston Fed has released a policy brief by Jihye Jeon, Judit Montoriol-Garriga, Robert K. Triest, and J. Christina Wang titled Evidence of a Credit Crunch? Results from the 2010 Survey of First District Community Banks:

This policy brief summarizes the findings of the Survey of Community Banks conducted by the Federal Reserve Bank of Boston in May 2010. This survey seeks to understand how the supply of, and demand for, bank business loans changed in the period following the financial crisis. The survey design focuses on assessing how much community banks were willing and able to lend to local businesses that used to be customers of large banks but lost access to credit in the aftermath of the financial crisis. The survey responses provide some evidence that lending standards for commercial loans have tightened moderately at community banks since late 2008, with the tightening being more severe for new customers than for those that already had a relationship with the respondent bank. The survey also reveals that expansions of several SBA guarantee programs since the crisis have ameliorated possible credit constraints on small businesses.

BIS has released the BIS Quarterly Review, December 2010 with features:

• The $4 trillion question: what explains FX growth since the 2007 survey?
• Derivatives in emerging markets
• Counterparty risk and contract volumes in the credit default swap market
• A user’s guide to the Triennial Central Bank Survey of foreign exchange
  market activity

Additionally, Basel III rules text and results of the quantitative impact study issued by the Basel Committee.

The Basel Committee issued today the Basel III rules text, which presents the details of global regulatory standards on bank capital adequacy and liquidity agreed by the Governors and Heads of Supervision, and endorsed by the G20 Leaders at their November Seoul summit. The Committee also published the results of its comprehensive quantitative impact study (QIS).
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The rules text presents the details of the Basel III Framework, which covers both microprudential and macroprudential elements. The Framework sets out higher and better-quality capital, better risk coverage, the introduction of a leverage ratio as a backstop to the risk-based requirement, measures to promote the build up of capital that can be drawn down in periods of stress, and the introduction of two global liquidity standards.
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With respect to the leverage ratio, the Committee will use the transition period to assess whether its proposed design and calibration is appropriate over a full credit cycle and for different types of business models. Based on the results of a parallel run period, any adjustments would be carried out in the first half of 2017 with a view to migrating to a Pillar 1 treatment on 1 January 2018 based on appropriate review and calibration.

OSFI notes:

As stated in the rules text, the BCBS is finalizing additional entry criteria related to non-viability contingent capital (NVCC) for instruments other than common equity. Once finalized, the additional criteria are to be added to the Basel III rules text. We currently expect this to occur early in 2011.
The Basel III rules affect the eligibility of instruments for inclusion in regulatory capital and provide for a transition and phase-out for instruments that do not meet the Basel III requirements. OSFI intends to adopt the Basel III changes in its domestic capital guidance for deposit-taking institutions (DTIs). As the Basel III rules text currently provides that the cap on non-qualifying capital will be applied to Tier 1 and Tier 2 instruments separately and refers to the total amount of non-qualifying capital, the finalization of rules related to NVCC may affect the operation of the cap on Tier 1 and Tier 2 non-qualifying instruments. Once the Basel III rules text governing NVCC requirements has been finalized by the BCBS, OSFI intends to issue guidance clarifying the phase-out of all non-qualifying instruments by DTIs, including OSFI’s expectations with respect to rights of redemption under regulatory event5 clauses.
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This letter does not apply to regulated life insurance companies or insurance holding companies. While such insurers should be aware of developments related to DTIs on matters where OSFI has traditionally aligned its regulatory requirements (such as eligible capital instruments), OSFI intends to engage in consultation during 2011 before determining which Basel III rule changes will be applied to the life insurance industry and to thereafter issue guidance to insurers to reflect such changes.

The Feds are proposing Pooled Registered Pension Plans, which have been praised by insurance salemen in all walks of life. Blake’s explains:

The main items discussed in the Backgrounder are as follows:

1. Eligible Administrators of the PRPPs will be regulated financial institutions, including trust and insurance companies and other financial institutions with a trust subsidiary.
2. The Administrator will have a fiduciary duty to plan members.

3. The PRPPs will have a suitable low-cost default investment option for a broad group, and a manageable number of investment options for members to choose from.

4. Administrators will be required to provide all members with prescribed information on a regular, periodic basis.

5. There will be certain tasks that an employer that offers a PRPP must fulfill.

6. Employers may be permitted to enrol their employees into a PRPP at any stage of their employment and there may be rights of an employee to “opt out” shortly after enrolment.

7. The framework also provides that employers will have the ability to increase the employee’s default contribution rate from time to time, potentially subject to a new “opt out” right.

8. Employer contributions will be locked-in with some jurisdictions permitting what appears to be limited unlocking rights.

9. Jurisdictions will make a determination as to whether to require mandatory employer participation.

10. Employers contributing directly to a PRPP and their employees will be permitted to make contributions under the RPP limits, with the pension adjustment reporting. Self-employed persons and other employees will contribute on the basis of their available RRSP limit.”

The Canadian preferred share market had another poor day on high volume, with PerpetualDiscounts bearing the brunt of the losses. PerpetualDiscounts were down 32bp, while FixedResets lost 4bp.

The Financial Post published an interesting factoid on Canadas:

Canadian 10-year yields gained 47 basis points to 3.28% today, from 2.81% on Nov. 4, the day after the Fed unveiled plans to buy US$600-billion in Treasuries through June to spur economic growth. The yields are rising so fast they exceed all 18 of the March 2011 forecasts of economists in a Bloomberg survey. The highest, from Kurt Karl, Swiss Re’s chief U.S. economist, calls for yields at 3.2% by then. The weighted average estimate is 2.95%.

The Boston Fed has released a four-part video lecture on the Great Recession. I must say, I’m pleased and impressed at this sort of outreach programme – I prefer written commentary myself, but I know most people prefer video. We never see anything like this in Canada … pity.

TD CEO Ed Clark announced today that he is an enthusiastic proponent of moral hazard:

If policy makers want Canadians to stop borrowing too much, it’s up to Ottawa, not financial institutions, to force a change in behaviour, says one of Bay Street’s longest-serving senior bankers.

Toronto-Dominion Bank chief executive officer Ed Clark acknowledged Canadians’ alarming debt levels, but said the issue is a matter of public policy and would be best resolved by a tighter government rules on residential mortgages.

In an interview with The Globe and Mail, Mr. Clark said that no bank wants to be the first to impose stricter requirements on borrowers out of fear that it will suffer a major loss of customers to rivals. Personal banking “is a highly competitive industry,” Mr. Clark said. “If we said ‘Look, we’re going to be heroes and save Canada from itself, and we’ll impose a whole new [mortgage] regime on everyone else,’ the other four [large] banks would say ‘Let’s carve them up.’ ”

Listen up, Mr. Clark! Nobody wants or needs you to save Canada from itself. You’re being paid a rather fat salary to save TD Bank from itself. Why are you so eager to make mortgage loans to poor credits? Why are you so worried that the poor credits will stampede to other banks, leaving TD in the miserable position of having a high quality mortgage portfolio?

Mr. Clark proposes government action, citing rules on credit cards as an example of where the banks follow whatever guidelines are provided. The Canadian banking system is run by “adults” who are able to come together and work with the government to guide the process, he said, so there is no trouble sitting everyone down at the same table.

The Canadian banking system is run by weak-kneed oligarchy of idiots, who have the idea that tough management consists of begging Mama to tell them what to do.

Naturally, the Globe and Mail is quick to urge arbitrary measures:

From Gordon Nixon of Royal Bank of Canada, to Ed Clark of Toronto-Dominion Bank, to William Downe of Bank of Montreal, chief executives of big banks are all on the record with some version of the same refrain: Something needs to be done to slow the growth in consumer debt.

So who can do it? The banks, you say? They could just turn down customers seeking loans more often. It’s not going to happen. Saying no would make the banks the bad guys. Plus, the bank executives are wont to point out, probably rightly, that competitive pressures mean that even if one says no, another will probably say yes.

If the government is to do anything, it has two logical measures: tighten up the rules on the risk-weighting of loans (via OSFI) and/or charge more to insure risky mortgages (via the CMHC). Early on in the US housing crunch, I suggested a regime whereby 25% (or so) capital was required on mortgages. If the consumer didn’t put it up as a down payment, then the required amount gets deducted, dollar for dollar, from the bank’s tier 1 capital. That’s the capital part of the loan. Then the rest gets risk-weighted as a normal mortgage.

More and more, I’m seeing a move towards central planning. It always sounds good and it never works.

Good news on the Canadian preferred share market today, as investors lost less than usual on continued elevated volume. PerpetualDiscounts were down 15bp, while FixedResets managed to gain a whopping 3bp.

PerpetualDiscounts now yield 5.48%, equivalent to 7.67% interest at the standard equivalency factor of 1.4x. Long Corporates now yield about 5.6%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 210bp, a widening from the 200bp reported December 8 as long corporate yields increased but interest-equivalent PerpetualDiscount yields increased more.

The FOMC Statement held no surprises:

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.
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Voting against the policy was Thomas M. Hoenig. In light of the improving economy, Mr. Hoenig was concerned that a continued high level of monetary accommodation would increase the risks of future economic and financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy.

It occurs to me that Mr. Hoenig is being used – probably with his enthusiastic cooperation – as a straw man. The Fed wants to send an explicit signal that they’ve thought about this, discussed this and reached a concensus to reject this. There’s no shortage of blogs out there claiming hyperinflation is imminent! Given the increased public discussion of economic data, with various levels of competence, one wonders if more public pronouncements by governments and their agencies will set up straw men in their releases and recognize that forecasts are necessarily imprecise.

“The Cabinet today decided that all protesters at G-20 meetings held in Canada will be billy-clubbed. Voting against the motion was the Public Safety Commissioner, who wished to place land-mines in approved protest areas”.

Oh boy, this is just like the old days! The Canadian preferred share market got clobbered today, with PerpetualDiscounts losing 70bp and FixedResets down 12bp. Volume continued at elevated levels.

CalPERS, the gigantic California pension fund most notable for not doing its own credit analysis, has been told to take a running jump:

Judge Richard Kramer in San Francisco state court said yesterday that the companies’ ratings of three structured investment vehicles that the California Public Employees’ Retirement System lost money on are a form of speech about an issue of public interest that is protected under a state law designed to fend off cases meant to chill public debate.
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The companies all gave their highest ratings to Cheyne Finance LLC, Stanfield Victoria Funding LLC and Sigma Finance Inc., prompting Calpers to invest $1.3 billion in them in 2006, the fund said in its complaint.

The Australian covered bond market is attracting attention:

Westpac Banking Corp., Commonwealth Bank of Australia, Australia & New Zealand Banking Group Ltd. and National Australia Bank Ltd. may be able to issue three-year covered bonds priced to yield about 50 basis points more than the bank bill swap rate, less than the 85 basis-point spread on senior debt, according to Royal Bank of Scotland Group Plc. Moody’s Investors Service estimates savings of 20 percent.

Covered bonds are “essential weapons as banks look for cheaper and more diversified sources of funding,” John Manning, a credit analyst at RBS in Sydney, said in a telephone interview. Even when global credit markets seized up, European banks “had good access to covered bond markets and were able to access the funding they required at quite commercially acceptable rates,” he said.

The Australian government will amend the law to let financiers issue the securities for the first time, Treasurer Wayne Swan said Dec. 12 as he announced an overhaul package aimed at spurring competition in the banking industry. Global sales of the securities, including Pfandbriefe, as they are known in Germany, have surged 33 percent to a record 329 billion euros ($435 billion) in 2010, according to data compiled by Bloomberg, as investors seek the relative safety of debt backed by both the issuer and an underlying pool of assets.
…
Investors in Europe demand 177 basis points of extra yield to hold covered bonds instead of government debt, according to Bank of America Merrill Lynch’s EMU Covered Bonds index. Spreads average 237 basis points, or 2.37 percentage points, on the region’s financial debt, a separate index shows.

Australia’s government will release draft amendments to the Banking Act to allow the sale of covered securities during the first sitting of Parliament next year, according to a federal document detailing the planned changes.

Allowing covered bonds will help “secure the long-term safety and sustainability” of Australia’s banking system, the document states. Treasury may impose a cap on the amount of covered bonds that each bank can sell, “for example five percent of an issuer’s total Australian assets,” it said.
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Canadian Imperial Bank of Commerce raised A$750 million in October in the first sale of Australian dollar-denominated covered bonds since the start of the credit crisis in 2007. The Australian laws don’t block overseas banks issuing the notes.

The 5.75 percent notes due December 2013 were priced to yield 91.25 basis points more than similar-maturity government debt, according to a statement at the time. The spread has narrowed to 87 basis points, according to ANZ Bank prices on Bloomberg. A basis point is 0.01 percentage point.

It was clobberin’ time on the Canadian preferred share market, as high volume and losses continued. PerpetualDiscounts got smacked for 42bp, while FixedResets were down 10bp.

The most irritating news of the day was the closing quote on BNA.PR.E, which settled on Friday and has already been forgotten by the underwriters who made a nice little fee for flogging it. It traded 64,885 shares on the day in a range of 24.81-91. So far, so good, right? The closing quote was 22.00-24.80, 20×50. That’s a two dollar and eighty cent spread on issue that closed on the previous trading day. This is a disgrace; the market maker, the exchange and the underwriters should be ashamed of themselves.

One factoid of note is that Scotia was the only broker with any buying interest, responsible for 60,500 of the buy side, leaving only 4,385 for the rest of the street.

Meanwhile, remember GWO.PR.J? It was quoted Friday at 26.40-27.60 after trading 2,457 shares and today traded 5,764 shares in a range of 26.75-95 before closing with a quote of 26.80-60, 1×8.

This is simply not acceptable. Market makers get valuable privileges and if they want to keep them, should be required to earn them.

I have sent the following eMail to the Exchange:

Sirs,

I have not yet received a reply to the eMail below. Can you tell me when I might expect to receive it?

I note additionally that GWO.PR.J had a closing quote 26.40-27.60 on Friday and a quote of 26.80-60. Can you explain why you permit such incompetent market making?

I also note that BNA.PR.E, a new issue which settled on Friday, closed the second trading day of its existence with a quote of 22.00 – 24.80. Why does the Exchange permit such a lackadaisical attitude by those whom it rewards with market making privileges?

I sent the original eMail on December 2.

Still no commentary! Sorry, guys, I’m sure next week will be better.

The Canadian preferred share market continued to slide today on above average volume, with PerpetualDiscounts down 21bp and FixedReset losing 13bp. Yield on FixedResets has climbed all the back up to 3.58%, which is a big difference from just over a month ago when it set a new all-time low of 2.88%. The current all-time low of 2.84% was reached on November 10.

No commentary at all today … it’s PrefLetter week! I have been grateful for the response to my request for spreadsheet testers, but the more the merrier! I need comments prior to about 11:59pm Sunday, but the need is there until then.

Volume on the Canadian preferred share market eased off to merely above average levels, but prices took a beating, with PerpetualDiscounts down 25bp and FixedResets losing 20bp.