Category: Market Action

Stub quotes will be butted out:

NYSE Euronext, Nasdaq OMX Group Inc. and Bats Global Markets sought permission from regulators yesterday to eliminate stub quotes, or bids and offers as low as pennies or as high as thousands of dollars provided by market makers that were blamed for worsening the May 6 crash.
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Stub quotes are placeholders provided by market makers at prices as low as 1 cent to satisfy a regulatory obligation to submit both bids and offers. Transactions aren’t meant to occur at those levels.

I don’t understand why stub quotes were ever allowed in the first place. As some HFT firms have pointed out:

In exchange for meeting stricter obligations, market makers are generally given advantages over other market participants, which act like subsidies,” RGM, Hudson River, Allston and Quantlab said in their letter. “These advantages have typically involved preferential access to the markets, lower fees and informational advantages. These advantages come at a substantial cost for all investors as they degrade competition and raise barriers to entry for new participants.”

Why market makers would be permitted to pay for these presumably valuable privileges with stub quotes is quite beyond me.

The pointless nature of financial journalism was well illustrated by two stories published back to back. The first was Fed Will Retain Policy on Assets, Low-Rate Pledge, Survey Shows:

The Federal Reserve next week is likely to affirm its pledge to keep interest rates low for an “extended period” and maintain the floor on its holdings of securities, say economists surveyed by Bloomberg News.

The Fed’s Open Market Committee at its Sept. 21 meeting will hold off from expanding the balance sheet by purchasing securities, according to 60 of 64 analysts surveyed Sept. 16-17. Fifty-four of 63 economists said the Fed will leave unchanged a sentence saying high unemployment and low inflation warrant “exceptionally low” rates for an “extended period.”

… and the second was Treasury Notes Gain on Bets Fed’s Statement Will Signal More Accommodation:

Treasury 10-year notes rose for the first time in four weeks as traders speculated the Federal Reserve will be more accommodative in its policy statement next week as the economic recovery showed signs of stalling.

A rally in two-year notes pushed yields down this week the most since May after the central bank bought shorter-maturity government debt and as investors bet that Japan’s purchases of securities will favor the front end of the U.S. yield curve after it sold the yen to weaken its currency. Notes climbed before the Sept. 21 Fed meeting as the annual rate of inflation excluding food and energy stayed at a 44-year low.

There’s a negative CDS basis in bank bonds:

Gaps between credit-default swaps and bonds have widened to 25 basis points from less than 2 basis points about three months ago, according to Citigroup Inc. Pimco, the manager of the world’s largest bond fund is finding as much as 1 percent of extra yield even after paying to insure bank debt, said Mark Kiesel, a managing director at the Newport Beach, California- based firm.

A rally that started in June may gain momentum as the divergence between swaps and yields gives investors extra incentive to own corporate debt. The increase in the so-called negative basis is attracting buyers that seek to profit by buying the debt while also purchasing credit swaps.
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The 100-basis-point gaps Pimco is identifying in bank bonds and 25 basis points in the broader market compare with the average difference of more than 250 basis points after the bankruptcy of Lehman Brothers Holdings Inc. two years ago, just before bonds posted a record rally. The all-time wide gaps emerged as credit markets seized up, causing bond spreads to soar while demand for swap protection failed to keep up.

“When capital is scarce, the basis becomes more negative,” said Alberto Gallo, a New York-based strategist at Goldman Sachs Group Inc. He said the basis should narrow as monetary policy and regulation reduce risk in the financial system and stabilize funding costs.

Negative-basis CDS spreads were discussed in Canadian Bond Liquidity Premia

I have sent the following communication to Canada Post and True North Public Affairs, where James Roche, Chairman of the Canada Post Foundation for Mental Health, has his day-job:

Sirs,

One of your clerks advised me that you were “collecting for mental health” today while I was purchasing stamps and requested a donation.

I strongly object to being importuned by beggars while going about my business and wish to advise you that I will have my first class mail serviced by your competitors in future.

I have often observed that precious little do-gooders tend to behave as thugs and therefore have a question: do you make it clear to your front-line staff that participation in this disgraceful exhibition of poor manners is entirely voluntary and there will be no repercussions on those who do not wish to humiliate themselves by begging? Or are they forced to participate as a condition of employment?

Sincerely,

Beggars! It’s enough to make a strong man go postal!

Hellzapoppin’ on the Canadian preferred share market today, with PerpetualDiscounts up 55bp and FixedResets gaining 12bp on heavy volume.

Ireland needs some green:

Treasuries rose while the cost to insure Irish government bonds jumped to a record amid concern that Europe’s debt crisis is worsening and American consumer confidence is slumping.
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The yield on the 10-year Irish bond surged 26 basis points to 6.29 percent in London. The spread with German bunds widened to as much as 389 basis points, or 3.89 percentage points, the most on record, according to Bloomberg generic data.
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Corporate creditworthiness in Europe is the best ever compared with governments, credit-default swap prices show, as companies cut debt while governments struggle with budget deficits.

The difference between the Markit iTraxx Europe Index of corporate credit-default swaps and the Markit iTraxx SovX Western Europe Index of contracts tied to government debt widened 1 basis point to a record 49, according to data from CMA and JPMorgan Chase & Co.

I don’t think there’s much need to worry. I think all those patriotic Americans who funded the IRA back in the eighties will be overjoyed to cut cheques to help out the old country.

Speaking of Europe, there’s a very good article on Greece, with the obligatory “It’s all Goldman Sachs’ fault” paragraph in the middle, by Michael Lewis, titled Beware of Greeks bearing bonds (hat tip: Financial Webring Forum).

A day of big volume on the Canadian preferred share market, with very strong returns: PerpetualDiscounts were up 45bp and FixedResets gained 12bp.

Nothing happened today.

Volume was very good on the Canadian preferred share market, while PerpetualDiscounts were up 9bp and FixedResets gained 10bp – although the vagaries of the index calculations meant that the reported yield for FixedResets crept up 2bp (returns are a mean; YTW is a median). MFC issues were, for a change, missing from both the performance and volume highlights.

OSFI has released its annual performance assessment:

A total of 49 one-on-one interviews were conducted among Chief Executive Officers (CEOs), Chief Financial Officers (CFOs), Chief Risk Officers (CROs), Chief Compliance Officers (CCOs), other senior executives, auditors and lawyers of deposit-taking institutions regulated by OSFI.

The regulated profess that the regulator is doing a great job!

Maple bonds issues are picking up:

Maple issuance may accelerate to C$6 billion ($5.8 billion) to C$8 billion next year, according to Greg McDonald, vice president and director of debt capital markets at Toronto- Dominion Bank’s TD Securities unit. The rest of this year may see an additional C$1 billion to C$1.5 billion in the Canadian dollar-denominated foreign debt, adding to the C$2.4 billion raised since January, he said.

Sales of Maple bonds, nicknamed after the leaf on the Canadian flag, surpassed the C$1.37 billion raised in all of 2009 in April, according to data compiled by Bloomberg. There haven’t been any Maple sales since July, when National Australia Bank Ltd. and Nederlandse Waterschapsbank NV raised C$600 million from two issues, as concern of a global economic slowdown drove investors to the refuge of government debt.

Would you like to diversify your fixed income portfolio with some Maples? Tough. The regulators say you’re too damn stupid for them to allow such a thing.

Subsidies to solar power lobbyists are continuing:

Prices for photovoltaic panels that convert sunlight into electricity may fall about 10 percent next year, less than analysts forecast, as European demand increases.

First-quarter prices will drop to an average of $1.65 a watt compared with $1.50 in the previous median estimate of five analysts surveyed by Bloomberg News. Analysts who contributed to the surveys included John Hardy at Gleacher & Co. in Connecticut and Sanjay Shrestha at Lazard Capital Markets. This year, contracts may average $1.80 to $1.85 a watt, they forecast.
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Developers have rushed to complete solar-energy projects ahead of planned declines in government incentives in Germany and Spain. At the same time, smaller markets expanded in France, the Czech Republic and the U.S. Increased orders will extend to 2011, when the analysts forecast sales to increase 20 percent.

Demand growth in Europe and North America will outpace higher production in Asia, Hardy and Shrestha said.

Evidence of currently reduced supply can be found in inventories and in some order terms.

Julie Williams, Chief Counsel for the OCC testifed on covered bonds:

Another important component of a statutory covered bond program is the types of assets eligible to collateralize the covered bonds. Typically, in Europe, covered bonds are associated with high quality assets comprised of residential or commercial mortgage loans and public-sector debt. While some have advocated a broad statutory spectrum of U.S. asset types, including credit card, student, small business, and auto loans, more recent proposals have tended to narrow the eligible asset classes.
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Various types of standards could be embodied in a covered bond regulatory framework. For example, all covered bonds, by asset class, should have minimum eligibility criteria setting asset quality standards to promote the inclusion of high quality assets in the cover pool. Most European jurisdictions prescribe asset quality criteria for the assets subject to the statutory covered bond program. Those standards in the U.S. could be set by statute or by the covered bond regulators through rulemaking. Given the likely detail involved, regulatory standards seem preferable.
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Covered bond legislation could authorize the covered bond regulators to establish minimum overcollateralization requirements for covered bonds backed by different eligible asset classes. As a related standard, legislation also could set forth a framework requiring each cover pool to satisfy an asset coverage test that assesses whether the minimum overcollateralization requirements are met, and obligates the issuer and an independent “Asset Monitor” to confirm on a periodic basis whether the asset coverage test is satisfied.
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Similar to the default situation approach, a statutory framework could create a
separate estate for the covered bond program similar to those in certain European jurisdictions. A recent legislative proposal creates a structure with the following general components when the FDIC is appointed as conservator or receiver for an insolvent issuer:

• Creation of a separate estate and provision to the FDIC of an exclusive right for 180 days to transfer the issuer’s covered bond program to another eligible issuer.
• A requirement that the FDIC as conservator or receiver, during the 180-day period, perform all monetary and nonmonetary obligations of the issuer until the FDIC completes the transfer of the covered bond program, the FDIC elects to repudiate its continuing obligations to perform, or the FDIC fails to cure a default (other than the issuer’s conservatorship or receivership).

US state pensions are in a bad way:

Less than half the 50 state retirement systems had assets to pay for 80 percent of promised benefits in their 2009 fiscal years, according to data compiled for the Cities and Debt Briefing hosted by Bloomberg Link in New York today. Two years earlier, only 19 missed the mark. Illinois covered just 50.6 percent of benefits last year, the lowest so-called funded ratio, which actuaries say shouldn’t be less than 80 percent.

Benefits paid by funds in at least 14 states equaled more than 10 percent of assets in the fiscal year, the figures show. In 2007, none exceeded the threshold. The growing burden prompted Colorado, Minnesota, Michigan and other states to trim benefits for millions of teachers and government workers. It also forced fund managers to keep money in short-term low-return investments to pay benefits, reducing chances pensions can earn their way back to financial health.

Expect to see more furious attacks on the reckless banks. Some misdirection is occurring already:

California sued Robert Rizzo, the ousted city manager of Bell who was paid almost $800,000 a year, and seven current and former officials, seeking the return of “excess salaries” and reductions in pension payouts.
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“We are filing our lawsuit on behalf of the public to recover the excess salaries that Bell officials awarded themselves and to ensure their future pensions are reduced to a reasonable amount,” state Attorney General Jerry Brown said in a statement.

But this is funny:

Fannie Mae agreed to finance loans to homebuyers putting as little as $1,000 down without getting the approval of the U.S. agency in charge of minimizing the costs of the mortgage company’s bailout.
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Fannie Mae is buying the Affordable Advantage loans from housing finance authorities in Massachusetts, Minnesota, Wisconsin and Idaho, Janis Smith, a spokeswoman, said today in a telephone interview. She declined to comment further.

The state housing authorities last year created the loan product aimed at first-time buyers, the New York Times reported Sept. 5. The mortgages come with 30-year fixed rates, require homeownership counseling, and are available to people with credit scores of at least 680 or 720, the paper said.

I love the bit about homeownership counselling. People only do naughty things because they don’t know better! That’s the only reason!

What makes this even funnier is some research from FRB-Richmond by Andra C. Ghent and Marianna Kudlyak, titled Recourse and Residential Mortgage Default: Theory and Evidence from U.S. States with the abstract:

We analyze the impact of lender recourse on mortgage defaults theoretically and empirically across U.S. states. We study the effect of state laws regarding deficiency judgments in a model where lenders can use the threat of a deficiency judgment to deter default or to shorten the default process. Empirically, we find that recourse decreases the probability of default when there is a substantial likelihood that a borrower has negative home equity. We also find that, in states that allow deficiency judgments, defaults are more likely to occur through a lender-friendly procedure, such as a deed in lieu of foreclosure.

They classify Minnesota and Wisconsin, two of the states mentioned with respect to the $1,000-down programme, as being non-recourse!

Another day of good returns and good volume on the Canadian preferred share market, with PerpetualDiscounts gaining 21bp and FixedResets up 10bp. MFC issues continued to be prominently displayed in the volume and performance tables.

PerpetualDiscounts now yield 5.67%, equivalent to 7.94% interest at the standard equivalency actor of 1.4x. Long Corporates now yield 5.4%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 255bp, a sharp tightening from the 270bp reported on September 8.

The Treasury Market Practices Group has updated its Best Practices Guidelines. The TMPG is a relatively recent creation:

The TMPG was formed in February 2007 in order to encourage dialogue on market issues and to offer recommendations for best practices in the Treasury cash, repo, and related markets. This private-sector group is currently composed of representatives from dealers, buy-side firms, custodians, and other market participants. In light of its aforementioned expansion, the TMPG’s membership composition will likely evolve over time to ensure robust support of the group’s efforts across the Treasury, agency debt, and agency MBS markets.

Sure, a private-sector group. When push comes to shove, which dealer in Treasuries is going to piss off the New York Fed?

One of the “best practices” is highly peculiar and likely to be counter-productive:

Market participants should be responsible in quoting prices and should promote overall price transparency in the interdealer brokers’ market.

• Although legitimate price discovery activities are an integral part of the Treasury, agency debt, and agency MBS markets and should be encouraged, market participants should avoid pricing practices that do not have the objective of resulting in a transaction, or that otherwise result in market distortions.
• Price discovery relies on efficient price reporting and transparent markets. Market participants should not conduct trades through interdealer voice brokers with electronic trading screens without having a record of the transaction published on the screen at the time of the transaction. In addition, market participants should avoid conduct that deliberately seeks to evade regulatory reporting requirements or impedes market transparency efforts.

Ludicrous. Remember, kiddies, bond trading is a cooperative game. It’s not about winning, it’s about being good citizens.

Not sure what to make of this:

International Business Machines Corp. Chief Executive Officer Sam Palmisano, who will turn 60 next year, said the practice of the company’s CEOs retiring from the position at that age isn’t “cast in stone.”

Ain’t nuthin’ cast in stone. You can carve things in stone and you can cast them in iron, but I’ve never heard of casting stone.

Another good day on good volume for the Canadian preferred share market, with PerpetualDiscounts up 24bp and FixedResets gaining 9bp. The yield on latter index is inching slowly towards 3%…

MFC.PR.A continues to trade heavily, at about even yield with the recent bond issue.

Deutsche Bank’s not letting the grass grow under their feet:

Deutsche Bank AG, Germany’s largest bank, plans to raise at least 9.8 billion euros ($12.5 billion) in its biggest-ever share sale to take over Deutsche Postbank AG and meet stricter capital rules.
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Deutsche Bank fell 2.32 euros, or 4.6 percent, to 47.70 euros in Frankfurt trading on Sept. 10, giving the company a market value of 29.6 billion euros. Postbank jumped 1.23 euros, or 4.8 percent, to 27.04 euros, valuing the bank at 5.9 billion euros.

Ackermann, who previously said the bank would only raise capital for acquisitions, is trying to build up the bank’s so- called stable businesses of retail banking and asset management, and reduce reliance on investment banking, which accounted for 78 percent of pretax profit in the first half.
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Postbank’s Tier 1 capital ratio, a measure of financial strength, fell to 6.6 percent under the most severe scenario of the European Union stress tests conducted in July, compared with the 6 percent minimum required to pass. Deutsche Bank’s ratio, by contrast, stood at 9.7 percent under the toughest test.

There is continued feeling that High Frequency Traders aren’t quite our type of person, dear:

The U.S. Securities and Exchange Commission has spent 15 years remaking the stock market into 11 competing exchanges and hundreds of computer-driven traders. In the process it has virtually eliminated the traditional market makers who bought and sold stocks when no one else would.

Now the SEC is concerned the revolution has gone too far, leaving markets vulnerable when selling starts to snowball.
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Specialists at the NYSE maintained “fair and orderly” markets by stepping in themselves when buyers and sellers weren’t available. Similar to market makers on the Nasdaq, they took risks in return for the ability to see supply and demand for stocks and profit from the difference between the bid and offer prices. Both businesses suffered when exchanges started pricing stocks in penny increments in 2001, squeezing profit out of the bid-ask spread.

The SEC is in the “early stages of thinking about whether obligations on market makers akin to what used to exist might make sense,” Schapiro told reporters on Sept. 7. The issue is “whether the firms that effectively act as market makers during normal times should have any obligation to support the market in reasonable ways in tough times,” she said during a speech in New York the same day.
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“The playing field has leveled dramatically,” said Joe Ratterman, chief executive officer of exchange operator Bats, which accounts for 11 percent of U.S. stock trading. “It used to be easy for a specialist to work off a 6- or 12-cent spread, but when he had to offer a penny spread it became hard to make a fat living. A new breed of firms stepped in and learned to be efficient. Those firms replaced the ones that were less efficient.”
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The Brady Commission report on the October 1987 crash found NYSE specialists and Nasdaq market makers performed erratically and didn’t stem the downward slide of prices. Many Nasdaq market makers didn’t answer their phones, ignoring customers, while overwhelmed NYSE specialists who had bought as sell orders flooded in later gave up or halted trading, according to the January 1988 report by the Presidential Task Force on Market Mechanisms, led by former New Jersey Republican Senator Nicholas Brady.

The article highlighted Vanguard’s comment letter:

Vanguard and its investors have benefited fiom the competition that today’s market structure facilitates. Over the past fifteen years, the competition among trading venues and significant technologtcal advancements have greatly reduced transaction costs for all investors across our markets. Although Vanguard does not engage in “high frequency trading” and does not operate a “dark pool,” we believe much of the public concern over “high fiequency trading” is misplaced and believes such activity, appropriately examined, contributes to a more efficient market that benefits all investors.
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Various groups have attempted to quantify the reduction in transaction costs over the last ten to fifteen years. The Commission will continue to receive this data throughout the comment period. While the data universally demonstrate a significant reduction in transaction costs over the last ten to fifteen years, the precise percentages vary (estimates have ranged from a reduction of 35% to more than 60%). Vanguard estimates are in this range, and we conservatively estimate that transaction costs have declined 50 bps, or 100 bps round trip. This reduction in transaction costs provides a substantial benefit to investors in the form of higher net returns. For example, if an average actively managed equity mutual fund with a 100% turnover ratio would currently provide an annual return of 9%, the same fund would have returned 8% per year without the reduction in transaction costs over the past decade.
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Vanguard supports a trade-through rule that provides “depth-of-book protection because protecting quotations at multiple price levels encourages the display of limit orders, which, for the reasons set forth above, benefits all investor.

The recent IIROC report trumpeted Canadian-style depth-of-book protection.

Vanguard believes the Commission should consider the costs and benefits of a “trade-at” rule in which a trading center that was not displaying the NBBO price at the time a marketable order was received could either: “1) execute the order with significant price improvement (such as the minimum allowable quoting increment (generally one cent)); or 2) route lSOs to full displayed size of NBBO quotations and then execute the balance of the order at the NBBO price.”

Such a rule would clearly provide an incentive to display limit orders which, as discussed above, Vanguard believes is in the best interests of all investors.

Vanguard is missing the point. The purpose of public markets is to give the private school guys the opportunity to make a fat living with no brains and less work. What do customers have to do with it?

Another good move upwards on hefty volume in the Canadian preferred share market, with PerpetualDiscounts gaining 32bp and FixedResets up 4bp. MFC issues had a notable day, with three issues featured on the nice side of the performance table. MFC.PR.A had another day of high volume; I see on CBID that the recent MFC senior bond issue, 4.079% of 2015, are quoted to yield 4.12% … basically even-yield with the preferreds, so the 160-odd bp of tax effectiveness looks very nice for a five-year term.

The Market Update will be delayed. TMX DataLinx advises that the “Application is currently unavailable.”

While I have prices that are … pretty close … to the closing quotations, I would rather do a proper update when the exchange restarts its DataLinx product.

Update, 2010-9-11, 2am, and I hope you guys appreciate this: DataLinx came back up about an hour ago.

PerpetualDiscounts continued to charge ahead on the Canadian preferred share market, gaining 35bp total return, while FixedResets slipped down by 4bp. Volume was good.

Deutsche Bank is rumoured to be considering a big equity issue:

Deutsche Bank AG has approached investment banks to assess their interest in managing a stock sale to raise as much as 9 billion euros ($11.4 billion), said three people with knowledge of the discussions.
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Proposed rules under consideration by the Basel Committee on Banking Supervision may also lead banks to raise reserves. Germany’s 10 biggest lenders, including Deutsche Bank and Commerzbank AG, may need about 105 billion euros in fresh capital because of new regulation, the Association of German Banks estimated on Sept. 6.

The lenders would need to raise that sum to reach an estimated 10 percent Tier 1 capital ratio, a key measure of financial strength, according to Dirk Jaeger, who is responsible for regulatory topics at the group.

The Swiss are hoping to grab some of the UK hedge fund business:

Swiss managers rank third in Europe, with 4 percent of the market, behind London’s 75 percent share and Sweden with 5 percent. Brevan Howard Asset Management LLP, Europe’s biggest hedge fund, and third-ranked BlueCrest Capital Management Ltd. have both opened offices in Geneva this year.

“Heavy competition between cantons has helped to keep tax rates low,” making Switzerland more appealing, Regina Anhorn, one of the study’s authors, said in a presentation in Zurich. “We have seen famous names move part of their institution to Switzerland. We may see many more to come.”

There are signs that fees charged by Swiss hedge funds fell over the past two years, from a typical 2 percent management fee and a 20 percent share of performance, according to the study. A 1 percent management fee is “increasing in popularity” together with a performance fee of 10 percent, it said.

A laudatory article about CalPERS new boss highlights the gravity of the US pension committments:

In 2000, more than half of the 50 states had the funds to cover what they owed. By 2008, that number had shrunk to four — Florida, New York, Washington and Wisconsin — as total unfunded liabilities reached a record $1 trillion, according to a February 2010 report by the Pew Center on the States that uses the latest available data.
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[CalPERS] has earned an annualized 2.88 percent return on its assets through the 10 years ended on June 30, far below the 7.75 percent it must collect every year to meet its obligations to 1.6 million beneficiaries.

Calpers’s unfunded liabilities amounted to $240 billion as of 2008, leaving it with only half of the assets it needs to make its required payouts, according to a Stanford University study released in April.
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As a group, state retirement systems earned a median 3.4 percent annualized return for the 10 years ended on June 30, according to Wilshire Associates Inc., a Santa Monica, California-based investment consulting firm. That about matches the performance of U.S. Treasury bonds.
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Even if pensions do exploit the latest financial engineering and hit their 8 percent annualized return target, many will run out of money in the next 20 years, beginning with Illinois in 2018, says Joshua Rauh, an associate professor of finance at Northwestern University near Chicago. California would run dry in 2030, he says.

So who’s going to solve the problem?

Dear is an unlikely candidate to refashion Calpers’s investment approach. In contrast to past CIOs, he doesn’t have a Ph.D. in economics or experience in managing money on the Street. He’s a one-time labor official who came up through the hurly-burly of state politics in Washington.

Great move! Perhaps the Maple Leafs should start hiring non-hockey players, too!

Blair W. Keefe of Tory’s wrote a very good article titled Canada: Financial Institutions Experience Slower Activity In Capital Markets:

In April, Canadian banks provided a quantitative impact study to OSFI on the implications of the proposed changes for individual institutions. And OSFI submitted data from the study to the Basel Committee in mid-May. Although the submission is confidential, we understand that the Basel III capital rules would have a significant negative impact on the existing capital ratios of the Canadian banks; the data will be analyzed, together with the results from other jurisdictions, and the preliminary findings will be presented to the Basel Committee in July.
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However, no new offerings of innovative Tier 1 capital will be made because such instruments will not be permitted under the Basel III capital rules.9 It is uncertain how long the existing innovative Tier 1 instruments will be grandfathered when the new rules come into force. This is significant, since Canadian financial institutions currently have over C$20 billion in innovative Tier 1 instruments outstanding and they were products favoured by institutional investors.

Finally, with the uncertainty over the ultimate definition of capital and the quantity of capital that will be required, OSFI has been advising institutions that any material redemption of capital instruments should be funded with new capital issuances. In that regard, the aggregate amount of innovative Tier 1 capital that is scheduled to be redeemed on June 30 or December 31 of this year is C$2.1 billion.

It was a very good day with high volume on the Canadian preferred share market, with PerpetualDiscounts gaining 56bp and FixedResets winning 13bp. MFC issues were again prominent in the volume highlights.

Nothing happened today.

It was a strong day on the Canadian preferred share market AGAIN, on good volume AGAIN, with MFC issues featured on the volume table AGAIN. This is getting a little dull. PerpetualDiscounts were up 28bp, while FixedResets gained 8bp, taking the median weighted average yield on the latter class down to 3.06% … creeping slowly towards the magic 3% mark.

PerpetualDiscounts now yield 5.75%, equivalent to 8.05% interest at the standard equivalency factor of 1.4x. Long Corporates now yield about 5.35%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) now stands at 270bp, a significant tightening from the 280bp reported on September 1, as PerpetualDiscount yields and long corporate yields made small moves in opposite directions.

The US government is creaking slowly towards GSE reform:

A Dodd-Frank mandated Treasury study on Fannie Mae and Freddie Mac is almost certain to be the first step in federal legislation to reform government-sponsored enterprises and the secondary mortgage market. The study, which must be submitted to Congress by the end of January 2011, was mandated by an amendment offered by Senator Chris Dodd, Chair of the Banking Committee, codified as section 1074, as the Senate was beating back an amendment offered by Senator John McCain that would have either ended the conservatorship of Fannie and Freddie or disbanded them with no reasonable alternative offered.

All that being said, there is a growing consensus that the 112th Congress must pass legislation reforming the GSEs.

Mary Schapiro spoke about market structure today:

May 6 was clearly a market failure, and it brought to the fore concerns about our equity market structure. The staffs of the SEC and CFTC are finalizing a joint report on our inquiry into the day’s events that will be published in the coming weeks.

But we have not waited for the report to begin taking steps to address weaknesses identified on May 6.

There will doubtless be some who consider this admirable.

To understand where individual investors are coming from, we must truly recognize the impact of severe price volatility on their interests: one example is the use and impact of stop loss orders on May 6. Stop loss orders are designed to help limit losses by selling a stock when it drops below a specified price, and are a safety tool used by many individual investors to limit losses.

The fundamental premise of these orders is to rely on the integrity of market prices to signal when the investor should sell a holding. On May 6, this reliance proved misplaced and the use of this tool backfired.

A staggering total of more than $2 billion in individual investor stop loss orders is estimated to have been triggered during the half hour between 2:30 and 3 p.m. on May 6. As a hypothetical illustration, if each of those orders were executed at a very conservative estimate of 10 percent less than the closing price, then those individual investors suffered losses of more than $200 million compared to the closing price on that day.

This is the first time I’ve seen a number. OK, so users of stop loss orders lost a lot of money, which is now in the hands of less stupid people better able to allocate capital. So what? Isn’t this what markets are supposed to do?

We should consider the relevance today of a basic premise of the old specialist obligations — that the professional trading firms with the best access to the markets (and therefore the greatest capacity to affect trading for good or for ill) should be subject to obligations to trade in ways that support the stability and fairness of the markets.

For example, the stocks with broken trades on May 6 highlight the fact that the order book liquidity in those stocks completely disappeared, if only briefly, and caused trades to occur at absurd prices. Where were the high frequency trading firms that typically dominate liquidity provision in those stocks?

I anticipate that the May 6 report will discuss the reasons that caused these firms to pull back, which they believed to be in their interest. The issue, however, is whether the firms that effectively act as market makers during normal times should have any obligation to support the market in reasonable ways in tough times.

This is craziness. In the first place, specialists and market-makers have a lot more advantages than mere “access”. In the second place, it will be remembered that these paragons of virtue stepped back during the crash of 1987, as well.

It looks like the established order of do-nothing incompetents has renewed its hegemony over the SEC!

Reverberations over Greek debt continue:

Four months after the 110 billion- euro ($140 billion) bailout for Greece, the nation still hasn’t disclosed the full details of secret financial transactions it used to conceal debt.

“We have not seen the real documents,” Walter Radermacher, head of the European Union’s statistics agency Eurostat, said in a Sept. 2 interview in his Luxembourg office. Eurostat first requested the contracts in February.

Radermacher vows new toughness when officials from his staff head to Greece this month to come up with a “solid estimate” of the total value of debt hidden by the opaque contracts. “This is a new era,” he said.

Greece is the only euro country that lied about using these complex swap contracts after Eurostat told countries to report them in 2008, Radermacher, 58, said.
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“You might say this is triumph of hope over experience,” [Yannis Stournaras, director general of the Foundation for Economic and Industrial Research in Athens] said, adding that the blame should be shared with the European Commission, which didn’t intervene despite years of warnings by Eurostat of problems with Greek data.

“We addressed the issue several times in meetings of finance ministers and we asked for enhanced powers for Eurostat in 2005, which we didn’t receive at the time,” said Amadeu Altafaj, a spokesman for the Commission.
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In April 2009, the European Central Bank identified a Greek swap operation of unusual terms, according to a confidential ECB document dated March 3, 2010, obtained by Bloomberg News. The ECB said its executive board prepared internal reports on the swaps. ECB spokesman Niels Buenemann declined to comment on it.

Greece began using this type of contract for the 2001 budget year to avoid recording a spike in debt the first year after it adopted the euro, Stournaras said. It continued to use them after 2001 and increased their use after 2004, he said.

Under guidance set out in 2008 by Eurostat, any upfront payments linked to a swap must be counted as a loan.

Germany, Italy, Poland and Belgium, like Greece, received upfront payments from derivatives, Radermacher said at a hearing at the European Parliament in April. The difference, he said in the September interview, was that when Eurostat asked the other countries about the contracts in 2008, they provided the data and adjusted their debt figures.

See? As I said at the time, this was a case of willful blindness by European bureaucrats and politicians, for which they frantically tried to blame Goldman Sachs when the shit finally hit the fan.

On September 2 I indulged myself with a rant on the Lori Douglas case and found it remarkable that tenure-track law professors couldn’t mount an actual argument. An ink-stained wretch, Judith Timson, managed it in the Globe on Friday, arguing (arguing!) in a column titled The net killed sexual privacy that Douglas showed poor judgment in allowing the photos to be taken and that this poor judgment disqualifies her from the judiciary.

Well, it’s a murky area and it’s very easy to add increments to the situation until most people will agree that the conduct is inappropriate, with nobody agreeing on which increment tipped the scale. But to stick with the situation as it is, I have to disagree and I’m going to disagree on the grounds that “judgment” is too broad a term – even if I allow for the sake of an argument that her judgment was poor in that instance and I’m not convinced it was.

Judgment is not fungible. There are lots of people whose judgment I would trust absolutely on some matters, but not on others. I see fixed income portfolios from lots of people that simply don’t make any sense at all – and it doesn’t affect my respect for their knowledge within their field of specialization. If Ms. Douglas showed “poor judgment” in the matter of her sexual relationship with her spouse (and I’m not saying she did), I don’t believe you can draw any conclusions about her judgment on the bench.

BUt OK. For the sake of an argument, let’s concede not just the first point – that allowing risque pictures to be take shows poor judgment – but the second one as well – that this poor judgment will be reflected in the judge’s judicial skills. I’m still not convinced that the Ms. Douglas deserves to lose her job, because I’m not sure whether there’s a net benefit to this.

If we insist on asking about the bare existence of naughty pictures as part of a prospective judge’s background check, we’re going to get lied to. A lot. Some people will honestly forget, some will figure it’s so long ago it doesn’t matter, some will figure it’s none of our business and some honestly won’t know. In such a case, what we are doing is increasing the chance for blackmail: if the pictures come to light, the judge will lose his job. I am by no means convinced that the change in standards is a net benefit.

Additionally, by loading down the process with many specific rules, we’re in danger of establishing “Gotcha Regulation”, the same that exists in the securities business. Do the bosses want to get rid of somebody? Put enough people on the case and it’s easy enough to find some rule that was broken.

Still: well done Ms. Timson for providing an actual argument! I wonder if she’s considered applying to law school? Not as a student; I mean, for a tenured position, job for life. status, pay, benefits … she could do a lot worse, and can obviously apply logic better than many of the incumbents.

Why am I spending time on this issue? Why is it is important? Because bureaucrats have contempt for the judicial process:

Wendy Vanstralen, 47, has been charged under the province’s stunt driving legislation.

Her truck has been impounded for a week, and she has also lost her licence for seven days.

Ms. Vanstralen is due in court Nov. 2.

… and that’s a scary thing. Especially when bank regulation is heading the same way.

It was quite a good day on the Canadian preferred share market; volume was good, with PerpetualDiscounts gaining 16bp and FixedResets gaining 13bp … taking the YTW on the latter index down to 3.08%. Next stop: three percent! MFC continued to be highlighted on the volume table.