Category: Market Action

Ireland’s decision to rewrite bankruptcy law on the fly has had a surprising effect:

The cost of insuring bonds sold by European banks rose for a sixth day on concern other governments will follow Ireland in forcing investors to share the cost of bailouts.

The Markit iTraxx Financial Index of credit-default swaps on subordinated debt of 25 European banks and insurers rose 4 basis points to a five-month high of 272 as of 3:30 p.m. in London, according to JPMorgan Chase & Co.
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Markit Group Ltd.’s index of subordinated financial swaps is up from 225.5 on Nov. 19, setting it on pace for the biggest weekly increase since March 2009, JPMorgan Chase data show. The senior index rose 1.5 basis points to 159 today, up from 135.5 at the end of last week.

The Markit iTraxx SovX Western Europe Index of contracts on 15 governments rose 3 basis points to a record 184, according to CMA. Spain increased 8 basis points to an all-time high based on closing prices of 303 and Ireland jumped 11.5 basis points to 591, after earlier reaching a record.

Ireland has also pledged to impose losses on junior bondholders at Irish Nationwide Building Society.

By me, this is just one more argument in favour of contingent capital that converts well before the business has reached the point of non-viability. If it converts when things are bad but not yet horrific, then at least holders will have the comfort that their contractual rights will be honoured.

I had a look at the Canadian Bankers Association recommendations for legislative review:

In our view, the federal government should ensure that financial institutions under the federal oversight system (including Crown lending agencies such as Farm Credit Canada) operate under equivalently strict capital, prudential and risk management standards as banks operating in Canada.

I wonder if that applies to the CDIC as well.

Given the complexity of both the regulatory system and the domestic/international marketplace in which financial institutions operate, the potential for significant and negative unintended consequences of regulatory changes is large. In light of this, we are strongly urging that the government adopt, as its standard practice, the practice of prior consultations with the industry and other stakeholders before any new regulatory requirements are initiated, to better determine the scope and nature of the issue to be addressed, and to explore if there are more effective alternatives to regulation.

That’s one for you, OSFI!

in its 2008-2009 Global Competitiveness Report, the World Economic Forum placed Canada at the top of the list of sound banks.

A tired old canard, as I have previously discussed. There were no comparisons made in the preparation of the WEF report.

Recommendation #2 – Bring the single securities regulator to completion: The banking industry commends the federal government for its efforts to create a national securities regulator. Given the importance of the initiative for the future strength of the Canadian economy, for improved consumer protection, and for stronger influence on international policy development, the industry urges the government to stay the course in its strong efforts to gain the support of provinces and territories.

Then they’ll be able to capture the regulators with one fat salary, rather than the present thirteen.

For example, in 2008 it came to light that the BEA allows for cheque writers to “cross” a cheque (putting two diagonal lines through the cheque) to make the instrument non-negotiable so that the only option for the payee is to deposit the cheque at his/her branch. While common in some other countries, the practice is virtually unknown now in Canada. As such, if cheque-crossing had suddenly come in vogue, it would have created a number of technical challenges and would have required a massive education effort on the part of institutions and the government to ensure that both cheque writers and cheque recipients understood the ramifications of crossing a cheque (since there are implications for both).

I didn’t know that!

Recommendation #12 – Critical need for stakeholder engagement in policy/regulatory planning: Given the complexity of both the regulatory system and the domestic/international marketplace in which financial institutions operate, the potential for significant and negative unintended consequences of regulatory changes is large. In light of this, it is critical that the government undertake prior consultations with the industry and other stakeholders before any new regulatory requirements are initiated, to better determine the scope and nature of the problem to be addressed, and to explore if there are more effective alternatives to regulation.

Hear, hear!

In addition, the federal government should be active in working with the provinces to ensure that financial literacy is part of the school curriculum.

The school curriculum is like a prospectus … things get added continually for very good reason until the system as a whole collapses under the weight of its own box-ticking uselessness.

Currently there is a limitation in the Insurance Companies Act which limits the amount of debt and preferred shares to 2% of overall balance sheet. Under Basel III requirements, banks that own an insurance company may want to have more debt and preferred shares. The limit is believed to be an historical restriction which pre-dates when insurance capital regulations were changed to mimic the banks capital structure, and which therefore is not only no longer necessary, but is also inconsistent with the Tier 1 / Tier 2 insurance capital structure.

Recommendation #32 – Remove limit on debt and preferred shares from Insurance Companies Act: Removing the limit would make the Insurance Companies Act consistent with capital requirements for banks.

The National Securities Regulator pipedream is coming to its predictable end. I’ve said it before … I’ll say it again: like-minded provinces should merge their regulation. Maybe if the OSC merges with the PEISC that won’t be much of a step forward, but you know something? It’ll be better than what we have now.

The SIU investigation of police conduct during the G20 meeting is just another whitewash. Since wrong was clearly done and no line officers are being punished, Chief Blair is clearly obliged to resign. But I’m not holding my breath while waiting for a bit of integrity in the service of the public.

A mixed day on pretty good volume for the Canadian preferred share market, with PerpetualDiscounts up 12bp and FixedResets losing 6bp.

I’d say things in Europe are heading for a crescendo … or should I say cascade?:

Mr. Honohan’s comments, and worries that Ireland’s hugely overextended lenders face nationalization or the butcher’s block, sent shares in Bank of Ireland and Allied Irish tumbling by 20 per cent on Tuesday. Depositors have been fleeing Irish banks since the beginning of the year, with Allied Irish losing €13-billion ($21-billion).
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But the focus of market anxiety is moving from Dublin to other European capitals, especially Lisbon and Madrid, where banks shares were under pressure Tuesday amid refinancing fears.
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Instead of sparking a relief rally in the euro zone bond markets, the €80-billion to €90-billion rescue package for Ireland triggered alarm bells – and a jump in the risk premium that a bondholder pays for insuring Irish, Greek, Portuguese and Spanish bonds. The yields on these bonds continued to rise on Tuesday, exacerbating the feverish market mood.
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The problem is a rolling tide of debt maturities on the horizon. Each wave is bigger than the last and the European Union’s ability to surf this breaker is looking doubtful.

Consider Greece. According to London brokerage Evolution Securities, Greece needs to repay €28-billion in rescue loans in 2014. But under the new German-inspired rules, any new bond Greece issues must contain a clause about debt restructuring, implying that bondholders will take a haircut in the event of default. As Evolution’s Gary Jenkins put it: “Who will lend to Greece €28-billion in 2014 on subordinated terms?”

But Ireland’s teetering government has proposed a budget:

Ireland’s government said it will cut spending by about 20 percent and raise taxes over the next four years as talks on a bailout of the country near conclusion.

Welfare cuts of 2.8 billion euros ($3.8 billion) and income tax increases of 1.9 billion euros are among the steps planned to narrow the budget deficit to 3 percent of gross domestic product by the end of 2014. The shortfall will be 12 percent of GDP this year, or 32 percent including a banking rescue.
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Irish bonds fell today after the country’s credit rating was downgraded yesterday two levels by Standard & Poor’s on estimates the cost of bailing out its banks will escalate.

The decline push the yield on the country’s 10-year debt up 52 basis points to 9.17 percent. The premium investors charge to hold the debt over German bunds, Europe’s benchmark, widened by 33 basis points to 619 basis points. The premium reached a record 652 basis points on Nov. 11.

The premium on Spanish 10-year bonds over bunds climbed to a euro-era record today.
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Finance Minister Brian Lenihan will maintain Ireland’s 12.5 percent corporate tax rate, criticized by some European governments such as Austria. Hewlett-Packard Co., the world’s largest computer maker, said this week it may reconsider its investment in Ireland should the country raise its company tax rate as part of an aid accord.

DBRS has downgraded some Anglo Irish Bank sub debt:

Today’s downgrade follows the execution of the Bank’s note exchange offer. The default status for the exchanged and now-extinguished 2017 Notes reflects DBRS’s view that bondholders were offered limited options, which, as discussed in DBRS’s press release dated 25 October 2010, is considered a default per DBRS policy.

The exchange offer was coercive and Orwellian:

Ireland faces a bill of more than 50 billion euros to prop up its banks and is seeking to ensure the losses of lenders it owns outright are shared with subordinated noteholders. Finance Minister Brian Lenihan has said he will legislate to allow the government to impose penalties on subordinated creditors while making senior investors whole.

… but it’s working:

Nationalised lender Anglo Irish Bank cleared the first major hurdle in its closely watched debt restructuring when a group of subordinated creditors agreed to take an 80 percent write-down on the value of their holdings.

Hear that whistling noise? That was 300 years of bankruptcy law being thrown out the window. It really gives you confidence that Europe will work out its problems in a rational, predictable and legal manner, eh? Maybe tomorrow I’ll rush out and make a great big investment, one that’s backed by the full faith and credit of the Irish government. Or maybe not.

The Canadian preferred share market enjoyed a bit of a bounce today, as volume came off its recent very high levels, but remained above average. PerpetualDiscounts gained 12bp and FixedResets were up 3bp.

PerpetualDiscounts now yield 5.36%, equivalent to 7.50% interest at the standard equivalency factor of 1.4x. Long Corporates now yield about 5.4%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now 210bp, a significant tightening from the 220bp reported on November 17 … although mind you, it was also 210bp on November 10, when the relevant yields were 5.28%, 7.39% and 5.3%.

The Irish government has fallen:

Amid calls for his immediate resignation from at least two MPs in his own Fianna Fail party and the withdrawal of support from coalition partners the Green Party, Prime Minister Brian Cowen was forced on Monday to announce the pending dissolution of his government.

“There will be a time for political accountability to the electorate,” Mr. Cowen said in a terse address Monday night in which he pleaded with MPs to keep his government afloat until the austerity budget passes in exchange for an election in January.

But contagion has set in:

German Chancellor Angela Merkel said the prospect of serial European bailouts was “exceptionally serious,” sending the euro to a three-month low as officials estimated saving Ireland will cost 85 billion euros ($114 billion).

Irish bonds dropped and the premium that investors demand to hold Spanish debt over German counterparts jumped to a euro- era record as the relief rallies triggered by Ireland’s Nov. 21 aid request evaporated. Traders are now betting the turmoil that started in Greece a year ago will spread to Portugal and Spain.

“The markets currently have virtually zero confidence that the bailout in Ireland will solve the European crisis,” Charles Diebel and David Page, fixed-income strategists at Lloyds TSB Corporate Markets in London, said in a note today. “With markets effectively in a position to dictate policy, the risk is that the credibility crisis shifts to more sizeable European Union countries and thereby poses a greater risk to the system as a whole.”

And S&P has downgraded Ireland:

S&P cut Ireland’s long-term sovereign rating to A from AA- and the short-term grade to A-1 from A-1+, today’s statement said.

Wanna buy a bank?:

Ireland’s banks are effectively up for sale, central bank Governor Patrick Honohan said on Tuesday as Dublin sought aid from the European Union and International Monetary Fund to prop up its lenders.

“They are for sale as far as I am concerned,” Honohan said. “I’ve been an advocate for a number of years for small countries to have foreign owners for their banks.”

MFC is not having a nice time:

Shares of Manulife Financial Corp. fell nearly 5% at one point on Monday after a downgrade at Citigroup. Analyst Colin Devine cut his rating to Sell from Buy and reduced his price target to US$14.50 from US$21 after a disappointing trip to the life insurance company’s Annual Investor Day on Friday.

Information provided at the meeting led Mr. Devine to estimate that roughly 35% of Manulife’s capital is tied up supporting three products at its U.S. John Hancock operations: living benefit variable annuities (VA), individual long-term care (LTC), and secondary guarantee universal life (SGUL). By the analyst’s count, each is responsible for losses of at least $1-billion since the beginning of 2009.

Yet the analyst pointed out that management only provided one slide and “did not devote even five minutes to discussing what had gone wrong with these products or what steps were available and a timetable to address them.”

Government Motors’ hybrids are a big hit!

President Barack Obama’s administration has bought almost a fourth of the Ford Motor Co. and General Motors Co. hybrid vehicles sold since he took office, accelerating federal purchases as consumer demand wanes.

Q: What happens when a draconian law hits reality? A: Regulators ursurp power:

The Securities and Exchange Commission extended the ability of asset-backed bond issuers to omit credit ratings from filings to comply with the Dodd-Frank financial reform act that became U.S. law in July.

Pending further notice, the SEC won’t recommend enforcement action if an asset-backed issuer doesn’t include the ratings disclosure required by the legislation, according to a letter today from Katherine Hsu, senior special counsel.
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“Without this extension, the entire public securitization market would have closed in late January,” Tom Deutsch, executive director of the American Securitization Forum, said today in an e-mailed statement.

Well, sure. That’s what happens with every zero-tolerance law, right? Instead of a judicial process, you get a regulatory process, with selective reporting and private decisions.

BMO redeemed some more BOaTS:

Bank of Montreal is back in the market to redeem its second batch of trust capital securities, better known as BMO BOaTS.

This batch, Series B, totals $400-million and pays 6.64 per cent interest annually.
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There are two factors at play here in BMO’s decision to redeem. For starters, as of year-end 2010, holders of these securities can exchange them into a series of preferred shares.

But maybe more important now, under Basel III, these innovative securities will no longer count as Tier 1 capital. Starting in 2013, the amount that they contribute to Tier 1 capital will be phased out by 10 per cent each year, for 10 years.

The FDIC has released its Quarterly Banking Profile: 3Q10, with highlights:

• Year-over-Year Earnings Improve for Fifth Consecutive Quarter
• Net Income Totals $14.5 Billion, Up from $2 Billion a Year Earlier
• Lower Loan-Loss Provisions Remain Key to Earnings Gains
• Asset Quality Trends Continued to Improve
• Industry Assets Increase by $163 Billion

Concerned investors will be pleased to learn there is now a cool name for offshore yuan debt:

Chinese bonds sold in Hong Kong rallied more than debt from the biggest developing nations in the past three months as international investors snapped up the securities to benefit from expected appreciation of the yuan.
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“There’s pent-up demand,” said Per Nordstrom, the head of euro medium term notes in Asia at London-based Standard Chartered Plc. “Investors are generally ‘buy and hold’ as supply is limited. The dim sum bond market is a frontier market and it is growing.”

Got Milk?:

Several studies have argued that the supply management system pushes up dairy prices for Canadian consumers. A recent study by the Conference Board of Canada estimated Canadians pay 60 cents more for a one litre carton of whole milk than Americans and $1.50 more for a one-pound package of butter than Australians, which has a deregulated dairy system. The OECD estimates dairy prices in Canada are more than double the world market.
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An analysis by the Dairy Farmers of Ontario shows that New Zealand has the highest retail price, at $5.69, for a four-litre size package of milk. That was followed by Ontario at $4.66, Britain at $3.57 and the U.S. at $3.38.

Good old farmers … taking milk away from children to finance the bucolic lifestyle of the favoured few.

The market slid slightly lower today on continued heavy volume, with PerpetualDiscounts down 10bp and FixedResets losing 7bp, taking the median weighted average yield on the latter index to 3.14%.

The Irish have some wiggle-room in bail-out negotiations:

Ireland won’t be required to raise its corporate tax rate as part of a European Union bailout, French President Nicolas Sarkozy said, addressing an issue that looms as a stumbling block to an aid agreement.

“When you have to tackle a deficit, you have two levers, spending and taxes,” Sarkozy said today in Lisbon at a summit of NATO leaders. “I can’t believe that our Irish friends, in full sovereignty, won’t look at both since they have more room for maneuver given that their tax rates are lower. But that’s not a demand or a condition, just an opinion.”

So much for bravado:

Finance Minister Brian Lenihan said Ireland will apply for a bailout as it sets itself up to be the second euro member to seek a rescue from the European Union and the International Monetary Fund.

“I will be proposing to my colleagues that they should formally apply for a program,” Lenihan said in an interview with state broadcaster RTE in Dublin. “The banks were too big a problem for the country. The key issue all the time for the government is to ensure that we do not have a collapse of the banking sector.”

And now, it’s official:

Ireland sought international aid, becoming the second euro country to need a rescue as the cost of saving its banks threatened a rerun of the Greek debt crisis that destabilized the currency.

Ireland will channel some of the money from the European Union and International Monetary Fund to lenders through a “contingent” capital fund, Irish Finance Minister Brian Lenihan told reporters late yesterday. The rest of the package, which Goldman Sachs Group Inc. estimates may total 95 billion euros ($130 billion), would help Ireland avoid selling bonds.

“The banks were too big a problem for the country,” Lenihan said in Dublin. “The key issue all the time for the government is to ensure that we do not have a collapse of the banking sector.”

This is interesting in light of the prognostications of Willem Buiter and Ann Sibert in The collapse of Iceland’s banks: the predictable end of a non-viable business model (discussed on November 5, 2008):

Iceland’s circumstances were extreme, but there are other countries suffering from milder versions of the same fundamental inconsistent – or at least vulnerable – quartet:
(1) A small country with (2) a large, internationally exposed banking sector, (3) its own currency and (4) limited fiscal spare capacity relative to the possible size of the banking sector solvency gap.

Countries that come to mind are:

•Switzerland,
•Denmark,
•Sweden
and even to some extent the UK, although it is significantly larger than the others and has a minor-league legacy reserve currency.

Ireland, Belgium, the Netherland and Luxembourg possess the advantage of having the euro, a global reserve currency, as their national currency. Illiquidity alone should therefore not become a fatal problem for their banking sectors. But with limited fiscal spare capacity, their ability to address serious fundamental banking sector insolvency issues may well be in doubt.

One way or another, there are repercussions:

Ireland’s bid for financial aid may trigger a cut in the country’s credit rating, the demise of the government and an exodus of multinational companies.

The euro fell and Irish bonds pared their advance after Moody’s Investors Service said a “ multi-notch” downgrade in Ireland’s Aa2 credit rating was “most likely” because the aid would increase the country’s debt burden. The prospect of January elections loomed as the Green Party said it would pull out of Prime Minister Brian Cowen’s coalition.

Accounting rules are a big issue:

A dispute between U.S. and international accounting groups about how to value financial instruments is threatening to derail efforts to converge global standards, affecting how trillions of dollars of assets are marked on bank balance sheets.

The debate pits the U.S. Financial Accounting Standards Board, which wants to expand the use of fair-value accounting to all financial assets, including loans and deposits, against the London-based International Accounting Standards Board, which opposes such a wide usage. The outcome also will determine how much capital banks have to hold to meet new rules.

FASB’s proposal, announced in May, could cause 26 of the largest U.S. banks to write down the value of about $4 trillion of loans on their books by as much as $138 billion, estimated Jason Goldberg, an analyst at Barclays Plc. Lenders, regulators and some investors have taken IASB’s side, leaving the U.S. standard-setter isolated in its battle.
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The five U.S. banking regulators sent a joint letter to FASB in September voicing opposition as well.

“We are concerned about the potential implications of the proposal for financial intermediation and stability and, therefore, we oppose the proposed requirement to report substantially all of a financial institution’s financial instruments at fair value,” the Fed, the Federal Deposit Insurance Corp. and three other regulators said.

Volcker who was Fed chairman in the 1980s and now advises U.S. President Barack Obama, said he favors IASB’s approach on valuing financial instruments.

“You can’t have everything at fair value,” Volcker, 83, said. “I’m not in favor of fair valuing bank loans because we don’t know their fair value anyway. It’s not consistent with the basic business model of commercial banks.”
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Goldman Sachs Group Inc., the most profitable U.S. securities firm, has said that banks hide losses on loans used to generate investment-banking fees. In a Sept. 1 letter to FASB, Goldman Sachs described how banks lend at below-market rates to win equity and debt-underwriting deals, a practice known as “lend to play.” Goldman Sachs executives have argued that the firm’s practice of marking assets to market value helped it prepare for the credit contraction earlier than rivals.

Spend-Every-Penny says he’s going to make some tough but fair decisions:

The country’s top financial policymakers warned Canadians on Sunday to brace for tough decisions and “very big challenges” ahead as Canada tries to secure its recovery in an ever-changing global economic landscape.

Finance Minister Jim Flaherty — set to deliver a key speech on federal economic policy in Oakville, Ont., on Monday — said the Conservative government is determined to cap program spending so Canada can return to a balanced budget position and avoid the turmoil Europe is undergoing.

He acknowledges this won’t be a popular decision, with certain segments of the population and his political opponents.

I’m astonished! I thought we were going to return to a balanced budget (wooHoo!) without any pain or effort whatsoever, and that anybody who spoke of structural deficits was wrongheaded and politically motivated.

One correlation measure states that stocks and bonds have decoupled:

For the first time since the financial crisis started, U.S. shares are moving independently of the bond market, a sign that profits and valuations are guiding investors more than concern about the economy.

The 30-day correlation coefficient measuring how often the Standard & Poor’s 500 Index moves in tandem with 10-year Treasury yields fell to minus 0.42 from a record 0.89 in June, data compiled by Bloomberg show. Readings of 1 indicate prices are moving together, while zero shows no link and minus 1 means they are going in opposite directions. Stocks and debt are ending a lockstep relationship that began in July 2007 and lasted through the worst recession since the 1930s.

Meredith Whitney thinks the shadow banking system will expand:

U.S. banks will close 5,000 branches in the next 18 months as they face profit declines from decreased loan demand and lower fee revenue, said Meredith Whitney, the former Oppenheimer & Co. analyst who now runs her own firm.
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Whitney has said earnings pressures and new regulation will lead to some lower-income customers losing access to banking services. The number of households without access to the “traditional banking system” will rise to 41 million by 2015 from 30 million in 2009, she said in the Nov. 18 note.

“The most regrettable unintended consequence of some of the quickly written regulatory reform, we believe, will be the inevitable ‘debanking’ of the U.S. financial system,” said Whitney, who started New York-based Meredith Whitney Group after correctly predicting Citigroup Inc.’s dividend cut in 2007. “Fewer ‘bankable’ customers will contribute to the trend in fewer bank branches.”

Potash Corp. is issuing 30-year USD notes at 5.625%. DBRS rates them BBB(high) and comments that the issue has a poison put and continuous call:

The terms of the Notes will include a change of control provision, which upon the occurrence of both (1) a change of control and (2) a downgrade of a particular series of notes below an investment grade rating (as specified), will require Potash to make an offer to purchase such series of notes at a price equal to 101% of the aggregate principal amount of such notes, plus accrued and unpaid interest to the date of repurchase. The Notes will also be redeemable, in whole or in part, at the option of Potash at any time and from time to time at a redemption price equal to the greater of: (1) 100% of the principal amount of the notes to be redeemed; and (2) the sum of the present values of the remaining scheduled payments of principal and interest on the notes being redeemed on the redemption date (not including any portion of any payments of interest accrued to the redemption date) discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at specified discount rate; plus any accrued and unpaid interest.

The draft prospectus makes it clear that the discounting rate is a spread over treasuries, but does not specify the spread.

Moody’s is acquiring CSI Global Education:

Moody’s Corporation (NYSE:MCO) announced today that it has acquired CSI Global Education Inc. (CSI), Canada’s leading provider of financial learning, credentials, and certification. CSI will operate within Moody’s Analytics, strengthening Moody’s capabilities for delivering credit training programs, research and analytical services, and risk management software to financial institutions worldwide.

Moody’s purchased CSI for C$155 million (US$151.4 million), subject to customary closing adjustments. Inclusive of the unfavorable impact of purchase accounting, the acquisition is expected to have a negligible impact on Moody’s GAAP earnings per share (EPS) for the fourth quarter of 2010 and full-year 2011, and to be accretive to EPS thereafter. The acquisition was funded from cash on hand.

This will be an interesting thing to follow, because CSI-GE is a joke of a company, producing the most inadequate training courses in the history of the universe. The only reason they exist is because they’ve got (what amounts to) an exclusive contract with Canadian securities regulators to provide required industry courses for box-ticking purposes. We shall see if quality improves over the next few years … and if the monopoly continues!

It was a day of declines in the Canadian preferred share market, with PerpetualDiscounts down 3bp and FixedResets getting hit for 12bp, taking the median weighted average yield on the latter index up to 3.10%. Volume continued at high levels.

Allied Irish is on central bank life-support:

Allied Irish Banks Plc, Ireland’s second-biggest bank, has tripled its reliance on funding from central banks since the end of June as companies and customers pulled money amid the country’s debt crisis.

The bank’s dependence on “monetary authorities” rose to 27 billion euros ($37 billion) from a “high single-digit” billion-euro amount on June 30, Alan Kelly, general manager of group corporate services at Allied Irish, said in a telephone interview today. Funding conditions were “increasingly challenging,” the Dublin-based lender said in a statement.

Irish lenders have become more reliant on European Central Bank funding after being frozen out of wholesale markets. The amount of ECB loans to the country’s banks rose 7.3 percent to 130 billion euros in October from the previous month, Ireland’s Central Bank said on Nov. 1. The data include both international and domestic banks operating in Ireland.
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Deposits dropped by about 13 billion euros since the start of the year, Allied Irish said in the statement. That equates to about a 17 percent decline, Kelly said. Allied Irish said it will increase the amount it’s seeking to raise in a share sale by the end of the year to 6.6 billion euros from 5.4 billion euros.

More specifically, their interim management statement says:

Customer accounts have been affected by current adverse international sentiment towards the Irish sovereign and banking sector and are down by c.€13bn from the beginning of 2010 to the close of business on 16 November. This reduction was primarily due to lower institutional and corporate balances.
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General funding market conditions in recent months have become increasingly challenging. This has had a negative impact on AIB’s funding position which has seen a reduction on maturity of debt securities in issue and customer accounts. This reduction has been offset by an increase in secured deposits by banks, in particular by monetary authorities. While AIB had issued term funding of €6.7bn during 2010 in anticipation of term funding maturing in September 2010, current market conditions are limiting funding access to shorter durations, mainly on a secured basis.

Geithner’s upset about the Fed’s politicization:

U.S. Treasury Secretary Timothy F. Geithner warned Republicans against politicizing the Federal Reserve and said the Obama administration would oppose any effort to strip the central bank of its mandate to pursue full employment.

“It is very important to keep politics out of monetary policy,” Geithner said in an interview airing on Bloomberg Television’s “Political Capital with Al Hunt” this weekend. “You want to be very careful not to take steps that hurt our credibility.”

The Republican congressional leadership, including John Boehner, nominated as the next House speaker, has criticized the Fed’s plan to buy $600 billion in assets, saying it would fuel inflation and asset bubbles. Senator Bob Corker, a Tennessee Republican who serves on the Banking Committee, said he favors confining the Fed’s mandate to promoting price stability.
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“It is very important that we respect and honor what the Congress did when it set up our independent central bank with a mandate to keep prices low and stable over time and to make sure” it promotes “sustainable economic growth,” said Geithner, who was president of the Federal Reserve Bank of New York before taking over as Treasury secretary last year.

FortisBC has issued 40-year MTNs at 5%.

The Canadian preferred share market continued to recover from the damage done earlier in the week on continued heavy volume, with PerpetualDiscounts up 23bp, while FixedResets lost 2bp.

I may have mentioned this before, but there are negative credit spreads in Europe:

The spread does, nevertheless, tell a story about relative risk. In Greece, Ireland, and Portugal, a number of sectors have negative corporate spreads, suggesting that firms are either less likely to default than their governments or will have higher recovery rates if they do default. The sector that stands apart as being much riskier than the government is financials. If these governments partially default, the guarantees they have made to the banking system are no longer credible, and the credit losses may be severe.

Click for Big

There’s some commentary from Felix Salmon and Bloomberg:

An index of credit-default swaps on 15 European governments now exceeds a gauge of investment-grade credit risk by about 50 basis points, according to data from CMA and JPMorgan Chase & Co. Corporate swaps are historically more expensive than sovereign contracts.

The gap between the indexes “highlights the difference between how fundamentally strong non-financial corporate credit is versus how weak governments are,” said Aziz Sunderji, a credit strategist at Barclays Capital in London. “Corporate balance sheets look strong, cash liquidity buffers are large, and earnings have surprised to the upside. Most of the problems are originating from the sovereign side.”

Berkshire Hathaway was touted last spring as having traded through Treasuries, but the data are suspect.

For those who are interested, the relevant CDS indices are the Markit iTraxx SovX Western Europe index and the Markit iTraxx Europe index. Today’s marks are 165bp and 102bp, respectively.

Ireland is going to the well:

Ireland said it may ask for an international bailout as European Central Bank President Jean- Claude Trichet signaled debt-laden nations can’t rely on him to keep their financial systems afloat forever.

Finance Minister Brian Lenihan said in Dublin he would welcome the creation of “substantial contingency capital funding” for Irish banks. In Frankfurt, Trichet said in a speech that policies first used to fight the global credit crisis can’t “evolve into a dependency as conditions normalize.”

The ECB is concerned that banks in Ireland and Greece are becoming too reliant on its unlimited money market operations and is pushing Ireland to accept a rescued funded by European Union governments and the International Monetary Fund. Irish central bank Governor Patrick Honohan said today that an agreement may amount to “tens of billions” of euros.

I’m not sure what exactly is meant by “contingency capital funding”.

Enbridge Gas Distribution, a wholly owned subsidiary of Enbridge Inc., has issued 40-year MTNs at 4.95%.

The Canadian preferred share market bounced back today on continued high volume, with PerpetualDiscounts up 18bp and FixedResets gaining 4bp.

Econbrowser‘s Menzie Chinn brings to my attention a very nice interactive from the NYT on the US budget deficit.

It looks as if the Europeans are thinking about rejecting bank leverage caps:

Banks in Europe may escape global rules designed to limit their debt, as several countries push the European Union to drop a so-called leverage ratio, two people close to the discussions said.

A majority of nations in the 27-country EU oppose introducing a binding leverage ratio that was adopted last week by the Group of 20 countries, according to the people, who declined to be identified because the discussions are private. The countries, including Sweden and France, say the ratio might encourage banks to pursue risky activities, the people said.
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Opponents of a leverage ratio say that by putting a limit on the scale of banks’ activities, institutions may be tempted to maximize returns by curtailing traditional lending in favor of riskier activities.
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Almost all EU states have said they oppose implementing legislation that includes a binding leverage ratio, according to the people. The countries are seeking a separate decision on the issue in several years, following further analysis of the financial effect.

“The leverage ratio is unsuitable as a regulatory instrument”, declared Chris De Noose, managing director of the European Savings Banks Group, “due to its lack of sensitivity to the specificities of the business models of the various financial institutions and their riskiness and exposure to market volatility.”

A binding leverage ratio probably leads to banks being given the “wrong incentives,” Lars Hofer, a spokesman for the Association of German Banks, said. Banks could take “higher risks in order to generate higher profits on a given number of risk-weighted assets,” he said.

Well, all I can say is that that doesn’t fit my memories of the Panic of 2007! However, a lack of leverage cap will allow the European banks to load up on nice, save, solid sovereign debt.

Efforts to politicize the Fed continue:

The four top Republicans in Congress wrote to Federal Reserve Chairman Ben S. Bernanke today expressing “deep concerns” over the central bank’s second- round of Treasury bond purchases.

“While intended to improve the short-term growth of the U.S. economy and help maintain a stable price level, such a measure introduces significant uncertainty regarding the future strength of the dollar,” the letter said. The purchases could “result both in hard-to-control, long-term inflation and potentially generate artificial asset bubbles.”

The letter, dated today, was signed by House Republican leader John Boehner of Ohio, House Republican Whip Eric Cantor of Virginia, Senate Republican leader Mitch McConnell of Kentucky, and Senate Republican Whip Jon Kyl of Arizona.

Straight Perpetuals continued to slide today, with PerpetualDiscounts losing 18bp, but FixedReset were able to hold, gaining 1bp. Volume continued to be heavy.

PerpetualDiscounts now yield 5.43%, equivalent to 7.60% interest at the standard equivalency factor of 1.4x. Long Corporates now yield about 5.4%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now 220bp, an increase from the 210bp reported on November 10.

Torys securities lawyer Joel Wiesenfeld says Securities officials should defend deals:

A principal rationale by a financial institution for settlement in the first place is to limit the reputational harm caused by long-term media exposure, such as is common if there is a contested hearing, no matter which party wins the hearing.

It is far more difficult to understand why securities regulators do not mount spirited defences of the settlements they enter into, including the purpose of the investigation, the decision to settle, and the terms of the settlement. Inasmuch as that analysis will likely not be forthcoming from the media, it is imperative that securities regulators learn that their job is not complete following the approval of a settlement, for it is in the public interest for the regulator to explain how and why its regulatory imperative in investigating and settling has been achieved. Until that begins to occur, all we will be left with is the usual rant.

I’ve got a better idea: no deals. If they’re guilty, nail ’em to the wall. If they’re not guilty, eschew extortion.

Meanwhile the SEC’s war on competition continues:

The SEC, the top U.S. securities regulator, must address the use of algorithms, the computer codes that power high-frequency trading and disrupt the marketplace, SEC Chairman Mary Schapiro told the Securities Industry and Financial Markets Association annual conference on Monday.

“We hope this will lead to a more stable marketplace,” she said.
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“Some high-frequency traders are not registered or regulated at all,” Schapiro told reporters on the sidelines of the conference. “There’s an issue about the use of disruptive algorithms in the marketplace, that contribute dramatically to volatility and instability.”

The SEC is considering “certain throttles” that would govern the way algorithms impact the marketplace, possibly slowing them down, she said.
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Other SEC steps since the crash included adding circuit breakers that pause trading when stocks plunge or soar. Schapiro on Monday said one algorithm recently triggered a breaker when it “tried to sell 10 percent of the daily volume of a stock in two seconds.

“That’s a huge volume disruption,” she said.

Golly! Can you imagine? Somebody trading stocks without being regulated! It’s a scandal!

It strikes me that the new circuit breakers are very prone to moral hazard … even if they’re not already written and in place, I bet a lot of programmers and developers are having a good think about how automatic circuit breakers and automatic trade busts can be used to their advantage. Moral hazard is profitable!

Allied Irish Bank was able to sell senior bonds earlier this year by making them retractible. Guess what’s happening?:

Ireland’s second-largest lender, which has a market capitalization of 418 million euros ($569 million), was able to raise debt this year by giving buyers the right to sell the notes back at face value at set dates prior to final maturity, according to data compiled by Bloomberg. Today the bank said an investor requested repayment of 120 million euros of its floating-rate bonds due in February at the Nov. 30 put date.

And the Europeans are bickering:

Greek 10-year bond yields surged 20 basis points to 11.62 percent amid concern that the nation, which received a 110 billion-euro bailout in May, won’t be able to cut its budget deficit fast enough. Austria is threatening to block its next transfer of funds to Greece unless the government gets back on track a deficit-cutting plan agreed just six months ago with the European Union and International Monetary Fund.

“We are getting indications that the Greeks can’t stick to their plan in a sufficient manner, in particular on the revenue side,” Finance Minister Josef Proell said according to a government e-mail that confirmed remarks made after a cabinet meeting today. “The data we have at the moment doesn’t give any reason to approve the December tranche from the Austrian point of view.”

Greece led a surge in the cost of insuring European government debt. Credit-default swaps on Greece soared 86 basis points to 944, the highest since June 29, according to data provider CMA. Contracts on Ireland rose 22 basis points to 515, Portugal climbed 13 to 426, Italy increased 7 to 188 and Spain was up 8 at 259.

The competitive position of European hedge funds vs. the banks is getting better:

Funds may have the option to explain to the Financial Services Authority why they are unable to comply with rules that require half of bonuses to be paid in shares, said the people, some of whom declined to be identified because negotiations are private. The regulator is reviewing whether the largest hedge funds must fully comply with the rules, according to the people.

The FSA in July proposed expanding the companies covered by its bonus rules from 27 banks to 2,500 firms, including building societies and hedge funds, to comply with European Union legislation on bank capital. The regulator proposed the possibility of giving firms a “comply or explain” exception and the Committee of European Banking Supervisors supported that position last month, said Darren Fox, a partner at Simmons & Simmons, who represents hedge funds.

This may be a good thing. It may be bad. I don’t think anybody’s really thought about it.

The Cleveland Fed has published the November, 2010 edition of Economic Trends:

This, in effect, is like the CPI asking the question, “What does it cost to maintain this fixed basket of goods and services?” while the PCE asks, “What does it cost to maintain this given level of satisfaction?” Because the CPI updates the expenditure weightings only every few years, it doesn’t allow for substitution effects. For example, if the price of coffee suddenly doubles, people may start to drink more tea. Thus, the CPI may tend to overstate the aggregate price level during periods of volatile relative price swings.

The last diff erence between the two series is called the “weight” effect. Due to the differences in the scope of the measures and in the source data for some items, the PCE and CPI have different weights on similar items. The largest difference comes from the shelter (housing) components, which in the CPI carry a relative importance value of roughly 32 percent, while in the PCE it is a little less than half of that. Such a huge difference in weights means that housing prices exert much more of an influence over the trajectory of the CPI than that of the PCE, leading to differences in their growth rates over time.

It was clobberin’ time on the Canadian preferred share market today, with PerpetualDiscounts losing 80bp and FixedResets down 43bp – taking the median weighted average yield on the latter index back above 3%. Volume continued at very high levels. This is great, just like the old days of two years ago! Still, on the theory that misery loves company, have a look at …

Click for Big

Government Motors will be profitable, provided subsidies are increased:

The Electrification Coalition, a Washington-based group of 21 company executives that formed a year ago to advocate for electric vehicles, released a report requesting the tax credits for corporations that make purchases for fleets, and to extend assistance through 2018 for building charging stations.

Coalition members are promoting their agenda ahead of a new Congress that will take office in January, with Republicans replacing Democrats in control of the House. General Electric Co. announced Nov. 11 that it plans to buy as many as 25,000 rechargeable cars, almost half from General Motors Co.

“I would almost guarantee you we will be successful in the next two years” in advancing the electric-vehicle agenda, Representative Edward Markey, a Massachusetts Democrat, said at the news conference.

DBRS had some good commentary on the G-20:

DBRS continues to believe the Canadian banks are well positioned to comply with the new minimum capital ratios given their existing tangible common equity ratios, expectation of internal capital generation, extended implementation period of adjustments and the lengthy phase-in period.

Going forward, DBRS believes the identification of systemically important financial institutions (SIFI) and globally SIFI (G-SIFI) will be an issue that could negatively impact one or more of the largest Canadian Banks as SIFIs and G-SIFI will be required to have higher loss absorbency capacity to reflect the greater risk that the failure of these firms poses to the global financial system. Currently, based on DBRS’s global bank rating methodology, the five largest Canadian Banks (Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada, and Toronto-Dominion Bank) are all deemed systemically important in Canada, which positively impacts DBRS’s senior and subordinated debt ratings of these banks.

Given that the comment period for Basel’s consultative paper “Proposal to ensure the loss absorbency of regulatory capital at the point of non-viability,” which includes the issue of contingent capital, ended on October 1, 2010, DBRS did not expect any significant announcements to be made surrounding this topic in the G-20 meeting in South Korea. The timeline for an announcement on contingent capital looks to be in or after 2011 as the Financial Stability Board and BCBS continue their work. Notwithstanding, DBRS believes the uncertainty surrounding contingent capital has been a contributing factor to spur significant subordinated debt issuances over the last month by several large Canadian banks.

Threats of easy sovereign default are having an effect in Europe:

Greece’s Prime Minister George Papandreou, speaking in Paris at a meeting of the Socialist International group, said Germany’s plan to force private bond investors to share the cost of sovereign bailouts with taxpayers was responsible for creating “a spiral of higher interest rates for countries that seemed to be in a difficult position, such as Ireland and Portugal … It could force economies toward bankruptcy.”
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On Monday, Portuguese Finance Minister Fernando Teixeira dos Santos said Portugal might have to seek a bailout package if only to prevent other euro zone countries from getting infected.
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The economic outlook for Portugal is so bleak that Foreign Affairs Minister Luis Amado said his country “faces a scenario of exit from the euro zone” – the 16 EU countries that share the euro – if it doesn’t get its financial house in order.

Gee … it’s not too long ago we were told such a thing couldn’t possibly happen!

The Canadian preferred share market took a hit today on very heavy volume, with PerpetualDiscounts down 37bp and FixedResets losing 17bp.

The Europeans have been distracted from the G-20:

Finance ministers from Germany, France and the U.K. met in Seoul to discuss Ireland’s debt crisis after bond yields soared on concern the European Union will need to step in with a bailout.

Ministers are monitoring developments and will probably issue a joint statement later today, said Steffen Seibert, a spokesman for German Chancellor Angela Merkel.

The premium investors charge to hold Irish debt over German bunds climbed to a record yesterday and the euro fell to the lowest level against the dollar since September. Yields on 10- year Irish bonds added 31 basis points to 9.07 percent. Bailing out Ireland’s financial system could cost as much as 50 billion euros ($68 billion) under a “stress case” scenario compiled by the finance ministry and central bank.

Germany is the biggest contributor to this year’s 860 billion euros in loans and pledges to stem Europe’s debt crisis. Bonds of the euro area’s so-called peripheral nations have tumbled since EU leaders on Oct. 29 backed Merkel’s demand to set up a permanent rescue system by 2013 that makes bondholders foot part of the cost of any future debt crisis.

Wow! Higher chance of default has brought with it higher yield demands! Who woulda thunk it? It must be those nasty hedge funds and short sellers at the bottom of this.

Charges have been laid in a tipping scandal. What I find most interesting is that the alpha-tipper (ground-zero tipper? primary tipper?), Mitchell Finkelstein, got his information in three of the four transactions by simply poking around in the Davies Ward Phillips Vineberg LLP document management system – I would have thought that material of this nature would be password protected with access logs maintained and reviewed. Who knows? It might have been; the OSC Statement of Allegations doesn’t go into much detail about it, but it’s an interesting question.

The Canadian preferred share market took a loss today on average volume, with PerpetualDiscounts down 18bp and FixedResets losing 2bp.