Category: Market Action

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.

Mr Thomas C Baxter, Jr, Executive Vice President and General Counsel of the Federal Reserve Bank of New York, testified to the Financial Crisis Inquiry Commission regarding the Lehman bankruptcy:

As of that Friday, there were two prospective Lehman acquirers: Bank of America and Barclays. On Saturday, September 13, Bank of America abandoned the potential acquisition of Lehman and reached an agreement to acquire Merrill Lynch. Barclays was the only remaining suitor. On Sunday, September 14, with the consortium financing committed, we learned for the first time that Barclays would not be able to deliver a key document to carry the merger to conclusion: a guarantee of Lehman’s trading obligations between the signing of the merger agreement and its closing.

The Bear Stearns transaction taught us the importance of the guarantee to a successful rescue. A guarantee maintains the ability of the troubled company to operate as a going concern and, thus, preserves value. It does this by providing protection to counterparties during an especially vulnerable period – the period between merger contract and merger closing. Without such a guarantee, the creditors and counterparties of the firm would be at risk in the event that the merger fell apart because of a failed shareholder vote or some other contingency. Consequently, as a market matter, the guarantee is an indispensable part of any such rescue operation.

On Sunday, September 14, we learned that Barclays could not proffer the needed guarantee without a shareholder vote. This vote would take days, if not weeks or months, and there was no way to predict if the shareholders would even vote for the transaction to proceed. I explored with counsel whether the U.K. government, or one of its instrumentalities like the FSA, might waive this U.K. requirement, such that the guarantee could be delivered and the rescue effected. I learned that the U.K. authorities were not amenable to a waiver. Thus, Barclays ceased to be available as the willing buyer that we needed to rescue Lehman, and there was no other interest from any firm of sufficient size and capability that could acquire Lehman, a company with consolidated assets of about $600 billion.

I’m suspicious of any portfolio management model that includes the word “regression”, but there’s occasionally a good idea in there. Econbrowser‘s James Hamilton highlights his recent paper in a post Policy tools that could lower interest rates further:

Our starting point was a framework developed by Vayanos and Vila (2009), who interpret the term structure of interest rates as arising from the behavior of risk-averse arbitrageurs. This model is one way to capture formally the portfolio balance channel that Fed Chairman Bernanke indicated is central to the Fed’s understanding of how nonstandard monetary operations might affect the economy. Vayanos and Vila’s framework has previously been applied to our question by Greenwood and Vayanos (2010) and Doh (2010). One of our contributions is to develop specific measures of how the available supplies of Treasury securities of different maturities might be expected to influence the pricing of level, slope, and curvature risk of the term structure. Although I began as a skeptic of the claim that bond supplies would make much difference, we found pretty strong evidence that historically they have. For example, we found that over the 1990-2007 period, we could predict the excess return from holding a 2-year bond over a 1-year bond with an R² of 71% on the basis of the level, slope, and curvature of the yield curve along with our 3 Treasury supply factors.

The full research paper is The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment.

Just when you thought that nothing good could be said about Russian politicians, they prove you wrong:

Speaking as the Russian government announces plan to raise duty on alcohol and cigarettes, [Russian Finance Minister] Alexei Kudrin said that by smoking a pack, “you are giving more to help solve social problems such as boosting demographics, developing other social services and upholding birth rates”.

“People should understand: Those who drink, those who smoke are doing more to help the state,” he told the Interfax news agency.

He’s got my vote.

It was a solid day on the Canadian preferred share market, with PerpetualDiscounts up 5bp and FixedResets gaining 3bp on average volume. There has been a lot of volume in MFC lately, presumably due to continued rebalancing after the downgrade.

Nothing happened in the financial markets today, so today the entire market update will be devoted to Canadian politics. Ain’t you lucky? But the integrity of the judicial system is important, as minority shareholders in Mascan Corp. can testify.

There’s a kerfuffle about a judge whose husband posted risque pictures of her on the Internet that has come to light because some little twerp has seen a chance for some legalized blackmail. There’s no indication the judge herself did anything wrong; unless you believe that allowing your spouse to take risque pictures of you is wrong. The whole story is no big deal, except for one incredible quote:

“If pictures of you naked end up on an internet site, it’s quite difficult to say you have the credibility to be a judge,” said Sébastien Grammond, dean of civil law at the University of Ottawa.

On the basis of what has been disclosed, I have no qualms about the credibility or ability of Associate Chief Justice Lori Douglas. However, I have deep qualms about the ability of Sébastien Grammond to think things through and to be responsible for the education of the next generation of lawyers. He should be removed from his post immediately.

Similarly:

“I think that no judge who has a cloud of scandal hanging over their heads is able to … act effectively as a member of the judiciary,” said Annalise Acorn, a law professor at the University of Alberta who specializes in ethics.

“I simply think it’s not consistent with the image of dignity and authority that the judiciary needs to have.”

Prof. Acorn said she would be “flabbergasted” if Judge Douglas stays on as a judge, and expects she might resign in the coming days.

It’s easy to tell member of a profession who are completely unable to do the work – they specialize in ethics. After all, how can you ever actually prove they’re wrong? It’s very convenient. The only surprising thing is that some authorities are actually willing to pay these people.

Alice Woolley claims that:

The problem is that her knowledge of those pictures prior to her appointment undermines the already fragile legitimacy of our appointments process. Applicants for judgeships are asked, “is there anything in your past or present which could reflect negatively on yourself or the judiciary, and which should be disclosed?” The question asks applicants to provide the committee with the information necessary to make a fair and appropriate assessment of the applicant’s qualifications to be a judge.

In this instance Douglas had to answer “yes” to that question.
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It is not even about whether she would be a good judge. It is about whether people appearing before her could feel confident that their cases were being heard fairly and dispassionately. If those people included a black man, or a white woman divorcing a black man, or a Mexican family dealing with a child apprehension case, those people could reasonably wonder whether the racial stereotyping that the website reflects is one that Douglas shares, and that will impact her judgment.

The last sentence is pure bullshit. These people could wonder, complain and appeal, but not reasonably. If they wanted, they could always demand that the judge recuse herself. It’s just another legal manoevre.

But wait! We have not yet finished plumbing the depths of Alice Woolley’s ignorance. Clearly, Douglas’ behaviour is not, in and of itself, a factor. So what if … what if she’d be sunbathing topless and her husband had posted those pictures? What if it wasn’t her husband, but a voyeur posted pictures of her on the internet? What if he had identified her? What if he had claimed he could arrange sexual liasons with her? What if he claimed she liked Mexicans, wink-wink nudge-nudge? What if it wasn’t even a topless picture, it was her official picture taken during her investiture?

Alice Woolley’s series of assertions – they are far too childish to be honoured with the sobriquet of “argument” – work equally well in any of these situations.

We can go further. What if a tireless research finds that, while in high school, Douglas answered a Teen Queen Magazeen quiz by circling the “tall dark and handsome” choice for ‘Guy you want’. When we consider this situation, we’re at least looking at something she did herself, not something done by a third party without her knowledge or consent. Does this expression of preference make her forever unfit to be a judge? What if she hears a case involving some short, fair, average-looking guy? In Alice Woolley’s anarchic dream world, in which assertion of bias is deemed equivalent to proof of bias, such a thing would bar her – and, basically, every living, breathing human on the planet – from the judiciary.

Alice Woolley is a fool – and a dangerous fool at that, for urging standards that will accomplish nothing but making judges easier to blackmail.

Honestly, the howls for Douglas’ head are so shockingly removed from any semblence of intellectual rigour that one has to wonder if the real story is being told – when smart people say dumb things, it’s often because they don’t want to say the sleazy thing, as when doctors claim they won’t give terminal patients sufficient painkillers ‘because there is the chance of addiction’, when the real story is that they don’t want to get a call from the ministry and fill out the painkiller forms. Are the critics going after her for some other, less publicly expressible reason? Was she appointed by the wrong party? In Harper’s Canada, did she find the wrong person liable?

It was another good day on the Canadian preferred share market, with PerpetualDiscounts gaining 11bp and FixedResets winning 2bp. Volume and volatility were enough to make the day interesting.

Donald C. Langevoort made a good point about trade-throughs in his paper U.S. SECURITIES REGULATION AND GLOBAL COMPETITION:

Gadinis points out that U.S. and European regulation is similar in one strategy—trying to force trading interest into public view in the form of limit order quotes so that the price can reflect available supply and demand at increments a little higher or lower than the last sale. Reg NMS goes one step further, however, by forcing the trade-through of orders to the market with the best displayed price, so long as that market has fast (that is, fully automated) execution capacity. This is required for two reasons: first, to give protection to and thereby encourage the display of quotations and limit orders; second, as a mechanism to try to ensure that brokers offer their customers best execution. In contrast, European market regulation does not have a trade-through regime, and leaves best execution to negotiation between broker and customer. For obvious reasons, many institutional investors feel hampered by Reg NMS, and many investors, brokers, and trading sites have taken advantage of exceptions in the regulation to accommodate so-called “dark pools”—undisclosed trading interest—and trading that is based on non-price preferences.

The differences in approach are not hard to understand. The national market system in the United States is a legacy of public markets wherein retail investors are protected not only from the abuses of monopolistic trading sites but also from being elbowed aside by large traders in an increasingly institutional marketplace. Europe has little direct retail participation, and so that legacy is not present. What Gadinis describes there is precisely what one would expect from markets that have been built in recent years almost entirely for the benefit of the institutional trade.
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U.S. institutional investors have ways of moving trading abroad when the domestic regulatory burdens are too much. As a result, Reg NMS is probably quite unstable. To date, the SEC has conditioned the cross-border mergers of exchanges (for example, New York Stock Exchange and Euronext) on keeping them separate for purposes of compliance with domestic market regulation. But that is inefficient, and probably hopeless in the long run. The right vision is no longer of a national market system but a global market system, and there is simply no way the SEC can impose its retail investor legacy extraterritorially. One suspects that it is simply a matter of time before the SEC does in this area what it did with IFRS: abandon exceptionalism in an effort to gain greater influence over market structure evolution around the world.

The issue of trade-throughs was discussed on August 27.

BIS has released preliminary results from its survey of FX and OTC derivatives:

•Activity in OTC interest rate derivatives grew by 24%, with average daily turnover of $2.1 trillion in April 2010. Almost all of the increase relative to the last survey was due to the growth of forward rate agreements (FRAs), which increased by 132% to reach $601 billion

The Bank of Canada has published its specific contribution, with the nugget:

Similarly, as an approximation, the three execution methods—(i) customer direct (over the telephone), (ii) multi-bank dealing systems, and (iii) single bank proprietary platforms—can be viewed as being execution methods primarily for customers. On that basis, 77 per cent of all customer trades in Canada are undertaken directly with the customer over the telephone, and 23 per cent are executed through either multi-bank or single-bank electronic trading systems.

In possibly the most amazing news story in the history of the universe, Bloomberg advises that Hong Kong i-bankers are competing on fees:

Hong Kong bankers are charging the lowest fees on record to arrange initial public offerings as firms vie for deals in a market where IPOs are raising more than in the U.S. and U.K. combined.

Initial sales by 37 companies in Hong Kong have paid average fees of 2.2 percent in 2010, the lowest level since Bloomberg began tracking the data in 1999. While companies going public raised $18.7 billion, 64 percent more than American IPOs, banks earned about 43 percent less underwriting in the territory, the data show.

Goldman Sachs Group Inc., JPMorgan Chase & Co. and Deutsche Bank AG are leading Wall Street in reducing fees and winning sales where Chinese companies go public to help finance the fastest growth among the world’s biggest economies. The firms are facing more competition from mainland banks that have boosted their share by 50 percent since the start of the financial crisis.

We won’t be seeing that here in hurry!

It looks like there’s a bit of capital flight from Greece:

Withdrawals by cash-strapped customers such as Efthymiou, as well as by Greeks moving money out of the country, helped push deposits at the nation’s banks down by 9 percent since the end of 2009.
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Business and household deposits in June fell for a sixth straight month to 216.5 billion euros ($277.3 billion) from 238 billion euros at the end of 2009, according to figures from the Bank of Greece.

The reporter, the politicians and the banks are emphasizing the ‘draw-down of savings to offset government payment reduction’ idea, but Greece’s GDP is USD 356-billion. So that’s about 6% of GDP in reduced bank deposits. I vote for capital flight and eagerly await compelling evidence and incisive arguments proving me wrong.

PrefBlog’s Strange Funds Department has come up with another exhibit:

Connor, Clark & Lunn Capital Markets Inc. (the “Manager”) is pleased to announce that a preliminary prospectus for HBanc Capital Securities Trust (the “Fund”) has been filed
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The Fund was established to provide investors with high levels of stable, tax-advantaged distributions through exposure to Capital Securities issued by HSBC Holdings plc, a conservatively positioned and strongly capitalized global bank.

CC&L is best known for packaging multi-name Credit Default Swaps as preferred shares and thereby vaporizing a lot of client money. More than once. However, I am confident that the time spent developing and managing these products will be properly accounted for as “experience” in the prospectus for the new fund.

Mayoral candidate Joe Pantalone has presented his vision of doing business in the city:

“I have no problem with people finding loopholes, if they’re good people,” says councillor Joe Pantalone, who spearheaded the moratorium.

“I know Albino well and I can’t say enough about what a good Torontonian he is.”

I have no idea how one gets to be a “good Torontonian”, but presumably it involves cash and being a friend of Joe Pantalone.

The Canadian preferred share market continued to gain today, with both PerpetualDiscounts and FixedResets up 9bp. Volume was good, but volatility was subdued, with the performance highlights table being empty.

PerpetualDiscounts now yield 5.78%, equivalent to 8.09% interest at the standard equivalency factor of 1.4x. Long Corporates now yield 5.3%, so the pre-tax interest equivalent spread is now 280bp, a significant rebound from the 265bp reported at August 31; however, note that in the interim there has been a migration of high-coupon, high-yield issues from PerpetualDiscounts to PerpetualPremiums, which has artificially reduced the yield on the PerpetualDiscount index.