Category: Market Action

Merkel and Sarkozy have the perfect answer for those annoying brats who shout that the emperor has no clothes: jail ’em:

France and Germany called on the European Union to speed up curbs on financial speculation, saying some bets against stocks and government bonds should be banned as markets suffer a resurgence of “strong volatility.”

In a joint two-page letter, French President Nicolas Sarkozy and German Chancellor Angela Merkel sought proposals from European Commission President Jose Manuel Barroso on a ban on so-called naked short sales of “certain” stock and bonds, as well as on naked credit-default swaps on sovereign bonds. They call for proposals to be ready by the middle of next month rather than October as had been planned.

The clowns at Basis Yield Alpha Fund (last mentioned May 19) are squaring their rots for a good boohoohoo:

The lawyer, Eric Lewis, said Basis Yield Alpha Fund is suing Goldman to recoup the $56 million it lost on the now notorious Timberwolf collateralized debt obligation, which garnered a lot of attention during a recent congressional hearing.

The lawsuit, being filed on Wednesday in U.S. District Court for the Southern District of New York, also seeks $1 billion in punitive damages.
…
David Lehman, who joined Goldman in 2004 and worked as a managing director in Goldman’s mortgage trading operation, met with representatives of Basis to convince them that the prices Goldman was selling the Timberwolf deal at were fair and legitimate.

The lawsuit alleges that Goldman’s sales and trading desks worked together to sell the deal, which Goldman was taking a shorting position on.

“This is not a bad case for dealing with the whole issue of how Goldman was conducting its business,” said Lewis. “They were selling bonds like they were used cars, in that you say what you need to get it done.”

Golly, you know, I can’t remember a single trade I’ve ever done (including buying tomatoes at the supermarket) in which the salesman didn’t try to convince me that the price was fair and reasonable. But I guess I should point out that my experience is limited to the planet Earth. If BYAF’s principals had spent a tenth as much on analysis as they are on lawyers, their investors would be a lot better off. The full document is hosted on Scribd, world’s second worst document storage system.

Amidst all this abuse of the legal system, there’s a bit of good news:

Distressed-debt investors shouldn’t have to disclose key details of their holdings when they participate in bankruptcy cases, a U.S. judiciary advisory group said.

Hedge funds and other investors that join together during bankruptcies as creditors need not reveal the prices paid for a company’s debt or the dates of purchase, according to a proposed change by the Advisory Committee on Bankruptcy Rules of the Administrative Office of the U.S. Courts.

The move is a victory for funds that invest in an ailing company’s debt and sometimes take control after the bankruptcy. They opposed an earlier proposal from the rules committee that would have required investor groups to reveal the date they acquired a company’s debt and, if ordered by a judge, the price.

It was another very good day for the Canadian preferred share market, as PerpetualDiscounts gained 44bp and FixedResets gained 26bp on moderate-to-elevated volume.

PerpetualDiscounts now yield 6.08%, equivalent to 8.51% interest at the standard equivalency factor of 1.4x. Long corporates now yield about 5.65%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) now stands at about 285bp, a dramatic tightening from the 305bp reported on June 2.

I suspect the propused US financial legislation will have severe and unintended knock-on consequences:

Lawmakers are set to negotiate a bill passed May 20 by the Senate that would require standardized derivative trades to be cleared through a third party and traded on an exchange or so- called swap-execution facility; place a fiduciary duty on dealers in transactions with municipalities; and subject the foreign exchange swaps market to regulation.
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The bill includes a provision that would require swaps dealers to report price information on a timely basis to the public — a provision designed to increase price transparency. Banks have opposed the language, arguing that it could reduce market liquidity. Gensler has backed the idea, which Stanford’s Duffie called one of “the most important additions” to the debate.

“Real time post-trade reporting of transactions is an essential element of a transparent marketplace,” Gensler said last week in his speech. “An effective conference committee report should include these provisions.”

Bond price reporting via TRACE has crippled the US public market in corporate bonds – see, for example, this post – but it doesn’t matter. The legislative climate is such that smooth functioning of the capital markets is not a concern; the concern is transparency, being nice to the little guy and bashing the banks.

The other big problem is fiduciary duty:

The fiduciary duty requirement was crafted in response to swaps deals between Wall Street and local governments designed to keep monthly interest payments low as lending rates change. Such deals often went sour during the economic crisis, pushing one municipality, Jefferson County, Alabama, to the brink of bankruptcy, Lincoln said.

“The bill’s ‘fiduciary duty’ provision would require swap dealers to put the financial interests of state and local governments, retirement plans, pensions and university endowments before its own, ensuring Wall Street doesn’t take advantage of Main Street and taxpayers,” Lincoln said in a June 4 statement provided by her office. “The stories of abuse in this area are alarming and need to be addressed.”

Asset-management firm BlackRock Inc. and some of the largest business trade groups in Washington have argued that imposing a fiduciary duty on deals with municipalities may shut down a market in which, for example, public retirement funds purchase derivatives in order to manage their portfolios.

‘No more buy-side, no more sell-side’ cry the legislators, ‘Capital markets should be a cooperative game, just like the ones we played in kindergarten!’

I suspect that what this will mean in practice is that institutional investors will no longer deal directly with the institutional desk. All orders will have to be routed through a stockbroker (who will probably be completely ignorant), garbled and transmitted. That broker will have to be paid, of course.

What I suspect might happen is that some of the larger asset management firms and hedge funds, not affected by the legislation, will take a more active approach to market-making via dark pools. Being headquartered in Dubai or Singapore will help, of course.

The Financial Crisis Investigation Committe Vice Chairman Bill Thomas demonstrated his integrity and deep committment to justice in the continuing scuffle over Goldman Sachs’ papers:

Blankfein, who has already testified in front of the FCIC along with other bank bosses back in January, is not expected to be asked to testify publicly again. A fired-up Thomas yesterday said the commission has no intention of giving Goldman a chance to make itself look cooperative.

“I’m not interested in providing [Blankfein] with a public forum to sound reasonable when in fact [Goldman’s] behavior has not been.”

Isn’t raking somebody over the coals publicly and under oath supposed to be a good corrective measure for wrongdoing or lack of cooperation? But I guess it’s more fun to vilify someone without giving him a chance to confront his accuser.

Banks’ holdings of each other’s paper – encouraged at the senior debt level by regulators – is attracting attention:

Small lenders, such as Riverside National Bank of Florida, were able to sell trust-preferred securities, known as TruPS, because investment bankers packaged them with those issued by dozens of other financial institutions.

Riverside, which started in a trailer in 1982, bought collateralized debt obligations made up of TruPS as it grew to 65 branches and $4.8 billion assets. When real estate soured and lenders racked up loan losses, Riverside and about 400 of its peers suspended interest payments on their TruPS, causing the CDOs to default or lose value and inflicting more harm on an industry suffering from the worst economy since the 1930s.
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Congress may end the use of TruPS as capital, forcing banks that issued them to replenish their coffers. Banks are lobbying to remove a provision barring their use that was introduced by Maine Republican Susan Collins and included in the financial reform bill passed by the Senate last month. The Senate version is being reconciled with one passed by the House of Representatives in December that doesn’t include a ban.

It’s a totally asinine reaction. The problem is not that they have issued the TruPS (which are Innovative Tier 1 Capital and, as the story notes, have had their distributions suspended in many cases, which is exactly what’s supposed to happen); the problem is simply that the risk-weighting on the assets is too low. The Fed could change that tomorrow if it felt like it.

If a bank bought $100 of Citigroup shares, it would have to hold $100 of capital against that asset. The purchase of $100 in Citigroup TruPS would require only $8 of capital. For $100 of AAA rated CDOs that pool bank TruPS, the amount of regulatory capital to be set aside declines to $1.60.

And before we start feeling smugly superior to the Americans, up here with our so-called better regulation, remember ING Canada’s 4Q08 balance sheet. However, the provision has been withdrawn:

Banks couldn’t use their TruPS as capital during the financial crisis because deferring the dividends would have been seen as weakness and could have led to bank runs.

“It contributes to a downward spiral,” said George French, the FDIC’s deputy director for policy in the division of supervision and consumer protection.

Trouble continues in Euroland:

Bank credit-default swaps surged near to a record on concern Spanish lenders will have to raise $60 billion to shore up capital as lawmakers struggle to finance a swollen budget deficit.

The Markit iTraxx Financial Index of swaps on 25 European banks and insurers climbed as much as 14 basis points to 208, approaching the all-time closing high of 210 basis points set in March 2009, JPMorgan Chase & Co. prices show. Banco Santander SA, Spain’s biggest bank, increased 23 basis points to a record 258, according to CMA DataVision.

Spanish lenders need as much as 50 billion euros ($60 billion) of capital, according to Banco Bilbao Vizcaya Argentaria SA, as they face mounting writedowns triggered by a housing market collapse and losses on government bond holdings. Civil servants went on strike today to protest at Prime Minister Jose Luis Rodriguez Zapatero’s efforts to tame the euro area’s third-largest deficit.

Another good day in the Canadian preferred share market, with PerpetualDiscounts up 65bp and FixedResets gaining 6bp, on moderate-to-elevated volume.

This is quite a recovery for PerpetualDiscounts! The total return index has returned to its level of March 19; Since March 19, their total return has been -0.35%, compared to -1.73% for FixedResets. Month to date returns have be +2.94% and +0.58%, respectively.

There’s some hasty back-pedalling in Hungary:

“Any comparison with countries that have much higher credit default swap ratings than Hungary is unfortunate,” State Secretary Mihaly Varga told reporters today in Budapest. “The comments that have been made about this issue are exaggerated and if they come from colleagues that’s unfortunate.”
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Prime Minister Viktor Orban, who took power a week ago, sought permission for a wider budget deficit from the European Union and the International Monetary Fund, which led the 20 billion-euro ($24 billion) bailout for Hungary. European Commission President Jose Manuel Barroso this week rebuffed Orban, urging him to continue fiscal consolidation.

The government will aim to meet the deficit target of 3.8 percent of gross domestic product, which is “attainable” through changes to spending and revenue plans, Varga said today. Orban called a three-day emergency cabinet meeting to hammer out the action plan.

Kenneth A. Posner writes an interesting piece on Contingent Capital:

This idea has in fact been around for some time: in 1991, Tom Stanton suggested contingent capital for Fannie Mae and Freddie Mac (FRE, Fortune 500) — if people had listened then, the idea would have saved taxpayers untold billions today — the government’s bailout of the two mortgage agencies is unlimited, with the Congressional Budget Office estimating it could cost $373 billion by 2020.

The proposed global bank tax has been rejected:

Group of 20 nations failed to agree on a proposal to impose a global tax on banks that was aimed at making the financial industry shoulder the cost of bailouts, settling instead for a common set of guidelines.

G-20 finance ministers and central bank governors said in a statement in Busan, South Korea, that governments will take account of each nation’s “circumstances and options.” The result allows nations such as Canada, China and Brazil, whose banks suffered less during the global financial crisis, to skip introducing a tax. European countries and the U.S. have advocated the levy.

“If we’re living in an ideal world, a global financial tax would be a good idea but in reality, it is almost impossible to implement,” said Tomo Kinoshita, an economist at Nomura Holdings Inc. in Hong Kong. “There are too many obstacles.”

Yesterday’s statement leaves in place an initiative to seek tighter global standards for capital levels at banks, which is a “more practical” way to help reduce the risk of financial crises, Kinoshita said. Banks have opposed the effort, warning that the costs may curb credit expansion and economic growth.

It is my understanding that the Europeans are opposed to increased capitalization, since a greater proportion of their credit markets consists of bank loans.

PrefBlog was mentioned in Larry McDonald’s Canadian Business Online Blog post Round-up of financial blogs. Thanks, Larry!

The Goldman pogrom continued:

The commission established by Congress to investigate the causes of the financial crisis issued a subpoena to Goldman Sachs on Monday for “failing to comply with a request for documents and interviews in a timely manner.”
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A person briefed on the investigation said that Goldman had already provided more than 20 million pages of documents, and that the commission had begun interviewing witnesses, on a range of issued, including derivatives, the complex financial instruments that were at the heart of the crisis.

Not just 20-million!

Goldman Sachs sent more than a billion pages of documents, FCIC Vice Chairman Bill Thomas said on a conference call with reporters today. Not all of the information is what the panel requested, and Goldman Sachs didn’t cooperate with requests to interview Chief Executive Officer Lloyd Blankfein, Chief Operating Officer Gary Cohn and Chief Financial Officer David Viniar, FCIC Chairman Phil Angelides said.

“We did not ask them to pull up a dump truck to our offices and dump a bunch of rubbish,” said Angelides, 56, who previously served as California’s treasurer. “This has been a very deliberate effort over time to run out the clock.”

Bank CDS levels in Europe show a certain amount of nervousness:

The cost of insuring against a default on financial-company bonds surged, with the Markit iTraxx Financial Index of credit- default swaps linked to the senior debt of 25 European banks and insurers climbing 6 basis points to 189, according to CMA DataVision in London, near the highest level since March 2009. The Markit iTraxx SovX Western Europe Index of contracts on 15 governments fell 1.5 basis points to 167, compared with the record-high 174.4 reached on June 4.

It is my understanding that the recently issued and poorly received EMA.PR.A will be repriced and offered at 24.50.

It was another very strong day on the Canadian preferred share market, with PerpetualDiscounts up 67bp and FixedResets gaining 15bp. Volume was elevated.

Hungary has joined Club Med:

Credit-default swaps on sovereign bonds surged on speculation Europe’s debt crisis is worsening after Hungary said it’s in a “very grave situation” because a previous government lied about the state of the economy.

The cost of insuring against losses on Hungarian sovereign debt jumped 83.5 basis points to 391.5, according to CMA DataVision prices. Swaps on France, Austria, Belgium and Germany also rose, sending the Markit iTraxx SovX Western Europe Index of contracts on 15 governments 10 basis points higher to 163, and close to the all-time high of 167 on May 6.

Hungary’s bonds fell after a spokesman for Prime Minister Viktor Orban said talk of a default is “not an exaggeration” because a previous administration “manipulated” figures. The country was bailed out with a 20 billion-euro ($24 billion) aid package from the European Union and International Monetary Fund in 2008.

The delays in bank reform are now being discussed publicly:

The Group of 20 nations is split on the scale and timing of increases in bank-capital requirements that have been under discussion since governments were forced to bail out lenders, an official from a G-20 government said.

Countries such as the U.S. whose economies are largely financed by markets want banks to be required to hold more assets on their balance sheets to buffer against future crises, said the official, who will attend this weekend’s talks of G-20 finance chiefs in Busan, South Korea. Policy makers in continental Europe, where banks provide more financing, are concerned that too-high reserves risk choking off growth, the official told reporters on condition he not be named.

Goldman has set up a $450-million CLO:

Goldman Sachs Group Inc. arranged a $450 million collateralized loan obligation, according to people familiar with the transaction, making it the third widely syndicated transaction of the year.

Last week’s deal marks a reversal for CLO issuance, which according to Moody’s Investors Service, fell to $26.5 billion in 2009, its lowest level in more than a decade as the credit crisis and subsequent drop in loan prices made it economically difficult to arrange new funds.

Golly, I sure hope that they pointed to investors that the fund was able to buy its holdings because other people wanted to sell them!

Recovery, Schmecovery:

[US] Private payrolls rose by 41,000, Labor Department figures showed today, trailing the 180,000 gain forecast by economists. Including government workers, employment rose by 431,000, boosted by a jump in hiring of temporary census workers. The jobless rate fell to 9.7 percent from 9.9 percent.

There’s some whimpering about the Magna deal:

Magna has offered to pay Mr. Stronach $300-million (U.S.) in cash plus grant him nine million new subordinate-voting shares of the company for a total value of $863-million. The deal values each of his multiple-voting shares at $1,187, a massive premium over Magna’s share price. Magna’s widely held subordinate voting shares closed 62 cents higher at $69.86 (U.S.) Thursday.

“In our minds, it is an entirely excessive, inappropriate and egregious price that we’re being asked to pay, so that’s why we’re reacting so quickly and so strongly to what this proposal lays out,” CPPIB chief executive officer David Denison said Thursday in an interview.

Suck it up, boys! That’s what happens when you buy participating debentures rather than, you know, actual equity.

It was another day of fine performance on moderating volume in the Canadian preferred share market today, with PerpetualDiscounts gaining 31bp and FixedResets up 12bp.

The Financial Post Block Trades Report is back in operation. The link in the right-hand panel has been updated.

Covered bonds are seeing increased issuance:

About $5.7 billion of the securities have been sold or are being marketed this week worldwide, almost double last week’s volume, data compiled by Bloomberg show. Bank of Montreal, Canada’s fourth-largest bank, sold $2 billion of the bonds due in 2015.
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The increase in covered bond sales contrasts with a decline in issuance for corporate debt, which fell to $70 billion last month, less than half April’s tally and the least since 2003.

It’s a nice trend, one that I hope continues and widens. It would be very nice if, for instance, long bonds secured by long lived assets (real-estate, etc.) were more available. The pendulum has swung too far in favour of companies’ equity holders.

The BMO Covered Bonds were USD, private placement, five-year, 2.85% coupon. Sounds good? Tough luck, Charlie, the regulators are protecting you from them.

DBRS comments:

Despite the above strengths, the Covered Bonds have the following challenges. First, a weakened housing market in Canada could result in higher defaults and loss severities than the assumptions used for credit protection assessment. This risk is significantly mitigated by the mortgage insurance covering principal and interest provided by AAA-rated CMHC. Second, BMO may be required to add mortgages to maintain the Cover Pool, incurring substitution and potential credit deterioration risk. These risks are mitigated by the mortgage insurance provided by CMHC and the ongoing monitoring of the Cover Pool to ensure the overcollateralization available (at least 3% as of May 31, 2010) is commensurate with the AAA rating assigned. Third, there is an inherent liquidity gap between the scheduled repayments of the Covered Bonds and the repayment of underlying mortgage loans over time. This risk is mitigated by the overcollateralized Cover Pool, the buildup of a reserve fund if BMO’s rating falls below A (low) or R-1 (middle) and the extendible maturity date for 12 months upon a default by BMO. Lastly, there is no specific covered bond legislative framework in Canada. This risk is mitigated by the contractual obligations of the transaction parties, supported by the well developed commercial and bankruptcy laws in Canada, satisfactory opinions provided by legal counsel to BMO and a generally creditor-friendly legal environment in Canada.

The legal framework problem is alleged to be under review, as discussed on PrefBlog on March 9 and by Ogilvy Renault, inter alia.

The SEC’s Market Structure Roundtable kicked off with a speech by Mary Shapiro:

Our roundtable is also informed by a more recent event: the severe, albeit brief, market disruption of May 6. For 20 minutes that afternoon, U.S. financial markets failed to execute their essential price discovery function, experiencing a decline and recovery that was unprecedented in its speed and scope. That period of fluctuating prices both directly harmed investors who traded based on flawed price discovery signals and undermined investors’ faith in the integrity and fairness of the markets

Her first conclusion – of direct harm – is a little hard to follow. There were two types of traders who traded during that period: value investors and idiots. The former made money. Shouldn’t we consider harm to idiots to be a good thing? I haven’t seen many signs of undermined faith, either. Meanwhile, Luis Aguilar appears to be lobbying for a post-SEC job as “investor advocate”.

On February 5 I discussed a form of solar power that actually has a chance of being more than a feel-good exercise; now, another method is attracting attention:

“We’ve produced tens of thousands of gallons, and by the end of 2010, I hope I can say we’ve produced hundreds of thousands,” [Solazyme cofounder] Wolfson, 39, says. “In the next two years, we should get the cost down to the $60 to $80-a-barrel range.”

At that price, Solazyme’s algae fuel would compete with $80-a-barrel oil.
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Algae proponents differ on growing methods. Open ponds, the choice of most researchers, rely on photosynthesis. Algae grow and fill with oil as they use sunlight to convert carbon dioxide into sugar and chemical energy. Ponds, though, can get infested by pesky, low-oil native organisms or become the targets of microscopic aquatic creatures.

Solazyme is trying fermentation, producing its algae without light in metal vats. This requires adding sugar or other feedstock before the algae are dried and the oil extracted.

There’s hope for the world yet, evidenced by attitudes towards greenwashing:

When asked for their reasons for not living more greenly, 46 per cent of Canadians cited their belief that companies are “greenwashing,” lying about or exaggerating their products’ environmental sustainability. This cynicism beat out cost and inconvenience as reasons for not helping the environment.

… smoking …:

In the new survey, 13 per cent of people in Grades 10 to 12 called themselves current smokers, up from 11 per cent during the previous survey period. While only 3 per cent of those in Grades 6 to 9 called themselves current smokers, unchanged from 2006-2007, that number rose from 2 per cent in 2004-2005.

“It is a troubling development,” [senior policy analyst at the Canadian Cancer Society] Mr. [Rob] Cunningham said. “The overwhelming majority of smokers begin as teens or preteens.”

… and Facebook …:

Privacy concerns don’t seem to have scared Canadians off Facebook.
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More than 912,000 Canadians signed up for the site last month, a six-per-cent increase in membership.

Good, bad, indifferent … diversity of views and rejection of preaching platitudes can only be a good thing.

There was another strong advance in the Canadian preferred share market, this time on moderate volume, as PerpetualDiscounts gained 50bp and FixedResets were up 6bp. There were no losers on the performance table and PerpetualDiscounts dominated the volume highlights.

The Financial Post’s block trade reporter continues to be inoperable.

The Financial Crisis Inquiry Commission kicks off its hearings on credit ratings today, including testimony from Raymond W. McDaniel, Chairman and Chief Executive Officer, Moody’s Corporation:

• Credit Rating Agencies are commenters, not gatekeepers
• Credit Ratings are not investment advice
• Rating analysts do not structure or underwrite securities
• Investors should not rely on rely on ratings to buy, sell or hold securities (investors must do their own work – you cannot outsource responsibility)
• Every business model has conflicts of interest that must be managed
• Concerns about rating shopping do not stem from the business model

Commission Chairman Angelidies, determined to display his prejudice, has been quoted:

In his opening remarks, Chairman Phil Angelides said, “To be blunt, the picture is not pretty.” He added that “Moody’s did very well. The investors who relied on Moody’s ratings did not do so well.”

Angelides characterized the ratings service as a “triple-A factory,” saying that it assigned the top grade to 42,625 residential mortgage-backed securities from 2000 to 2007.

“In 2006 alone, Moody’s gave 9,029 mortgage-backed securities a triple-A rating,” said Angelides, whose panel was created to investigate the causes of the financial crisis as Congress debates the most sweeping overhaul of banking regulations since the Great Depression. “To put that in perspective, Moody’s currently bestows its triple-A rating on just four American corporations.”

Another day of fine returns in the Canadian preferred share market. “They” should “raise interest rates” more often! PerpetualDiscounts were up 31bp, while FixedResets gained 4bp as volume continued at slightly elevated levels.

No details of block trades are given today – the usual data source has been 404ed and it appears that the Financial Post has not yet completed implementation of the new publication mechanism – either that, or I can’t figure out the easy-to-use intuitive interface!

PerpetualDiscounts now yield 6.23%, equivalent to 8.72% interest at the standard equivalency factor of 1.4x. Long corporates are now at about 5.65%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) now stands at about 305bp, a 10bp tightening from the 315bp recorded at month end.

The Kansas City Fed has published the Spring 2010 edition of TEN Magazine with articles on:

• A PIVOTAL INDUSTRY: Energy’s ups and downs drive economies
• A COMMUNITY AFFAIR: Kansas City Fed programs take policymakers to the front lines
• CONFERENCE ROOM TO CLASSROOM: Financial education in the workplace benefits employees, employers
• FINANCIAL STABILITY REPORTS: How useful during a financial crisis?
• REGIONAL CONNECTIONS TO NATIONAL POLICY: The directors of the Federal Reserve Bank of Kansas City

Corporate bond sales are slow:

There were no corporate bond sales in the U.S. today, compared with $2.2 billion on the corresponding day following the holiday weekend in 2009, according to data compiled by Bloomberg. In Europe, 1.35 billion euros ($1.66 billion) was raised from two sales of covered bonds, versus 6.5 billion euros of bond issuance a year earlier, Bloomberg data show.

The global new issue market failed to revive after declining to $70 billion last month, less than half of April’s tally and the least since August 2003, Bloomberg data show. The Frankfurt-based European Central Bank forecast that banks will have to write off 195 billion euros of bad debts by 2011, according to a biannual report published May 31.

I just read John Mortimer’s Rumpole Misbehaves, an entertaining if rather lightweight romp, in which the UK’s Anti-Social Behaviour Orders figure in the plot. I’m surprised they haven’t been discussed much here, as they unite many elements of current fashion: the ability to denounce your neighbors to the police and the ability of bureaucrats to invent new crimes and punish transgressors. Anyway, in the course of poking around to see what ASBOs are all about, I found this story which may – but probably won’t – give pause to those who self-righteously exercise their right to draw pictures of Mohammed, since apparently 1,000 years of trespassing precedents aren’t enough to protect property right:

Harry Taylor, 59, of Salford, left images of religious figures in sexual poses on three occasions in 2008.

Jurors found him guilty of causing religiously aggravated intentional harassment, alarm or distress in March.

He was also given a five-year Anti-social Behaviour Order (Asbo) at Liverpool Crown Court.

Among the posters, one image showed a smiling crucified Christ next to an advert for a brand of “no nails” glue.

In another, Islamic suicide bombers at the gates of paradise were told: “Stop, stop, we’ve run out of virgins.”
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The chaplain at the airport was “severely distressed” by the discoveries, the court heard.

Well, well! We can’t have chaplains being “severely distressed”, now, can we? Let’s put somebody in jail instead.

The first day of the Dreaded Rise in Interest Rates didn’t interupt the recent rally in the Canadian preferred share market, with PerpetualDiscounts up 47bp on the day and FixedResets up 14 bp. Volume returned to average-to-elevated levels.

There’s a scuffle brewing over FASB’s proposal that bank loans be marked-to-market:

A U.S. accounting board’s proposal that would require banks to report the fair value of loans on their books will lead to reduced lending, a former chairman of the Federal Deposit Insurance Corp. said.

“This is a terribly destructive idea to even propose,” William Isaac said in a telephone interview today. Just by making the proposal, the Financial Accounting Standards Board will lead banks to quit making loans without an easily discernable market value, and keep the ones they do make to shorter maturities, Isaac said.
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The proposal comes “in the face of worldwide condemnation,” Isaac said. It conflicts with the recommendations of the Group of 20 nations, the Basel Committee on Banking Supervision and the International Accounting Standards Board, according to the American Bankers Association, which also opposes the plan.

David Larsen, who serves on FASB’s Valuation Resource Group, said the volatility created by markets and fair value “is there whether or not it is measured.”

“It comes down to the question, is greater transparency of help to users of financial statements?” said Larsen, a managing director at New York-based Duff & Phelps Corp.

Mark-to-market accounting destroyed $500 billion of bank capital as traders marked down all assets during the crisis by a total of 27 percent, and many of those values have now returned to near par, Isaac said. “Now FASB is going to spread this disease throughout the system,” he said.

The trouble with mark-to-market is that it assumes an infinitely liquid market. Sometimes, this embedded assumption gets a little frayed around the edges.

Congrats to my nephew Sam Arfin:

TORONTO INVITATIONAL

Rowing – Champions … Boys’ – 1000 m T1x – Sam Arfin, Birchmount Park, 4:39; 1000 m T2x – Sam Arfin and Oscar Kahu, Birchmount Park, 4:15;

It was a quiet but positive day for Canadian preferred shares, with PerpetualDiscounts gaining 15bp and FixedResets up 8bp.

PerpetualDiscounts now yield 6.29%, equivalent to 8.81% interest at the standard equivalency factor of 1.4x. Long corporates now yield 5.65% (maybe a hair more?) after scoring a total return of +0.46% for the month, so the pre-tax interest-equivalent spread (also called the Seniority Spread) now stands at 315bp, a 10bp tightening from the 325bp recorded on May 26.

And that’s it for another month!

Two of the eight new BMO ETFs are of interest:

BMO Long Federal Bond Index ETF (ZFL)
BMO Real Return Bond Index ETF (ZRR)

These have management fees of 20bp and 25bp respectively.

Interesting mea culpa from Scottwood Capital, indicating that yes, there are some investors who believe that a short term credit line will solve structural deficit problems:

As the situation in Greece continued to deteriorate and spread in May, we were indeed watching closely for how that could affect our market and Scottwood’s positions. However, when the EU and IMF announced their $1Trillion rescue package, we believed that that would eliminate many of the – real and perceived – potential macro risks that had been hanging over what had been up to that time extremely healthy and vibrant US credit markets. Our belief was based on the fact that, as opposed to 2008, the Euro governments now had the entire US playbook to show exactly what programs worked (and how, and why) and what did not (and how, and why).

Scottwood does not publish performance figures.

The SEC is holding a public meeting on Market Structure:

The Commission already has proposed rules that would:

• Establish a consolidated audit trail system to help regulators keep pace with new technology and trading patterns in the markets.
• Generally require that information about an investor’s interest in buying or selling a stock be made available to the public, instead of just to a select group operating with a dark pool.
• Effectively prohibit broker-dealers from providing their customers with unfiltered access to exchanges and alternative trading systems and ensure that broker-dealers implement appropriate risk controls.
• Create a large trader reporting system to enhance the Commission’s ability to identify large market participants, collect information on their trades, and analyze their trading activity.

As an old bond buy, I am flabbergasted by point 2. That information is GOLD. I suspect that implentation of point 2 will reduce liquidity, since participants will be less willing to make such indications if it’s going to be broadcast. What’s next? Making it illegal for brokers to work a block trade?

Point 3 also has interesting implications. It would be nice to see Exchange membership opened up to large funds and chip away at the brokerage oligopoly. Unfiltered access was discussed on January 19; to it’s credit, the SEC addressed such a possibility in its request for comments:

The Commission seeks comment on any other potential costs to brokers or dealers that may result from the proposed rule. While the Commission does not anticipate that there would be significant adverse consequences to a broker or dealer’s business, activities, or financial condition as a result of the proposed rule, it seeks commenters’ views regarding the possibility of any such impact. For instance, would the proposed rule impact a broker or dealer’s ability to attract or retain its market access customers? Could a broker or dealer lose order flow, because its customer might seek other arrangements in order to access the securities markets, such as becoming a member of a particular exchange or becoming a broker or dealer? The Commission requests for commenters to quantify those costs, where possible.

I saw what I’m reasonably sure was an Eight-Spotted Forester Moth in my garden today. Apparently my neighbor’s Virginia Creeper is a larval host, which is the first use I’ve ever heard of for the disgusting stuff.

It was another zippetty-doo-dah day in the Canadian preferred share market, with PerpetualDiscounts rocketting up another 57bp, while FixedResets were up 5bp. The gain brings the PerpetualDiscount total return index to its highest level since April 20 and the yields (basically the price index) to their lowest level April 21.

PerpetualDiscounts have returned -0.35% from April 20 and +1.23% month-to-date. Figures for FixedResets are -0.02% and +1.25%, respectively. Three consecutive nice days don’t make a rally – but it’s a lot better than the steady drip-drip-drip of price declines in the sector we’ve been seing all year!

GWO PerpetualDiscounts did especially well on the day, occupying the best five places on the performance table. This was their first day of trading ex-dividend. See comments.

Update, 2010-5-31: Revised figures for PerpetualDiscounts and FixedResets after correction of erroneous dividends (see comments):

The legislation to close the loophole on taxation of “carried interest” (discussed on May 20) has a rather peculiar feature:

Private-equity firms, trying to derail legislation that would boost taxes on their leaders’ pay, are attacking a provision that would make it more costly for executives to sell their own management firms.

The provision, which also would affect operators of hedge funds, would make executives pay ordinary income tax rates on profits from selling a stake in their own management companies. Founders of other types of businesses would remain eligible to pay lower capital-gains rates when they sell. The House is scheduled to vote on the legislation today.
…
The sales provision is intended to stop executives at buyout, venture-capital and real-estate partnerships from circumventing the higher taxes on their pay imposed by the bill, said Matthew Beck, a spokesman for the House Ways and Means Committee. Otherwise, he said, fund managers would sell their stake — and pay the lower tax rate — just before receiving income subject to higher taxes.

Well – I haven’t read the legislation and I’m not a tax lawyer anyway. But this sounds like a ridiculous punitive provision that will pass anyway because it bashes those evil Wall Street Types. I find it very difficult to believe that the income vs. Capital Gain question used as justification is applicable only to private equity firms.

Another day of elevated volume and fine returns, as PerpetualDiscounts gained 60bp to take the total return subindex for this class to its highest level since April 21. FixedResets gained 5bp and continue their record of outperforming PerpetualDiscounts from both that date and month-to-date.