Category: Market Action

The Bank of Canada has released a working paper by Fousseni Chabi-Yo and Jun Yang titled Idiosyncratic Coskewness and Equity
Return Anomalies:

In this paper, we show that in a model where investors have heterogeneous preferences, the expected return of risky assets depends on the idiosyncratic coskewness beta, which measures the co-movement of the individual stock variance and the market return. We find that there is a negative (positive) relation between idiosyncratic coskewness and equity returns when idiosyncratic coskewness betas are positive (negative). Standard risk factors, such as the market, size, book-to-market, and momentum cannot explain the findings. We construct two idiosyncratic coskewness factors to capture the market-wide effect of idiosyncratic coskewness. The two idiosyncratic coskewness factors can also explain the negative and significant relation between the maximum daily return over the past one month (MAX) and expected stock returns documented in Bali, Cakici, and Whitelaw (2009). In addition, when we control for these two idiosyncratic coskewness factors, the return difference for distress-sorted portfolios found in Campbell, Hilscher, and Szilagyi (2008) becomes insignificant. Furthermore, the two idiosyncratic coskewness factors help us understand the idiosyncratic volatility puzzle found in Ang, Hodrick, Xing, and Zhang (2006). They reduce the return difference between portfolios with the smallest and largest idiosyncratic volatility by more than 60%, although the difference is still statistically significant.

Cuomo’s suing Ivy Management, a unit of BONY-Mellon:

The damaging information that Ivy discovered about Madoff and then failed to disclose includes:

In 1997, Ivy learned that there were not enough options to support Madoff’s purported trading strategy.

• Specifically, the volume of Standard and Poor’s 100 Index options (“OEX”) available would only support half of the amount of assets Ivy believed Madoff had under management. This strongly suggested that the trades Madoff had been reporting were not actually being made.
• Between 1997 and 1998, Madoff gave Ivy three vastly different explanations as to where and with whom he traded OEX options, all of which were inconsistent with Ivy’s observations and understanding of OEX options.
• Ivy received information from industry contacts indicating that Madoff was misusing client assets to fund his broker-dealer business instead of investing the money as he claimed he was doing.

…
Internal e-mails reveal that [former Chief Executive Officer Lawrence] Simon and [former Chief Investment Officer Howard] Wohl intentionally failed to disclose their doubts about Madoff to their clients with heavy Madoff-related investments:

On December 16, 1998, the day after Madoff gave Ivy his third explanation about his option trades, Wohl recommended to Simon that Ivy withdraw all of the funds they personally managed from Madoff, including some of their own money, writing:

• “I’m concerned that he [Madoff] now admits that he does not execute all of the index options on the exchange that there are ‘unknown’ counterparties that if these options are not paid off he’d lose less than 100%. It remains a matter of faith based on great performance – this doesn’t justify any investment, let alone 3%.”
• In response, Simon argued that Ivy should not withdraw the investment it had placed with Madoff because that could lead Ivy’s clients to withdraw their money from Madoff as well, which would significantly impact their total revenue, writing: “Amount we now have with Bernie in Ivy’s partnerships is probably less than $5 million. The bigger issue is the 190 mil or so that our relationships have with him which leads to two problems, we are on the legal hook in almost all of the relationships and the fees generated are estimated based on 17+% returns …. [to be] $1.275 Million… Are we prepared to take all the chips off the table, have assets decrease by over $300 million and our overall fees reduced by $1.6 million or more, and, one wonders if we ever “escape” the legal issue of being the asset allocator and introducer, even if we terminate all Madoff related relationships?”

Just like with SocGen, Barings and just about every other fraud: willful blindness.

To my astonishment, Trichet actually gave a thoughtful speech, titled What role for finance?, although his premises do not support his conclusions:

Sellers of securitised products must disclose all information about the underlying loan structure so that both investors and rating agencies can correctly price the risks embedded in these products. More transparency can also be achieved by central counterparty clearing of bilateral over-the-counter trading arrangements.

There was lots of transparency in the sub-prime market; it just wasn’t used and – in some cases – the math was wrong. Additionally, firms were hired as collateral managers on the basis of – as far as I can tell – complete lack of managerial skill. Come on, people. The sell-side has no brains at all – they’re not paid to have brains, they’re paid to have bright smiles and firm handshakes while telling clients how astute they are. Give me a break. Fortunately, however, the buy-side isn’t presenting much of a challenge:

JPMorgan Chase & Co.’s traders matched those at Goldman Sachs Group Inc. in making money every day of the first quarter, a first for both companies.

Bank of America did the same:

During the three months ended March 31, 2010, positive trading-related revenue was recorded for 100 percent of the trading days of which 95 percent were daily trading gains of over $25 million. This compares to the three months ended December 31, 2009, where positive trading-related revenue was recorded for 86 percent of the trading days of which 58 percent were daily trading gains of over $25 million, 10 percent of the trading days had losses greater than $25 million and the largest loss was $90 million.

Back to Trichet:

For instance, investors are currently allowed to buy credit defaults swaps without holding the underlying asset, typically a bond. By first buying the credit default swaps and then trying to affect market sentiment by going short on the underlying bond, investors can make large profits without a change in the fundamental value of the reference entity and, worse, to its detriment.

If there is truly no change in the fundamental value of the reference entity, then there will be plenty of people stepping up to buy it cheaply. This is merely a problem of liquidity.

I commented yesterday that the EU bail-out was only a stop-gap the relies on future reforms; Bernanke agrees:

Federal Reserve Chairman Ben S. Bernanke told U.S. senators today that the euro region’s almost $1 trillion aid package to stem its debt crisis isn’t a cure- all, according to a participant.

“He said, ‘This is basically not a panacea,’” and that the measures are “temporary,” Alabama Senator Richard Shelby, the senior Republican on the Banking Committee, told reporters in Washington after a closed-door briefing Bernanke held with the panel. “There’s got to be fundamental underlying changes in their economies, not just Greece, but a lot of other countries,” Shelby cited Bernanke as saying.

The Canadian preferred share market continued recent trends today, with PerpetualDiscounts losing 10bp while FixedResets gained 10bp. Volume returned to heavy levels. There was quite a bit of volatility.

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	2.62 %	2.77 %	44,678	20.87	1	-1.4214 %	2,112.6
FixedFloater	5.00 %	3.07 %	42,647	20.26	1	1.0228 %	3,198.2
Floater	2.08 %	2.33 %	103,420	21.51	3	-0.2105 %	2,339.6
OpRet	4.92 %	4.24 %	91,418	2.97	11	-0.0464 %	2,292.9
SplitShare	6.49 %	6.83 %	126,763	3.53	2	0.0224 %	2,101.3
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	-0.0464 %	2,096.6
Perpetual-Premium	5.53 %	4.77 %	22,814	15.83	1	0.0000 %	1,824.2
Perpetual-Discount	6.32 %	6.39 %	216,909	13.32	77	-0.1030 %	1,689.4
FixedReset	5.53 %	4.38 %	517,296	3.58	44	0.0985 %	2,143.2

Performance Highlights
Issue	Index	Change	Notes
IAG.PR.F	Perpetual-Discount	-2.22 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-11 Maturity Price : 22.39 Evaluated at bid price : 22.50 Bid-YTW : 6.71 %
IAG.PR.A	Perpetual-Discount	-2.17 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-11 Maturity Price : 17.61 Evaluated at bid price : 17.61 Bid-YTW : 6.64 %
IGM.PR.B	Perpetual-Discount	-1.47 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-11 Maturity Price : 22.69 Evaluated at bid price : 22.82 Bid-YTW : 6.52 %
BAM.PR.E	Ratchet	-1.42 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-11 Maturity Price : 22.87 Evaluated at bid price : 21.50 Bid-YTW : 2.77 %
PWF.PR.E	Perpetual-Discount	-1.32 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-11 Maturity Price : 20.97 Evaluated at bid price : 20.97 Bid-YTW : 6.63 %
ELF.PR.F	Perpetual-Discount	-1.29 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-11 Maturity Price : 18.41 Evaluated at bid price : 18.41 Bid-YTW : 7.30 %
PWF.PR.G	Perpetual-Discount	-1.24 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-11 Maturity Price : 21.95 Evaluated at bid price : 22.35 Bid-YTW : 6.65 %
HSB.PR.C	Perpetual-Discount	-1.23 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-11 Maturity Price : 20.02 Evaluated at bid price : 20.02 Bid-YTW : 6.47 %
GWO.PR.J	FixedReset	1.02 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-01-30 Maturity Price : 25.00 Evaluated at bid price : 26.70 Bid-YTW : 4.21 %
BAM.PR.G	FixedFloater	1.02 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-11 Maturity Price : 25.00 Evaluated at bid price : 21.73 Bid-YTW : 3.07 %
BNS.PR.N	Perpetual-Discount	1.03 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-11 Maturity Price : 21.50 Evaluated at bid price : 21.50 Bid-YTW : 6.17 %
GWO.PR.F	Perpetual-Discount	1.09 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-11 Maturity Price : 22.89 Evaluated at bid price : 23.15 Bid-YTW : 6.46 %
PWF.PR.O	Perpetual-Discount	1.26 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-11 Maturity Price : 22.37 Evaluated at bid price : 22.48 Bid-YTW : 6.51 %
RY.PR.R	FixedReset	1.36 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-26 Maturity Price : 25.00 Evaluated at bid price : 26.91 Bid-YTW : 4.11 %
GWO.PR.M	Perpetual-Discount	1.53 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-11 Maturity Price : 23.10 Evaluated at bid price : 23.25 Bid-YTW : 6.37 %
MFC.PR.C	Perpetual-Discount	2.06 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-11 Maturity Price : 18.30 Evaluated at bid price : 18.30 Bid-YTW : 6.26 %

Volume Highlights
Issue	Index	Shares Traded	Notes
BMO.PR.P	FixedReset	102,724	RBC crossed blocks of 10,000 and 40,000 at 26.30. RBC sold 20,000 to Nesbitt at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-03-27 Maturity Price : 25.00 Evaluated at bid price : 26.23 Bid-YTW : 4.23 %
TRP.PR.A	FixedReset	89,014	TD crossed 24,800 at 25.25; RBC crossed 40,000 at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-01-30 Maturity Price : 25.00 Evaluated at bid price : 25.25 Bid-YTW : 4.51 %
CM.PR.G	Perpetual-Discount	67,350	National bought 10,000 from Scotia at 21.05. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-11 Maturity Price : 21.05 Evaluated at bid price : 21.05 Bid-YTW : 6.48 %
RY.PR.R	FixedReset	54,313	Nesbitt crossed 40,000 at 26.60. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-26 Maturity Price : 25.00 Evaluated at bid price : 26.91 Bid-YTW : 4.11 %
PWF.PR.D	OpRet	50,000	RBC crossed two blocks of 25,000 each at 25.71. YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2012-10-30 Maturity Price : 25.00 Evaluated at bid price : 25.54 Bid-YTW : 4.36 %
BAM.PR.B	Floater	47,839	Nesbitt crossed 25,000 at 17.00. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-11 Maturity Price : 16.85 Evaluated at bid price : 16.85 Bid-YTW : 2.35 %
There were 51 other index-included issues trading in excess of 10,000 shares.

We can expect regulators, polititicans and the media to trumpet the latest Economist piece on Canada … but how many will quote from the last two paragraphs?

How much of the Canadian model can, or should, be exported? Critics of the Canadian banks reckon that their conservatism was the flip side of a cosy oligopoly. The big five were barred from merging and partly protected from foreign interlopers. They shared out a profitable domestic market and gave up competing on price. And keeping tabs on the banks is much easier when all are relatively small by international standards and are based within a few hundred yards of each other and of regulators in Toronto.

The result is that Canadians pay more for financial services than others and there is little innovation. Even so, as taxpayers elsewhere dig deep to pay for their bankers’ wheezes they might think that Canadians got a bargain. Replicating Canadian banking elsewhere would be hard. But when Americans and Europeans press Mr Harper at the G20 meeting to accept a tax on banks to curb their riskiness, he has reason to retort that Canadian-style regulation does the job better.

Good article on High Frequency / Algorithmic trading and risk control from the Chicago Fed (hat tip: Financial Webring Forum):

Sometimes, these trading errors have been the result of the removal of pre-trade risk controls to decrease latency. For example, futures broker MF Global suffered $141.5 million in losses in February 2008, when a rogue trader initiated transactions during off hours using a terminal intended for the business of major customers. One breakdown in MF Global’s internal risk systems was the removal of trade limits, which had been done to increase trading speeds.
…
A well-built algorithm contains risk controls, such as price and quantity limits.

The Themis Trading blog has some good commentary on the May 6 Bungee Jump:

The story is a failed market structure. The market failed today.

The market melted down and “liquidity providers” quickly pulled all bids. According to today’s Wall Street Journal, high frequency firm, Tradebot, closed down its computer systems completely, as did New Jersey’s own Tradeworx, who was so critical of our silly market structure comments in their SEC comment letter. By the way, if you don’t know who or what Tradebot is, it is the proprietary trading engine that used to be part of the BATS exchange. In fact the reason BATS was rolled out as an exchange to begin with was to lower costs and facilitate trades for Tradebot (Tradebot’s 1251 NW Briarcliff Pkwy Kansas City address is next door to BATS’s North Mulberry Drive address fyi). In the WSJ article Mr. Cummings said his Tradebot system was designed to stop trading when the market becomes too volatile, because he “doesn’t want to compound the problem.” Too bad he doesn’t understand that that was and is the problem. To make matters worse, while some high frequency firms shut down yesterday and pulled their bids, as we warned they would do for over a year and a half, other high frequency firms turned from being liquidity providers to liquidity demanders, as they turned around and indiscriminately hit bids like Randolph and Mortimer Duke.
…
Today’s price swings in a great number of stocks highlight the inherent and systemic risk of our automated stock market, which has few checks and balances in place. Once the market sensed stress, the bids were cancelled and market sell orders chased prices down to the lowest possible point. Investors who thought they were protecting themselves with the prudent use of stop orders were left with fills that were far away from the closing price. In some stocks like our SAM example above, this was $0.01. We warned of the potential for HFT to behave this way when we met with and showed our regulators the NY Fed study that highlighted HFT’s vanishing act around stressful news announcements in the currency markets.

We read this in a recent comment letter to the SEC about HFT and couldn’t agree more: “When markets are in equilibrium these new participants increase available liquidity and tighten spreads. When markets face liquidity demands these new participants increase spreads and price volatility and savage investor confidence.”
…

The market action of May 6th has demonstrated that our equity market has major systemic risks built into it. There was a time today when folks didn’t know the true price and value of a stock. The price discovery process ceased to exist. High frequency firms have always insisted that their mini-scalping activities stabilized markets and provided liquidity, and on May 6th they just shut down. They pulled the plug, as we always said they would, and they even admit it in the papers this morning. We need a new mousetrap. This is not an isolated incident, and it will happen again.
…
Significant Movers This Morning:

It doesn’t matter; earnings don’t matter. Our regulators have decreed that stock valuation shall be determined by the whims of “liquidity providing” HFT firms armed by our new breed of exchanges.

Earnings Today:

It doesn’t matter; earnings don’t matter. Our regulators have decreed that stock valuation shall be determined by the whims of “liquidity providing” HFT firms armed by our new breed of exchanges.

Expected Earnings Later:

It doesn’t matter; earnings don’t matter. Our regulators have decreed that stock valuation shall be determined by the whims of “liquidity providing” HFT firms armed by our new breed of exchanges.

Significant Upgrades and Downgrades:

It doesn’t matter; earnings don’t matter. Our regulators have decreed that stock valuation shall be determined by the whims of “liquidity providing” HFT firms armed by our new breed of exchanges.

While I have not dealt with Themis Trading, I do have a certain amount of respect for them as traders – they have clearly studied market microstructure quite intensively and if I were putting together a major US equity trading operation, I would certainly take the time to find out more about them and what they might be able to do for me.

However, trading is not investing and their closing comments betray their bias. Even after allowing for a fair amount of hyperbole, earnings matter and valuations matter. Accenture pays a semi-annual dividend of $0.375 and made $0.60 per share in 2Q10 (note: I have not actually analyzed Accenture and have no idea of its value. It’s just an example, and I’m assuming the quoted figures are sustainable). If some idiot wants to sell me shares at $0.01 each, I have no problem buying them all day long … and if the value is good, why should I care what the price is? Increased volatility brings a lovely range of potential entry and exit points – an actual investor can make quite a bit of extra money punishing the bozos.

The SEC release of public comments on the Equity Market Structure concept release included the Themis Trading response. There is no public comment from Tradeworx – they just had a meeting.

In the Themis response, they note:

Traditionally, exchanges have competed for revenues in three different areas: listings, transaction fees and market data revenue. A recent study by Grant Thornton details what the firm refers to as “The Great Delisting Machine Timeline.” They detail how a progression of regulation (including order handling, decimalization and Sarbanes-Oxley) has destroyed the economic incentive for traditional market making, investment banking and research.

It is interesting to compare this (claimed) equity market structure effect with the corporate bond market, in which the greater transparency provided by TRACE has led to a market that is tighter but with significantly less depth.

All in all though, I will be most interested to learn what the SEC finds in their investigation of the bungee jump – the data will be very good, I’m sure, although it may be presented in such a way as to provide support for whatever conclusions they wish to draw.

I suspect that there will be a certain amount of evidence that stop-loss orders will be implicated to at least some degree. Stop loss orders are the most idiotic order type known to man (if you’re willing to sell something at $45, why the hell aren’t you selling at $50? It makes no sense!) but have immense popularity. There are so popular, in fact, that even if the evidence shows they were 100% responsible for the bungee jump (it won’t: ain’t nuthin in the markets ever so clear cut; but just say), there will be no talk of banning them.

James Hamilton of Econbrowser mentions stop-loss orders in his discussion of the bungee jump:

… if momentum-chasing algorithms come to rule the financial world, those who try to follow them will be the biggest losers.

Another notion that’s popular with many financial gurus these days is the claim that you can eliminate certain risks to your portfolio with the right strategy of automatic trading and stop-loss sell orders. Again that claim invites an economic question– if you are getting an insurance policy, who is selling it to you? I believe the implicit answer is, you are counting on the market-maker to insure you by taking the other side of your escape transactions. But the curious thing about such an insurance policy is that the market-maker gets to decide what premium to charge you after you ask to collect on the policy. You just might find that the state of the world when you and your buddies all most desperately want to cash in on your insurance is exactly the time when the premium proves to be ruinously expensive.

The SEC has held a meeting about the bungee jump:

This morning, SEC Chairman Mary Schapiro had a constructive meeting with the leaders of six exchanges — the New York Stock Exchange, NASDAQ, BATS, Direct Edge, ISE and CBOE — and the Financial Industry Regulatory Authority to discuss the causes of Thursday’s market events, the potential contributing factors, and possible market reforms.

“As a first step, the parties agreed on a structural framework, to be refined over the next day, for strengthening circuit breakers and handling erroneous trades.

Too bad investors weren’t represented at the meeting; but then, investor scum would only get in the way.

The Greek crisis is now worse than the Lehman crisis – at least by one measure:

The cost of insuring against losses on European bank bonds soared to a record, surpassing levels triggered by the collapse of Lehman Brothers Holdings Inc., as the sovereign debt crisis deepened.

The Markit iTraxx Financial Index of credit-default swaps on 25 banks and insurers soared as much as 40 basis points to 223, according to JPMorgan Chase & Co. The index closed at 212 basis points March 9, 2009. Swaps on Greece, Portugal, Spain and Italy rose to or near all-time high levels.
…
The spread between the three-month dollar London interbank offered rate and the overnight indexed swap rate, a barometer of the reluctance of banks to lend that’s known as the Libor-OIS spread, is at 18 basis points, up from 6 basis points on March 15 and near the highest level in more than five months. It’s still far from the record 364 basis points in October 2008, almost a month after Lehman’s bankruptcy.

Funny, isn’t it, that we are told that the Lehman crisis arose because of incompetent decision makers, while the Greek crisis is due to speculators and hedge funds. However, funding is sufficiently tight that the dollar swap line has been re-established:

In response to the re-emergence of strains in U.S. dollar short-term funding markets in Europe, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing the re-establishment of temporary U.S. dollar liquidity swap facilities. These facilities are designed to help improve liquidity conditions in U.S. dollar funding markets and to prevent the spread of strains to other markets and financial centers. The Bank of Japan will be considering similar measures soon. Central banks will continue to work together closely as needed to address pressures in funding markets.

The Federal Open Market Committee has authorized temporary reciprocal currency arrangements (swap lines) with the Bank of Canada, the Bank of England, the European Central Bank (ECB), and the Swiss National Bank. The arrangements with the Bank of England, the ECB, and the Swiss National Bank will provide these central banks with the capacity to conduct tenders of U.S. dollars in their local markets at fixed rates for full allotment, similar to arrangements that had been in place previously. The arrangement with the Bank of Canada would support drawings of up to $30 billion, as was the case previously.

These swap arrangements have been authorized through January 2011. Further details on these arrangements will be available shortly.

The Bank of Canada states:

The Bank of Canada and the Federal Reserve have agreed to re-establishment of the US$30 billion swap facility (reciprocal currency arrangement) that had expired 1 February 2010. This facility would be accessed, should the need arise, to provide U.S.-dollar liquidity in Canada. If drawn on by the Bank of Canada, the swap would provide liquidity facilities for use by financial institutions in Canada that are similar in nature to those being announced today by the other central banks. This swap facility expires in January 2011.

This agreement provides the Bank of Canada with flexibility to address rapidly evolving developments in financial markets. The Bank judges that it is not necessary for it to draw on this swap facility at this time, but that it is prudent to have the agreement in place. Should the swap be drawn on, the details of the liquidity facilities provided would depend on the specific market circumstances at the time.

Additionally, the Fed has approved a practice session with the Term Deposit Facility, whereby banks can deposit free Fed Funds with the Fed on a competitive basis.

The EU was able to agree on a bail-out:

European policy makers unveiled an unprecedented loan package worth nearly $1 trillion and a program of securities purchases as they spearheaded a drive to stop a sovereign-debt crisis that threatened to shatter confidence in the euro. Jolted into action by last week’s slide in the currency to a 14-month low and soaring bond yields in Portugal and Spain, governments of the 16 euro nations agreed to make loans of as much as 750 billion euros ($962 billion) available to countries under attack from speculators.

The “attack from speculators” line means the reporter has drunk the Kool-aid. The fund is all very well and good, but it is not as simple a matter as providing funding for a solvent but illiquid financial firm until such time as markets recover and its assets mature. Unless Club Med takes credible actions, not just to reduce their deficits to 3%, not just to balance the budget, but to pay down some of their debt … it’s only delaying the inevitable.

Continued heavy volume today, with PerpetualDiscounts continuing their slide and finishing down 3bp, while FixedResets continued their recovery, gainng 12bp.

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	2.58 %	2.66 %	45,121	20.92	1	0.0000 %	2,143.0
FixedFloater	5.06 %	3.12 %	43,008	20.20	1	-2.2273 %	3,165.8
Floater	2.07 %	2.33 %	104,115	21.52	3	-0.1051 %	2,344.5
OpRet	4.92 %	4.25 %	92,490	2.88	11	0.1214 %	2,293.9
SplitShare	6.50 %	6.95 %	128,045	3.53	2	-0.1789 %	2,100.8
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.1214 %	2,097.6
Perpetual-Premium	5.53 %	4.77 %	23,758	15.83	1	0.0399 %	1,824.2
Perpetual-Discount	6.32 %	6.39 %	217,019	13.31	77	-0.0259 %	1,691.2
FixedReset	5.53 %	4.44 %	518,216	3.58	44	0.1151 %	2,141.1

Performance Highlights
Issue	Index	Change	Notes
BAM.PR.G	FixedFloater	-2.23 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-10 Maturity Price : 25.00 Evaluated at bid price : 21.51 Bid-YTW : 3.12 %
W.PR.H	Perpetual-Discount	-1.28 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-10 Maturity Price : 20.90 Evaluated at bid price : 20.90 Bid-YTW : 6.67 %
GWO.PR.M	Perpetual-Discount	1.46 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-10 Maturity Price : 22.77 Evaluated at bid price : 22.90 Bid-YTW : 6.46 %
BAM.PR.I	OpRet	2.48 %	YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2013-12-30 Maturity Price : 25.00 Evaluated at bid price : 25.25 Bid-YTW : 5.41 %
GWO.PR.H	Perpetual-Discount	4.00 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-10 Maturity Price : 19.23 Evaluated at bid price : 19.23 Bid-YTW : 6.41 %

Volume Highlights
Issue	Index	Shares Traded	Notes
TRP.PR.A	FixedReset	552,065	RBC crossed blocks of 100,000 and 300,000 at 25.25. Nesbitt crossed 100,000 at 25.25 and RBC crossed 13,900 at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-01-30 Maturity Price : 25.00 Evaluated at bid price : 25.20 Bid-YTW : 4.55 %
PWF.PR.H	Perpetual-Discount	74,520	RBC crossed blocks of 36,900 and 20,000 at 22.00. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-10 Maturity Price : 21.95 Evaluated at bid price : 21.95 Bid-YTW : 6.62 %
BMO.PR.M	FixedReset	55,825	TD crossed 50,000 at 25.81. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-09-24 Maturity Price : 25.00 Evaluated at bid price : 25.80 Bid-YTW : 3.89 %
BMO.PR.P	FixedReset	41,054	RBC crossed 25,000 at 26.30. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-03-27 Maturity Price : 25.00 Evaluated at bid price : 26.23 Bid-YTW : 4.23 %
CM.PR.H	Perpetual-Discount	38,247	Desjardins crossed 12,400 at 18.80. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-10 Maturity Price : 18.82 Evaluated at bid price : 18.82 Bid-YTW : 6.44 %
BNS.PR.K	Perpetual-Discount	33,971	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-10 Maturity Price : 19.44 Evaluated at bid price : 19.44 Bid-YTW : 6.24 %
There were 48 other index-included issues trading in excess of 10,000 shares.

Market fragmentation is being suggested as the cause of yesterday’s bungee jump:

Federal regulators reviewing yesterday’s stock plunge will try to determine if the fivefold increase in the number of American equity exchanges has left them unable to manage the biggest surges in volume.
…
The rout showed how the fragmentation of the U.S. equity market may suppress demand when it’s needed most, especially when the New York Stock Exchange attempts to calm trading, said James Angel, a finance professor at Georgetown University in Washington. NYSE Euronext Chief Operating Officer Larry Leibowitz said the Big Board prevented a bigger decline.
…
Rapid-fire orders trigger what the NYSE calls liquidity replenishment points, or LRPs, shifting the market into auctions. While the system is designed to restore order on the Big Board, trading is so fast during times of panic that orders routed past the exchange may swamp other venues and exhaust buy orders, said Angel at Georgetown.

That’s when prices may plummet as orders execute against so-called stub quotes from market makers. Brokers can set the quotes as low as a penny a share because they’re never expected to be used.
…
Computer programs that increase sell orders when stocks are falling may have exacerbated yesterday’s plunge, said Nick Colas, chief market strategist at BNY ConvergEx Group LLC in New York. Programs that may have smoothed out trading during periods of low volatility can “make market moves a lot worse” when equities are plunging, he said.

I beg to differ. Market fragmentation did not cause the bungee jump. Stupid dumb trading triggered the bungee jump. What kind of idiot sends in a market order to sell Accenture when it’s down 99.9% on the day on no news?

The way to eliminate stupid dumb trading is to ensure that stupid dumb traders lose all their money, go bankrupt and die.

There’s trouble in the German real-estate mutual fund sector:

Two German real estate mutual funds with properties worth 10.5 billion euros ($13 billion) closed for redemptions yesterday after government proposals to impose an industrywide writedown of assets spooked investors.

SEB Asset Management AG closed its ImmoInvest fund and KanAm Grund KAG closed Grundinvest Fonds after German Finance Minister Wolfgang Schaeuble released a draft bill May 3 that proposed to introduce a 10 percent cut in asset values.

In the past five years, Germany’s 89 billion-euro real estate mutual-fund industry has been rocked by unprecedented waves of redemptions by investors. The writedown proposal is accompanied by a mechanism to smooth out violent swings in appraisal values, which the government blames for the surge in redemptions.
…
Investors fled German property funds after Lehman Brothers Holdings Inc.’s bankruptcy in September 2008, which forced 12 to close for redemptions. That was only the second time in half a century that German funds had shut for redemptions.

Three closed in December 2005 and January 2006 after probes by Germany’s financial regulator and a Frankfurt prosecutor raised concern that property valuations had been inflated and led to the eventual withdrawal of 11.6 billion euros from all of the funds.

TMW Immobilien Weltfonds halted redemptions Feb. 8, just two months after reopening. That followed a 21 percent writedown in the assets of Aberdeen Asset Management’s DEGI Global Business, which also halted redemptions in November.

The New York Fed has released its Quarterly Research Review.

The SEC & CFTC have issued a joint statement:

Thursday’s unusual trading activity included extreme volatility for a number of individual securities. This is inconsistent with the effective functioning of our capital markets and we will make whatever structural or other changes are needed.

Extreme volatility is a good thing for long term investors, but I suppose that doesn’t matter when you’ve got to prove you’re Doing Something.

The Euro’s defense may include trading restrictions:

European leaders agreed to set up an emergency fund to halt the spread of Greece’s fiscal woes, seeking to prevent a sovereign debt crisis from shattering confidence in the 11-year-old euro.
…
European officials declined to disclose the size of the stabilization fund, to be made up of money borrowed by the European Union’s central authorities with guarantees by national governments. Finance ministers will meet at 4 p.m. tomorrow in Brussels to flesh out the details.

“It will be a very clear signal against those who want to speculate against the euro,” German Chancellor Angela Merkel said.

Asked whether steps against speculation would include restrictions on short sales or credit default swaps, [European Commission President Jose] Barroso said “some of the points you have mentioned will be contemplated.”
…
The extra yield that investors demand to hold Greek, Portuguese and Spanish debt instead of safer German bonds rose to euro-era highs yesterday. The premium on 10-year government bonds jumped as high as 973 basis points for Greece, 354 basis points for Portugal and 173 basis points for Spain.

Maybe Barroso can bring back the old Iron Curtain crimes of “economic sabotage” for trading foreign currency on the black market!

PerpetualDiscounts got whacked again, losing 30bp on continued heavy volume, while FixedResets fared better and lost only 5bp on the day.

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	2.58 %	2.66 %	46,657	20.92	1	0.0000 %	2,143.0
FixedFloater	4.94 %	3.00 %	43,474	20.34	1	0.0000 %	3,237.9
Floater	2.07 %	2.33 %	104,673	21.52	3	-1.0231 %	2,347.0
OpRet	4.93 %	4.10 %	96,051	2.89	11	-0.1533 %	2,291.1
SplitShare	6.48 %	6.95 %	129,470	3.54	2	-0.4674 %	2,104.6
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	-0.1533 %	2,095.0
Perpetual-Premium	5.53 %	4.77 %	23,937	15.84	1	0.0000 %	1,823.5
Perpetual-Discount	6.32 %	6.37 %	217,182	13.35	77	-0.3040 %	1,691.6
FixedReset	5.54 %	4.47 %	511,650	3.59	44	-0.0458 %	2,138.7

Performance Highlights
Issue	Index	Change	Notes
GWO.PR.H	Perpetual-Discount	-3.95 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-07 Maturity Price : 18.49 Evaluated at bid price : 18.49 Bid-YTW : 6.66 %
BAM.PR.K	Floater	-1.79 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-07 Maturity Price : 17.00 Evaluated at bid price : 17.00 Bid-YTW : 2.33 %
BAM.PR.B	Floater	-1.73 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-07 Maturity Price : 17.00 Evaluated at bid price : 17.00 Bid-YTW : 2.33 %
PWF.PR.O	Perpetual-Discount	-1.73 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-07 Maturity Price : 22.02 Evaluated at bid price : 22.11 Bid-YTW : 6.62 %
GWO.PR.M	Perpetual-Discount	-1.66 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-07 Maturity Price : 22.46 Evaluated at bid price : 22.57 Bid-YTW : 6.56 %
PWF.PR.G	Perpetual-Discount	-1.27 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-07 Maturity Price : 22.12 Evaluated at bid price : 22.56 Bid-YTW : 6.58 %
GWO.PR.F	Perpetual-Discount	-1.22 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-07 Maturity Price : 22.32 Evaluated at bid price : 22.72 Bid-YTW : 6.57 %
ELF.PR.G	Perpetual-Discount	-1.18 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-07 Maturity Price : 16.70 Evaluated at bid price : 16.70 Bid-YTW : 7.21 %
BAM.PR.H	OpRet	-1.18 %	YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2012-03-30 Maturity Price : 25.00 Evaluated at bid price : 25.15 Bid-YTW : 5.76 %
BAM.PR.P	FixedReset	1.17 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-10-30 Maturity Price : 25.00 Evaluated at bid price : 26.75 Bid-YTW : 5.45 %
TD.PR.Y	FixedReset	1.19 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-07 Maturity Price : 25.38 Evaluated at bid price : 25.43 Bid-YTW : 4.56 %

Volume Highlights
Issue	Index	Shares Traded	Notes
TRP.PR.A	FixedReset	163,789	Nesbitt crossed 40,000 at 25.25. RBC crossed 50,000 at the same price. Scotia crossed 43,100 at the same price again. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-01-30 Maturity Price : 25.00 Evaluated at bid price : 25.23 Bid-YTW : 4.52 %
RY.PR.X	FixedReset	76,202	Desjardins bought 52,700 from CIBC at 26.70. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-09-23 Maturity Price : 25.00 Evaluated at bid price : 26.70 Bid-YTW : 4.53 %
RY.PR.D	Perpetual-Discount	75,665	RBC crossed blocks of 25,000 and 18,300 at 18.55. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-07 Maturity Price : 18.55 Evaluated at bid price : 18.55 Bid-YTW : 6.09 %
MFC.PR.E	FixedReset	69,715	RBC crossed blocks of 12,300 and 12,800 at 26.25; bought 25,000 from anonymous at the same price; and crossed 12,500 at the same price again. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-10-19 Maturity Price : 25.00 Evaluated at bid price : 26.26 Bid-YTW : 4.57 %
TD.PR.G	FixedReset	65,685	TD crossed 20,000 at 26.70; Desjardins crossed 26.75 at the same price; TD crossed 20,000 at 26.70. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-05-30 Maturity Price : 25.00 Evaluated at bid price : 26.65 Bid-YTW : 4.57 %
TD.PR.S	FixedReset	61,557	TD crossed 50,000 at 25.60. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-08-30 Maturity Price : 25.00 Evaluated at bid price : 25.60 Bid-YTW : 4.27 %
There were 42 other index-included issues trading in excess of 10,000 shares.

More fun at Club Med?

Greek bond yields yesterday rose above their level before the government agreed on a European Union-led bailout on May 2 as escalating protests cast doubt on its ability to drive through austerity measures. Spanish and Portuguese bonds also renewed last week’s slide as investors question their ability to cut budget deficits that are among the highest in the euro area.
…
The extra yield that investors demand to buy its debt over German bunds rose 21 basis points to a 14-month high of 117.8 points. Spain’s benchmark IBEX Index, the euro region’s worst performer after Greece, fell 5.4 percent to the lowest since July. Portugal’s spread rose 40 basis points to 247 yesterday.

The euro weakened 1.4 percent to $1.3011, the lowest in more than a year. The currency retreated further in Asian trading today, to $1.2961 as of 11 a.m. in Singapore.

The Swiss are making a big play to attract mobile professionals:

Swiss government officials and Geneva-based financial advisers have come to London to lure rich residents with glowing descriptions of the country’s low taxes, safe streets, private-banking options and convenient ski weekends.

“We are here to make it easier for you to come to Switzerland,” says Martin Meyer, head of economic development for the Swiss canton of Valais, which borders Lake Geneva, Bloomberg Markets reports in its June issue.

Next door, an overflow crowd of 50 more attendees enjoys wine and canapes as they watch the presentation on closed- circuit televisions in a mahogany-lined library, which includes a chart showing the prevalence of English as a language for doing business in Switzerland. A JPMorgan Chase & Co. banker who declined to be identified confides he’s planning to relocate next year. His main complaint: higher U.K. taxes, a theme the Swiss delegation has pounced upon.

Geithner has a solution to the problem: regulate everything!

No regulator or supervisor had the legal authority to look across the financial system and take action to prevent the diversion of activity away from regulation. A system that applied safety and soundness regulation only to banks was unable to protect the overall safety and stability of a financial system composed substantially of non-banks that played a role traditionally reserved for banks.

Moreover, accounting and disclosure requirements and regulatory capital requirements helped encourage the shift in risk to the parallel financial system, without adequately capturing the remaining exposure of banks to those risks.

When the crisis hit and huge swaths of the American financial system got caught in the run on the parallel banking system, many came running to the Federal Reserve for liquidity and for protection.

The emergency financial response to the run that started in the parallel financial system was necessary to protect our economy from an even greater calamity. But if our regulatory and supervisory systems had had the tools and authorities to prevent risks from accumulating in unregulated sectors of the financials system in the first place, such a large emergency response would not have been necessary. That is a key reason why financial reform is so essential.

This is disingenuous at best. The Fed had unlimited authority to penalize the exposure of the core financial system to the shadow financial system; by limiting such exposure it could have restrained the growth of the shadow sector and limited the damage when the bust occurred.

However, they elected to ignore concentration risk and things like Citigroup’s “liquidity puts” (discussed April 13 and risk-weighted liquidity guarantees at a low value; ignored concentration risk, and allowed risk-weighting of bank paper according to the credit rating of the sovereign.

Financial crises will never be abolished. GM & Chrysler have cost far more than the piddly little bank crisis, and Club Med is going to cost even more. But the former players are popular with blue-collar voters and the latter with expansionary EU politicians, while banks are always a popular target for regulatory opprobrium.

Hank Paulson commented on Bear Stearns today:

Former Treasury Secretary Henry Paulson said bets against the survival of Bear Stearns Cos. before the firm’s sale to JPMorgan Chase & Co. amounted to “the wolf pack trying to pull down the weak deer.”

“I don’t use the word collusive because it’s got a legal connotation,” Paulson said today at a hearing of the Financial Crisis Inquiry Commission in Washington. “It sure looked to me like some kind of coordinated action.”

Paulson said he wasn’t “saying there was behavior that was illegal” and he thinks short-selling “is essential for the price-discovery process.”

All this brings to mind the importance of liquidity. Price discovery requires liquidity. Say BSC is at $50, a bunch get shorted, and the price goes down. Theoretically, this should mean that holders of other brokerages will find BSC relatively more attractive and sell, say, JPM to buy BSC. Eventually, the price of the brokerage sector will go down and become relatively more attractive to holders of other sectors; a new equilibrium will be established.

But say all the potential buyers of BSC are full up? What if investment decisions are not made on the basis of hard-nosed facts, but on the basis of the marketting department’s evaluation of how much the clients want to see a troubled brokerage on their books? The slope of the demand curve will decline; perhaps go flat; and the price goes to zero. Contingent Capital is one way of ensuring that the demand for common is not flat (although forced selling by irate bond investors may further reduce the price), but it’s an interesting question and one that I have not yet been able to answer.

Common stock had an exciting day:

The Dow Jones Industrial Average plunged almost 1,000 points today before paring its decline and ended down 347.80 points, or 3.2 percent, at 10,520.32. About $700 billion of U.S. stock-market value was erased in less than 10 minutes, data compiled by Bloomberg show.
…
A total of 19 trades of 100 shares each [of Accenture common] were executed at 1 cent in seven seconds from 2:47 p.m. to 2:48 p.m. in New York, a minute after the Dow average plunged by the most since the market crash of 1987, the data showed.

Eighteen of the trades were executed on the CBOE Stock Exchange and were canceled. The first trade that sent Accenture to a penny was executed on the Nasdaq Stock Market. That transaction has yet to be canceled, the data showed.

Accenture shares closed today at $41.09, down 2.6 percent in New York Stock Exchange composite trading.

There is speculation that the plunge was due to trader error:

A possible culprit for the drop was a trader error in which someone entered a “b” for billion instead of an “m” for million in a trade. Multiple sources confirmed the report to CNBC and CNBC.com

The apparent trigger for the massive selloff, which began shortly after 2 pm ET, was the approval of austerity measures by the Greek Parliament, which sparked renewed rioting in Athens.

It could very well be trader error – the absence of a clear trigger, the steepness of the descent and the swift recovery make that plausible – but I’d be happier with such an explanation if some corroborative evidence were provided: ‘waves of selling in 23 liquid basket stocks’, for instance.

Update: Corroborative evidence?

While the first half of the Dow Jones Industrial Average’s 998.5-point plunge probably reflected normal trading, the selloff snowballed because of orders sent to venues with no investors willing to match them, [NYSE Euronext COO Larrry] Leibowitz said in an interview on Bloomberg Television.

“If you look at the charts you can see fairly clearly where the trades came in,” he said from New York. “It’s that V-shaped drop where it came down and snapped right back up. You had some very high-cap stocks trading down 50 percent or large percentages in a split instant because there really was no liquidity in electronic markets.”
…
“The fact that it snapped back so quickly made it clear that it was an aberration,” Leibowitz said. “When a large order or series of orders comes into electronic markets, they don’t really have any way to recognize either that they’re a mistake or to slow them to down to attract the proper liquidity on the other side. And so the electronic markets actually traded all the way through the slower New York Stock Exchange markets where we were trying to slow down trading.”

…End of update

The SEC & CFTC are looking into it:

The SEC and CFTC are working closely with the other financial regulators, as well as the exchanges, to review the unusual trading activity that took place briefly this afternoon. We are also working with the exchanges to take appropriate steps to protect investors pursuant to market rules.

“We will make public the findings of our review along with recommendations for appropriate action.

Just a little too precious for my taste. An “investor” has no need of protection in cases like this. The ones who need protection from volatility are better referred to as “bozos”.

The Canadian preferred share market was nowhere nearly as exciting, but went in the same direction as PerpetualDiscounts lost 28bp and FixedResets were down 13bp. Volume lightened considerably to well-maybe-just-a-little-above-average, with FixedResets scoring a shut-out on the volume highlights table.

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	2.58 %	2.66 %	48,507	20.93	1	-2.1973 %	2,143.0
FixedFloater	4.94 %	3.00 %	43,920	20.34	1	-0.4525 %	3,237.9
Floater	2.05 %	2.29 %	104,883	21.64	3	-0.6032 %	2,371.2
OpRet	4.92 %	4.03 %	94,599	2.90	11	-0.1992 %	2,294.7
SplitShare	6.45 %	6.89 %	129,025	3.54	2	-0.8824 %	2,114.5
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	-0.1992 %	2,098.3
Perpetual-Premium	5.53 %	4.77 %	22,167	15.84	1	0.0000 %	1,823.5
Perpetual-Discount	6.30 %	6.37 %	215,089	13.36	77	-0.2829 %	1,696.8
FixedReset	5.54 %	4.42 %	512,293	3.59	44	-0.1313 %	2,139.6

Performance Highlights
Issue	Index	Change	Notes
BAM.PR.I	OpRet	-3.41 %	YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2013-12-30 Maturity Price : 25.00 Evaluated at bid price : 24.64 Bid-YTW : 6.15 %
IAG.PR.E	Perpetual-Discount	-2.30 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-06 Maturity Price : 23.25 Evaluated at bid price : 23.41 Bid-YTW : 6.50 %
BAM.PR.E	Ratchet	-2.20 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-06 Maturity Price : 22.52 Evaluated at bid price : 21.81 Bid-YTW : 2.66 %
CIU.PR.B	FixedReset	-2.05 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-07-01 Maturity Price : 25.00 Evaluated at bid price : 26.91 Bid-YTW : 4.62 %
TD.PR.Y	FixedReset	-1.95 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-06 Maturity Price : 25.07 Evaluated at bid price : 25.13 Bid-YTW : 4.61 %
MFC.PR.A	OpRet	-1.75 %	YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2015-12-18 Maturity Price : 25.00 Evaluated at bid price : 25.25 Bid-YTW : 4.03 %
GWO.PR.I	Perpetual-Discount	-1.70 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-06 Maturity Price : 17.35 Evaluated at bid price : 17.35 Bid-YTW : 6.58 %
POW.PR.C	Perpetual-Discount	-1.68 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-06 Maturity Price : 21.81 Evaluated at bid price : 22.27 Bid-YTW : 6.57 %
POW.PR.D	Perpetual-Discount	-1.55 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-06 Maturity Price : 19.00 Evaluated at bid price : 19.00 Bid-YTW : 6.66 %
BAM.PR.K	Floater	-1.37 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-06 Maturity Price : 17.31 Evaluated at bid price : 17.31 Bid-YTW : 2.29 %
BNA.PR.D	SplitShare	-1.19 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2014-07-09 Maturity Price : 25.00 Evaluated at bid price : 25.67 Bid-YTW : 6.89 %
BAM.PR.H	OpRet	1.39 %	YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2012-03-30 Maturity Price : 25.00 Evaluated at bid price : 25.45 Bid-YTW : 5.08 %
CU.PR.B	Perpetual-Discount	1.54 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-06 Maturity Price : 24.04 Evaluated at bid price : 24.40 Bid-YTW : 6.14 %

Volume Highlights
Issue	Index	Shares Traded	Notes
TD.PR.E	FixedReset	102,476	TD crossed 90,000 at 26.80. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-05-30 Maturity Price : 25.00 Evaluated at bid price : 26.80 Bid-YTW : 4.41 %
BMO.PR.M	FixedReset	95,197	TD crossed 90,000 at 25.85. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-09-24 Maturity Price : 25.00 Evaluated at bid price : 25.80 Bid-YTW : 3.88 %
TD.PR.G	FixedReset	81,840	TD crossed blocks of 50,000 and 25,000 at 26.86 each. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-05-30 Maturity Price : 25.00 Evaluated at bid price : 26.77 Bid-YTW : 4.44 %
RY.PR.T	FixedReset	78,020	RBC crossed blocks of 29,000 and 40,000 at 26.85. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-09-23 Maturity Price : 25.00 Evaluated at bid price : 26.86 Bid-YTW : 4.35 %
TD.PR.I	FixedReset	66,255	RBC crossed 17,600 at 26.81 and the same amount at 26.82. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-08-30 Maturity Price : 25.00 Evaluated at bid price : 26.76 Bid-YTW : 4.50 %
NA.PR.O	FixedReset	59,979	National crossed 40,000 at 26.80; RBC crossed 10,000 at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-17 Maturity Price : 25.00 Evaluated at bid price : 26.80 Bid-YTW : 4.58 %
There were 33 other index-included issues trading in excess of 10,000 shares.

Agreement has been reached on the US too-big-to-fail fund:

The deal would eliminate a proposed industry-paid $50 billion fund to cover the government’s costs of liquidating a failing financial firm, Dodd said today in an interview. Republicans said the fund would encourage bailouts rather than prevent them.
…
The Dodd-Shelby agreement would apply to a section of the bill that would give the government authority to liquidate large failing financial firms whose collapse would threaten the economy. The two senators have agreed to replace the proposed pre-funded $50 billion reserve with language that would require regulators to impose fees on the financial industry to recoup costs for unwinding a company after a collapse, Dodd said today.

The amendment passed 93-5. Typical of modern Republicans – spend first, tax later. Much later!

The Club Med countries may be paying much, much later!

Greek bond yields yesterday rose above their level before the government agreed on a European Union-led bailout on May 2 as escalating protests cast doubt on its ability to drive through austerity measures. Spanish and Portuguese bonds also renewed last week’s slide as investors question their ability to cut budget deficits that are among the highest in the euro area.
…
That didn’t stop a sell-off in Spanish bonds yesterday. The extra yield that investors demand to buy its debt over German bunds rose 21 basis points to a 14-month high of 117.8 points. Spain’s benchmark IBEX Index, the euro region’s worst performer after Greece, fell 5.4 percent to the lowest since July. Portugal’s spread rose 40 basis points to 247 yesterday.

The euro weakened 1.4 percent to $1.3011, the lowest in more than a year. The currency retreated further in Asian trading today, to $1.2961 as of 11 a.m. in Singapore.

Volume in the Canadian preferred share market was off significantly today, but remains on the high side of normal. PerpetualDiscounts squeaked out another win, gaining 2bp, while FixedResets continued their recovery with a 15bp gain. Volatility was muted, with only four issues on the performance highlights list.

PerpetualDiscounts now yield 6.35%, equivalent to 8.89% interest at the standard equivalency factor of 1.4x. Long Corporates now yield 5.6% (gaining total return of +44bp on the month-to-date), so the pre-tax interest-equivalent spread is now about 330bp, an increase from the +320bp reported at month end, as long corporate yields have come in a little while PerpetualDiscounts have remained flat.

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	2.53 %	2.56 %	50,174	21.05	1	0.4052 %	2,191.2
FixedFloater	4.92 %	2.98 %	43,686	20.37	1	0.0000 %	3,252.7
Floater	2.04 %	2.25 %	100,710	21.73	3	0.0172 %	2,385.6
OpRet	4.91 %	4.09 %	94,393	1.78	11	-0.1492 %	2,299.2
SplitShare	6.40 %	6.54 %	128,624	3.55	2	-0.1762 %	2,133.3
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	-0.1492 %	2,102.4
Perpetual-Premium	5.53 %	4.77 %	23,084	15.84	1	0.0000 %	1,823.5
Perpetual-Discount	6.27 %	6.35 %	215,997	13.38	77	0.0163 %	1,701.6
FixedReset	5.53 %	4.38 %	520,251	3.59	44	0.1539 %	2,142.5

Performance Highlights
Issue	Index	Change	Notes
BAM.PR.H	OpRet	-1.61 %	YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2012-03-30 Maturity Price : 25.00 Evaluated at bid price : 25.10 Bid-YTW : 5.86 %
HSB.PR.D	Perpetual-Discount	1.23 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-05 Maturity Price : 19.80 Evaluated at bid price : 19.80 Bid-YTW : 6.41 %
ELF.PR.G	Perpetual-Discount	1.32 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-05 Maturity Price : 16.88 Evaluated at bid price : 16.88 Bid-YTW : 7.13 %
NA.PR.N	FixedReset	1.40 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2013-09-14 Maturity Price : 25.00 Evaluated at bid price : 26.16 Bid-YTW : 3.83 %

Volume Highlights
Issue	Index	Shares Traded	Notes
GWO.PR.J	FixedReset	122,703	Desjardins crossed 100,000 at 26.60. TD crossed 19,200 at 26.66. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-01-30 Maturity Price : 25.00 Evaluated at bid price : 26.38 Bid-YTW : 4.56 %
TD.PR.K	FixedReset	73,044	Nesbitt crossed 32,000 at 26.80; TD crossed 25,000 at 26.85. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-08-30 Maturity Price : 25.00 Evaluated at bid price : 26.90 Bid-YTW : 4.36 %
SLF.PR.C	Perpetual-Discount	57,540	RBC crossed 50,000 at 17.50. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-05 Maturity Price : 17.44 Evaluated at bid price : 17.44 Bid-YTW : 6.48 %
BNS.PR.X	FixedReset	40,950	Desjardins crossed 34,500 at 26.88. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-05-25 Maturity Price : 25.00 Evaluated at bid price : 26.75 Bid-YTW : 4.47 %
NA.PR.M	Perpetual-Discount	34,810	Nesbitt crossed 16,700 at 23.85. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-05 Maturity Price : 23.65 Evaluated at bid price : 23.85 Bid-YTW : 6.32 %
BMO.PR.J	Perpetual-Discount	31,271	Desjardins crossed 12,000 at 18.72. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-05 Maturity Price : 18.72 Evaluated at bid price : 18.72 Bid-YTW : 6.03 %
There were 38 other index-included issues trading in excess of 10,000 shares.

The Volcker Rule is costing Citigroup some employees:

[Citigroup prop trader Jay] Glasser, 53, who was based in New York and specializes in derivative and currency trades linked to Japanese interest rates, generated an average of more than $10 million a year of revenue for Citigroup from 2007 through 2009, people with knowledge of the matter said. He started at Nomura last week and is based in New York, said Peter Truell, a spokesman for the Tokyo-based firm.

Glasser told his former bosses at Citigroup, which has lost at least 10 proprietary traders this year, that he quit partly because of concern that President Barack Obama’s proposed Volcker rule may force U.S. banks to divest or close proprietary-trading units, people with knowledge of the matter said. As a Japanese securities firm, Nomura wouldn’t be subject to the rule. Citigroup is the third-biggest U.S. bank by assets.

The administration is warning that fragmentation can go too far:

Treasury Secretary Timothy F. Geithner said Congress won’t improve the stability of the financial system by forcing banks to split up core parts of their business.

In testimony today to the Senate Finance Committee, Geithner declined to comment on a specific proposal from Senator Blanche Lincoln to force Bank of America Corp., JPMorgan Chase & Co. and other lenders to separate swaps trading from commercial banking. The proposal is part of a broader financial overhaul proposed by Senate Banking Committee Chairman Christopher Dodd.
…
Federal Deposit Insurance Corp. Chairman Sheila Bair has come out against the proposal and the Federal Reserve has warned that the measure could be costly to the banks and their customers.

There is a push to ensure that big banks won’t be the only ones with ‘living wills’:

German Chancellor Angela Merkel’s coalition stepped up calls for allowing the “orderly” default of euro-region member states burdened with debt to avoid a repeat of the Greek fiscal crisis.
…
Merkel, who faces elections in Germany’s most populous state on May 9, is seeking to shift focus from the Greek bailout to drawing lessons from the euro’s biggest crisis. An “orderly insolvency” process would ensure that creditors participate in any future rescue, she said on ARD television yesterday.

In other words, the idea is that sovereign debt in the EU will less secure than previously … that could have some very interesting knock-on effects.

The CalPERS lawsuit against the rating agencies is proceeding:

Standard & Poor’s, Moody’s Investors Service and Fitch Ratings must face the California Public Employees Retirement System’s lawsuit claiming their faulty risk assessments on structured investment vehicles caused $1 billion in losses.

A state court judge in San Francisco rejected the companies’ requests to dismiss Calpers’ claims of negligent misrepresentation, Brad Pacheco, a spokesman for Calpers, the largest U.S. pension fund, said today in a phone interview.

Funny – I used to respect CalPERS. Now it seems that they don’t do their own credit analysis. I last mocked CalPERS and its lackadaisical attitude towards investment management on July 31, 2009.

Assiduous Reader KH writes in and says:

your comment today about the Goldman Sachs story. This story seems to be going in the wrong direction. In my view, what is being missed here is the reality that the buyers and sellers of these CDOs were purely gambling and knew (or should have known) they were doing so. I mean it’s not as if these synthetic CDOs represented any productive capital at work or any socially redeeming value. It was a zero-sum game bet, similar to betting a portion of an institutional portfolio on red at the roulette table. Isn’t the real issue whether pension portfolios should be allowed to gamble like this in the first place?

In the particular story about ABACUS, none of the players was a pension fund, but the point is well taken – particularly in light of the CalPERS lawsuit! However, I do not feel that securities laws and regulations should restrict the investments of pension funds. Structured notes can have characteristics that make them very useful for portfolio management (although they usually don’t. Structured notes are most often vehicles whereby the intent of investment mandates can be evaded; for instance, buying “S&P Bear” instruments in a portfolio that is supposed to be fully invested.).

I take issue with the implication that “redeeming social value” should be judged, with access to investments being restricted accordingly. In the first place, whether a particular investment action has redeeming social value is very much in the eye of the beholder. Secondly, as I pointed out yesterday, Paulson’s action in shorting the instruments had the effect of intercepting the ACA/IKB sub-prime investment in the financial marketplace; otherwise, that money would have gone into further distorting an already over-heated US housing market. Paulson’s action can be viewed as helping to precipitate the crisis sooner, rather than later, before the inefficient allocation of capital did even more damage to the real economy. Which is something I consider to be socially redeeming.

PerpetualDiscounts squeaked out a win today, gaining 2bp, while FixedResets continued their strong recovery with a win of 16bp. Volume was slightly off, but still at elevated levels dominated by FixedResets.

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	2.54 %	2.58 %	50,746	21.03	1	0.0450 %	2,182.3
FixedFloater	4.92 %	2.98 %	43,988	20.38	1	0.4545 %	3,252.7
Floater	2.04 %	2.25 %	101,966	21.73	3	-0.2579 %	2,385.2
OpRet	4.90 %	3.98 %	98,319	1.18	11	-0.0320 %	2,302.7
SplitShare	6.39 %	6.50 %	133,430	3.56	2	0.2428 %	2,137.1
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	-0.0320 %	2,105.6
Perpetual-Premium	5.53 %	4.76 %	24,038	15.85	1	0.0399 %	1,823.5
Perpetual-Discount	6.28 %	6.35 %	217,100	13.37	77	0.0236 %	1,701.3
FixedReset	5.53 %	4.42 %	524,779	3.59	44	0.1568 %	2,139.2

Performance Highlights
Issue	Index	Change	Notes
ELF.PR.F	Perpetual-Discount	-1.20 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-04 Maturity Price : 18.87 Evaluated at bid price : 18.87 Bid-YTW : 7.11 %
ELF.PR.G	Perpetual-Discount	-1.13 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-04 Maturity Price : 16.66 Evaluated at bid price : 16.66 Bid-YTW : 7.22 %
IAG.PR.A	Perpetual-Discount	-1.09 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-04 Maturity Price : 18.20 Evaluated at bid price : 18.20 Bid-YTW : 6.41 %
TRI.PR.B	Floater	-1.08 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-04 Maturity Price : 22.71 Evaluated at bid price : 23.00 Bid-YTW : 1.69 %
MFC.PR.D	FixedReset	1.09 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-07-19 Maturity Price : 25.00 Evaluated at bid price : 27.00 Bid-YTW : 4.78 %
IAG.PR.C	FixedReset	1.19 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-01-30 Maturity Price : 25.00 Evaluated at bid price : 26.41 Bid-YTW : 4.73 %
CU.PR.B	Perpetual-Discount	8.00 %	Simply a reversal of yesterday’s nonsense. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-04 Maturity Price : 23.94 Evaluated at bid price : 24.30 Bid-YTW : 6.28 %

Volume Highlights
Issue	Index	Shares Traded	Notes
BMO.PR.O	FixedReset	145,714	RBC bought 11,700 from Nesbitt at 27.09; Desjardins crossed 100,000 at 27.15. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-06-24 Maturity Price : 25.00 Evaluated at bid price : 27.05 Bid-YTW : 4.30 %
TD.PR.G	FixedReset	111,620	National crossed 70,800 at 26.77; RBC bought 13,900 from anonymous at 26.65. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-05-30 Maturity Price : 25.00 Evaluated at bid price : 26.66 Bid-YTW : 4.55 %
TD.PR.I	FixedReset	97,713	Desjardins crossed 49,000 at 26.70; RBC crossed 25,000 at 26.73. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-08-30 Maturity Price : 25.00 Evaluated at bid price : 26.73 Bid-YTW : 4.52 %
MFC.PR.E	FixedReset	88,440	RBC crossed 65,000 at 26.25. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-10-19 Maturity Price : 25.00 Evaluated at bid price : 26.16 Bid-YTW : 4.66 %
GWO.PR.H	Perpetual-Discount	76,803	TD crossed 40,000 at 19.35. Desjardins crossed 20,000 at 19.16. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-04 Maturity Price : 19.20 Evaluated at bid price : 19.20 Bid-YTW : 6.41 %
TD.PR.E	FixedReset	65,910	National crossed 11,900 at 26.78; Desjardins crossed 34,600 at 26.71. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-05-30 Maturity Price : 25.00 Evaluated at bid price : 26.72 Bid-YTW : 4.49 %
There were 46 other index-included issues trading in excess of 10,000 shares.

This one will cause some angst for the bubble-gum crowd:

Warren Buffett, the Wall Street critic who invested $5 billion in Goldman Sachs Group Inc., said he supports the bank’s Chief Executive Officer Lloyd Blankfein “100 percent” after the firm was sued by regulators for fraud.
…
Buffett said he will discuss the trade at the center of the regulator’s suit later today at the meeting and “I will bet that of the 40,000 people in there, 39,900 of them have a misconception.”

God endorses Satan! Of course, Buffett achieved his status by a very rare process known technically as “thinking about what he was doing”.

He went further later on:

“I can’t see what difference it makes if it were Paulson on the other side of the deal or Goldman Sachs or Berkshire Hathaway,” Buffett said today at his company’s annual meeting in Omaha, Nebraska. Buffett said it “wasn’t so obvious” when the investments were sold in 2007 that the housing market would collapse.

Gracious heavens, the bubble-gum crowd is going to have a collective nervous breakdown!

Buffett said today that Berkshire has four decades of experience with Goldman Sachs and no expectation that the bank would offer investment advice or disclose its own stance on trades.

“We are in the business of making our own decisions,” Buffett said. “They do not owe us a divulgence of their position.”

A grown-up! An actual grown-up! Quick, call the nannies! It occurs to me that one reason Buffett has done so well is that he’s an adult in a world of kiddies.

Suprisingly, I don’t see his comments highlighted in one of the sacred places where the acolytes proselytize and interpret the Holy Word. I guess Buffett can only be considered wise when he recites platitudes that people want to hear … but that’s the marketting biz!

Blankfein has learned that lesson and is attempting to distance himself and the firm from some headlined eMails:

Lloyd Blankfein, chief executive officer of Goldman Sachs Group Inc., said a “callousness” toward clients demonstrated in some e-mails released to the public this week is unacceptable and doesn’t represent the firm.

“There were some e-mails where some people were projecting I would say, at best indifference, and at worst a callousness,” Blankfein, 55, said in an interview on the “Charlie Rose” television show last night, according to a transcript. While he said those e-mails aren’t representative of the firm, “it’s inexcusable if 10 people think that way or thought that way.”

But, of course, you don’t get to be head of a big (public) firm by telling people what they don’t want to hear. I’ve had a look, but unfortunately have been unable to find a link to the actual transcript.

Never let it be said that PrefBlog doesn’t report both sides of the story: Suna Reyent writes a post on Seeking Alpha titled Why SEC has a Strong Case Against Goldman, Part 1. She states, for instance:

SEC alleges that Goldman not only hid Paulson’s role from all long parties via making it appear like a third long party (ACA) picked the portfolio, which is a material misrepresentation on its own, but it also made one investor (ACA) believe that Paulson was interested in the long side of the deal.

That’s where I stopped reading. ACA was the Selection Agent; they were paid to be the Selection Agent; they had fiduciary responsibility as the Selection Agent. The idea that Goldman made one investor (ACA) believe that Paulson was interested in the long side of the deal. is:

• contested by Goldman & Tourre
• completely non-material and irrelevent even if true.

Some light reading with a moral… Never Kick Your Chief Regulator in the Nuts. Or, to put it another way, never disclose that the emperor has no clothes. The light reading is best accompanied by SEC Fraud Allegations against MBIA. Of course, since this was settled without admission of guilt, we’ll never know whether they were really guilty, or whether not paying up would have constituted kicking the Chief Regulator in the Nuts.

Ackman, by the way, agrees with PrefBlog and Buffet about Goldman Sachs:

Ackman also staunchly defends Goldman Sachs. He says that the media misrepresents the charges against Goldman Sachs. He states that it would have been unethical had Goldman disclosed who the counter party(John Paulson) was on the trade. Ackman states that SEC laws require client confidentiality. Paulson himself did not know who was the long on the trade nor did he care.

I’ll go further, actually. Any fiduciary who cared about the identity of the seller, or who would have allowed the identity of the seller to influence his decision on the investment in any way whatsoever should be in jeopardy of losing his license. Investing is not a kiddie game of follow the leader … or shouldn’t be.

Trichet gave a speech decrying the propensity of investment managers to act in (what they believe to be) their clients’ best interest:

Gradually, the focus of finance shifted in the recent past. From its traditional role of helping the real economy to cope with economic risk, finance became a self-referential activity. The notion of “financial engineering” is a striking illustration of the shift of attitudes that spearheaded the changing focus of finance.

The ABACUS transaction is a good illustration of the point. ACA & IKB beleived that sub-prime borrowers were getting a deal favourable to the lenders. Paulson thought they were getting way too rich a deal. Goldman got between them, as brokers do, and created a security referencing the deals. Had this deal not gone forward, Paulson would not have been able to take a view on the market (it’s hard to short houses with mortgages!); the ACA/IKB money would have eventually have flowed into the sub-prime market, thus distorting the real economy even further. By creating a vehicle to interupt the inefficient allocation of capital to an overheated sector of the market, Goldman did the world financial system a great service, and deserves our thanks … but I suppose that profits on the books and expectations of future profits from similar deals will satisfy them.

James Hamilton of Econbrowser writes a post on the evolution of investment strategy at Reserve Primary Fund, which has attracted (so far) some very good comments. That post bulds on a very good post he wrote previously in which he traced the flow of funds into the US housing market.

The Greek bail-out conditions have been released. The effect on the total economy is fearsome:

*Economic contraction of 4 percent this year and 2.6 percent in 2011. Growth will return in 2012 at 1.1 percent and 2.1 percent in 2013 and 2014.

*Debt will rise from 133.3 percent of GDP this year to 145.1 percent in 2011, 148.6 in 2012 and peak at 149.1 percent in 2013. It is projected to fall to 144.3 percent in 2014.

*Budget deficit will shrink to 8.1 percent this year, 7.6 percent next year, 6.5 percent in 2012, 4.9 percent in 2013 and below the 3 percent demanded by the European Union in 2014.

There is some speculation that regulatory uncertainty is affecting the real economy:

Bank are increasing purchases of U.S. government securities to pump up profits while lending to businesses languishes near the lowest levels since credit markets started to freeze almost three years ago.

Holdings of Treasuries rose each of the past five weeks, an increase of $63.2 billion to $1.5 trillion, according to Federal Reserve data. At the same time, commercial and industrial loans climbed less than 1 percent to $1.27 trillion and are down 23 percent from the record high level in October 2008.
…
“The risk of owning Treasures is lower than creating loans,” said Anthony Crescenzi, a market strategist and money manager at Newport Beach, California-based Pacific Investment Management Co., the world’s largest bond-fund manager. “There is no clarity on what the capital climates will be domestically or on a global scale with regulation coming down the pipes, which means banks will be banking their money in safer assets.”

Jerome Kerviel, the SocGen trader last discussed on PrefBlog on July 28, 2009, has written a book:

The five-billion-Euro rogue trader Jerome Kerviel will claim in a book this week that he was merely a “prostitute” in the “great banking orgy” and should be treated leniently in his trial next month.

Kerviel, 33, has broken a long silence with an autobiography and two newspaper interviews in which he says that his €4.9bn losses in rogue trades in 2006-07 should be blamed on a world banking industry “disconnected from reality”.

One reason not to ban shorting is that it’s a risky business:

Hedge funds that profit from falling shares have seen 34 percent of their value evaporate since February 2009, according to Chicago-based Hedge Fund Research Inc. Zions Bancorp., Sears Holdings Corp. and Wynn Resorts Ltd., among the favorites of so- called short-sellers, caused the biggest losses as their shares more than tripled.
…
The combination of record-low interest rates, first-quarter economic growth of 3.2 percent and analyst estimates for the fastest profit gains in 14 years erased 94 percent of the HFRI EH Short Bias Index’s advance from June 2007 to February 2009. The better news for bulls is that the percentage of New York Stock Exchange shares that remain shorted is higher than any time before 2008, providing more grist for gains should speculators be forced to retreat.

Some recovery in the Canadian preferred share market today on continued heavy volume, with PerpetualDiscounts squeaking out a win of 5bp, while FixedResets were up 36bp.

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	2.54 %	2.58 %	50,829	21.02	1	1.7415 %	2,181.4
FixedFloater	4.94 %	3.00 %	45,733	20.35	1	0.0000 %	3,237.9
Floater	2.03 %	2.26 %	105,337	21.72	3	-0.7000 %	2,391.4
OpRet	4.90 %	3.87 %	99,302	1.19	11	0.0000 %	2,303.4
SplitShare	6.40 %	6.57 %	134,863	3.56	2	-0.0662 %	2,131.9
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.0000 %	2,106.3
Perpetual-Premium	5.53 %	4.77 %	25,032	15.84	1	0.0000 %	1,822.8
Perpetual-Discount	6.28 %	6.36 %	218,625	13.39	77	0.0462 %	1,700.9
FixedReset	5.54 %	4.41 %	502,788	3.59	44	0.3642 %	2,135.8

Performance Highlights
Issue	Index	Change	Notes
CU.PR.B	Perpetual-Discount	-8.72 %	This one is courtesy of a lazy market-maker. Three transactions late in the day comprised the entire day’s volume of 1,300 shares; all were executed at 24.65. That took out the bid, though, and the closing quote was 22.50-24.99 (!!), 5×20. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-03 Maturity Price : 22.21 Evaluated at bid price : 22.50 Bid-YTW : 6.80 %
BAM.PR.K	Floater	-1.13 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-03 Maturity Price : 17.50 Evaluated at bid price : 17.50 Bid-YTW : 2.26 %
POW.PR.C	Perpetual-Discount	1.08 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-03 Maturity Price : 21.95 Evaluated at bid price : 22.45 Bid-YTW : 6.51 %
BNS.PR.Y	FixedReset	1.18 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-03 Maturity Price : 23.96 Evaluated at bid price : 24.00 Bid-YTW : 4.01 %
PWF.PR.G	Perpetual-Discount	1.69 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-03 Maturity Price : 22.60 Evaluated at bid price : 22.86 Bid-YTW : 6.50 %
BAM.PR.E	Ratchet	1.74 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-03 Maturity Price : 22.51 Evaluated at bid price : 22.20 Bid-YTW : 2.58 %
BMO.PR.P	FixedReset	1.75 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2015-03-27 Maturity Price : 25.00 Evaluated at bid price : 26.15 Bid-YTW : 4.29 %
BNS.PR.T	FixedReset	2.06 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-05-25 Maturity Price : 25.00 Evaluated at bid price : 26.80 Bid-YTW : 4.39 %
ELF.PR.F	Perpetual-Discount	4.49 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-03 Maturity Price : 19.10 Evaluated at bid price : 19.10 Bid-YTW : 7.02 %

Volume Highlights
Issue	Index	Shares Traded	Notes
BNS.PR.X	FixedReset	93,927	Desjardins crossed two blocks of 20,000 each at 26.60. RBC crossed 40,000 at 26.80. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-05-25 Maturity Price : 25.00 Evaluated at bid price : 26.62 Bid-YTW : 4.60 %
CM.PR.L	FixedReset	89,410	RBC crossed 20,000 at 26.62; Desjardins crossed 12,300 at 26.68. RBC crossed 35,000 at 26.67. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-05-30 Maturity Price : 25.00 Evaluated at bid price : 26.70 Bid-YTW : 4.74 %
TD.PR.K	FixedReset	71,127	Nesbitt crossed 65,000 at 26.70. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-08-30 Maturity Price : 25.00 Evaluated at bid price : 26.70 Bid-YTW : 4.55 %
CM.PR.M	FixedReset	62,570	RBC crossed 29,200 at 26.69 and 30,000 at 26.70. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-08-30 Maturity Price : 25.00 Evaluated at bid price : 26.83 Bid-YTW : 4.66 %
TD.PR.C	FixedReset	53,776	RBC crossed 50,000 at 26.10. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-02 Maturity Price : 25.00 Evaluated at bid price : 26.17 Bid-YTW : 4.30 %
TD.PR.I	FixedReset	45,411	RBC crossed 25,000 at 26.70. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-08-30 Maturity Price : 25.00 Evaluated at bid price : 26.70 Bid-YTW : 4.55 %
There were 50 other index-included issues trading in excess of 10,000 shares.

I can’t resist picking on Basis Yield Alpha Fund (discussed yesterday; it’s crying about having bought Timberwolf notes from Goldman) a little bit more. It was among the earliest crunch casualties:

[2007-08-28] Basis Yield Alpha Fund, a hedge fund specializing in corporate and structured credit, on Wednesday filed for bankruptcy protection in the United States amid mounting losses from U.S. subprime mortgage assets, court papers show.
…
Earlier in the month, the hedge fund firm told investors that losses at one of its portfolios had lost more than 80 percent in assets.

Award winning!

Basis earned the “Fund of the Year” title at the 2005 AsiaHedge awards and Macquarie Bank Ltd.’s “Skilled Manager of the Year” in 2004.

The lenders got paid:

Banks that lent to failed hedge fund Basis Yield Alpha, run by Australia’s Basis Capital, are likely to get all their money back and there could be a payment to investors, the fund said. Yield Alpha, which started the year with about $700m, has returned to solvency and can afford to repay banks which seized the fund’s assets when it missed margin calls earlier this year. The development is a result of continued payouts by structured credits in which Basis invested, apparently resolving one of the few situations in which lenders to a hedge fund lost money. Basis became the second hedge fund group this year to see one of its funds collapse amid the US subprime crisis, after the failure of two funds run by Bear Stearns.

Budget cuts in Greece may put Canada’s 1990’s experience to shame:

Greek Prime Minister George Papandreou said the country’s survival was at stake in talks to win a potential $159 billion European Union-led bailout in exchange for budget cuts denounced by unions as “savage.”
…
Papandreou’s budget cuts may include a three-year wage freeze for public workers and eliminating two of their 14 annual salary payments, the ADEDY union said. Greece’s NET Radio reported that cuts could amount to 10 percentage points of gross domestic product. The deficit was 13.6 percent of GDP in 2009.
…
Other deficit-cutting steps include increasing sales tax and raising the cap on the number of workers who can be fired to 4 percent from 2 percent, Kathimerini newspaper said, without saying where it got the information.

There is a sort-of encouraging trend for US banks:

Gerald J. Ford, who became a billionaire by purchasing distressed lenders during the last banking crisis, isn’t waiting around during this one for Sheila Bair’s Federal Deposit Insurance Corp. to offer him a deal.

After bidding unsuccessfully on several lenders seized by the FDIC, Ford said he’s pushing ahead with a $500 million injection for Pacific Capital Bancorp, a California lender that has said it may collapse. He’s among the private-equity investors who are now willing to buy banks without an FDIC guarantee on loan losses.

“We’re trying to do this one sooner rather than later,” Ford, 65, said in an interview yesterday. “We’ve been out there looking for a long time.”

Private-equity firms are going after live banks after complaining the FDIC put up too many obstacles and changed the rules for buying failed lenders, which are piling up at the fastest rate in two decades. Three days before Ford’s deal, private-equity firm Thomas H. Lee Partners LP agreed to pay $134.7 million for a stake in Sterling Financial Corp., a Spokane, Washington-based lender that’s still open after posting two annual losses.

Both deals depend on the U.S. Treasury Department agreeing to take a loss on the stake held by its bank bailout fund. The Treasury signed on to the Sterling deal yesterday, according to the bank.
…
The Sterling accord calls for the bank to raise a total of $720 million and would give Boston-based Lee a 19.9 percent stake. The U.S. agreed to swap its $303 million stake for new securities valued at $75.8 million, Sterling said in a statement on April 29. Treasury spokesman Andrew Williams declined to comment and Richard Walsh Jr. at Thomas H. Lee didn’t immediately respond to a request for comment.

At Pacific Capital, the agency would be required to exchange $180.6 million for common shares at about 20 cents on the dollar, according to a statement. Pacific Capital has told investors it may not survive without new capital.

If Treasury is involved, then it’s a political issue – which it should be. However, the details of the deals would have to be examined very closely to see whether, all in, Treasury taking a loss now is better for taxpayers than the FDIC (maybe) taking a loss later.

The forces of do-goodism have received a mild rebuff:

Spain is lancing an 18 billion-euro ($24 billion) investment bubble in solar energy that has boosted public liabilities, choking off new projects as it works to cut power prices and insulate itself from Greece’s debt crisis.

Industry Minister Miguel Sebastian is negotiating reductions in subsidies for solar plants that would curb energy costs, a ministry spokesman said this week. Grupo T-Solar Global SA, the world’s biggest photovoltaic plant owner, shelved its Spanish stock offering three days ago. Solar Opportunities SL postponed a 130 million-euro deal due to be signed today.
…
Spain is battling on several fronts to revive its economy and convince government bondholders it can avoid getting dragged into a Greek-style debt spiral after Standard & Poor’s cut its credit rating April 28. Solar-plant owners including General Electric Co. earn about 12 times what’s paid for power from fossil fuels. Most of that is a subsidy charged to customers.

You can only waste money if you’ve got money to waste! Unfortunately, the Smitherman subsidy aimed at making Ontario a hot-bed of world-class lobbying is still considered sane.

OSFI’s Mark White has delivered a speech titled P&C Reinsurance to Fit the Times – A Question of Balance; the limits and collateralization rules on Property and Casualty reinsurance are being revamped. This follows the Response Paper: Reforming OSFI’s Regulatory and Supervisory Regime for Reinsurance, published in late March.

Transcripts from 2004 show that the Fed was perplexed by the early housing boom; at the June meeting a researcher stated:

With regard to the question of owning versus renting, it depends to some extent on what is happening to interest rates because that changes that calculation at the margin. So it’s really important to plot any kind of valuation measure relative to an opportunity cost. Just showing the rent-to-price ratio I think would have been somewhat misleading; it’s really that gap that we think is the meaningful measure of valuation. And it looks somewhat rich, taking account of the fact that interest rates are relatively low and income growth has been relatively strong. I don’t want to leave the impression that we think there’s a huge housing bubble. We believe a lot of the rise in house prices is rooted in fundamentals. But even after you account for the fundamentals, there’s a part of the increase that is hard to explain.

SEC Commissioner Luis A. Aguilar has delivered a speech to the Investment Adviser Association Annual Conference

The Senate Bill, however, has abandoned its strong position in the face of determined lobbying by the insurance and brokerage industries. The revised version that was voted out of the Senate Banking Committee on March 22nd has eliminated the provision applying the fiduciary standard to brokers who provide investment advice. It would, instead, require a one-year study by the SEC concerning the effectiveness of existing standards for “providing personalized investment advice and recommendations about securities to retail customers.”

I continue to have concerns about this retreat from requiring a fiduciary standard for all who provide investment advice. First, I see no need to study the effectiveness of existing obligations for investment advisers. We already have a strong, workable standard that has been in use successfully for decades, and I would not support any attempt to weaken it. Second, as with the House Bill, I question why the protection of the fiduciary standard should be limited to “retail” customers. It is readily apparent from recent Commission enforcement cases — such as the cases involving auction rate securities — that all investors, including institutional investors, need the protection of the fiduciary standard. Third, I question why the study, as well as the reach of the House Bill, should be limited to “personalized services.” This qualification would narrow the range of clients that would be protected by the fiduciary standard, and I fear that it may become a loophole that would make it easy to avoid putting clients first.

This is completely insane. Institutional investors are acting as fiduciaries for the institutions they represent. How many layers of fiduciary responsibility are necessary? How many have to be paid for? Why do F-Class and discount brokerages exist in the first place? As discussed yesterday, an institutional investor will discuss trades with the sell side with the clear understanding that his counterparty wants to clean him out and send him home naked and hungry. Any buy-side investor who does not understand this – and does not understand that there is exactly one layer of fiduciary between the lions and lambs an that he’s it; or who does not devote independent analysis to each investment idea with precisely this fact in mind – should lose his license. I am sick to bloody death of politicians and regulators telling me that I’m too stupid to negotiate deals for my clients — and that only the sell side can be trusted with such important decisions.

Commissioner Aguilar’s background should be noted:

Prior to his appointment as an SEC Commissioner, Mr. Aguilar was a partner with the international law firm of McKenna Long & Aldridge, LLP, specializing in securities law. During his career, his practice included matters pertaining to general corporate and business law, international transactions, investment companies and investment advisers, securities law, and corporate finance. He also focused on issues related to corporate governance, public and private offerings (IPOs and secondary offerings), mergers and acquisitions, mutual funds, investment advisers, broker-dealers, and other aspects of federal and state securities laws and regulations.

A lawyer. Almost certainly has never been on the ‘phone and said “done” in his life.

A long, long month for Canadian preferred share investors shuddered to an end today with, wonder of wonders, gains for both PerpetualDiscounts (up 5bp) and FixedResets (up 3bp). Volume continued heavy.

PerpetualDiscounts now yield 6.35%, equivalent to 8.89% interest at the standard equivalency factor of 1.4x. Long corporates have returned +1.21% on the month (+6.29% on the year-to-date) and now yield about 5.7%, making the pre-tax interest-equivalent spread (also called the Seniority Spread) about 320bp, about the same as was reported April 28 and a massive jump higher than the +285 bp reported March 31.

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	2.58 %	2.66 %	51,230	20.94	1	-2.1525 %	2,144.0
FixedFloater	4.94 %	3.01 %	45,896	20.36	1	0.0000 %	3,237.9
Floater	1.92 %	1.66 %	45,744	23.47	4	-0.0609 %	2,408.2
OpRet	4.90 %	3.96 %	102,875	1.05	10	0.0703 %	2,303.4
SplitShare	6.40 %	6.53 %	135,075	3.57	2	-0.1982 %	2,133.3
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.0703 %	2,106.3
Perpetual-Premium	5.91 %	4.77 %	25,341	15.86	2	-0.0205 %	1,822.8
Perpetual-Discount	6.28 %	6.35 %	215,916	13.41	76	0.0523 %	1,700.1
FixedReset	5.56 %	4.55 %	506,444	3.60	44	0.0296 %	2,128.1

Performance Highlights
Issue	Index	Change	Notes
ELF.PR.F	Perpetual-Discount	-3.79 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-04-30 Maturity Price : 18.28 Evaluated at bid price : 18.28 Bid-YTW : 7.34 %
BAM.PR.E	Ratchet	-2.15 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-04-30 Maturity Price : 22.52 Evaluated at bid price : 21.82 Bid-YTW : 2.66 %
BNS.PR.T	FixedReset	-1.46 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-05-25 Maturity Price : 25.00 Evaluated at bid price : 26.26 Bid-YTW : 4.96 %
BNS.PR.Y	FixedReset	-1.37 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-04-30 Maturity Price : 23.68 Evaluated at bid price : 23.72 Bid-YTW : 4.13 %
BAM.PR.B	Floater	-1.30 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-04-30 Maturity Price : 17.47 Evaluated at bid price : 17.47 Bid-YTW : 2.26 %
TRP.PR.B	FixedReset	-1.23 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-04-30 Maturity Price : 23.97 Evaluated at bid price : 24.01 Bid-YTW : 4.36 %
NA.PR.K	Perpetual-Discount	-1.07 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-04-30 Maturity Price : 22.91 Evaluated at bid price : 23.20 Bid-YTW : 6.32 %
GWO.PR.L	Perpetual-Discount	1.01 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-04-30 Maturity Price : 22.01 Evaluated at bid price : 22.10 Bid-YTW : 6.48 %
BNS.PR.P	FixedReset	1.15 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2013-05-25 Maturity Price : 25.00 Evaluated at bid price : 25.50 Bid-YTW : 4.33 %
GWO.PR.G	Perpetual-Discount	1.39 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-04-30 Maturity Price : 20.43 Evaluated at bid price : 20.43 Bid-YTW : 6.45 %
GWO.PR.H	Perpetual-Discount	1.64 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-04-30 Maturity Price : 19.16 Evaluated at bid price : 19.16 Bid-YTW : 6.42 %
IAG.PR.C	FixedReset	1.72 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-01-30 Maturity Price : 25.00 Evaluated at bid price : 26.05 Bid-YTW : 5.14 %

Volume Highlights
Issue	Index	Shares Traded	Notes
BMO.PR.P	FixedReset	105,057	RBC crossed 100,000 at 25.73. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-03-27 Maturity Price : 25.00 Evaluated at bid price : 25.70 Bid-YTW : 4.69 %
SLF.PR.A	Perpetual-Discount	86,546	TD crossed 50,000 at 18.60. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-04-30 Maturity Price : 18.57 Evaluated at bid price : 18.57 Bid-YTW : 6.48 %
RY.PR.T	FixedReset	74,915	RBC crossed 64,000 at 24.70. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-09-23 Maturity Price : 25.00 Evaluated at bid price : 26.70 Bid-YTW : 4.50 %
RY.PR.A	Perpetual-Discount	67,551	Nesbitt crossed 50,000 at 18.65. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-04-30 Maturity Price : 18.64 Evaluated at bid price : 18.64 Bid-YTW : 5.98 %
BNS.PR.R	FixedReset	65,984	RBC crossed two blocks of 30,000 each at 25.45. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-02-25 Maturity Price : 25.00 Evaluated at bid price : 25.50 Bid-YTW : 4.44 %
RY.PR.X	FixedReset	63,946	RBC crossed two blocks of 25,000 each at 26.65. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-09-23 Maturity Price : 25.00 Evaluated at bid price : 26.61 Bid-YTW : 4.60 %
There were 55 other index-included issues trading in excess of 10,000 shares.

Interesting mutual fund idea:

BlackRock Inc., the world’s largest asset manager, and Blackstone Group LP’s GSO Capital Partners LP are forming mutual funds to invest in loans as the London interbank offered rate rises to the highest level since August.

Within the past two months, the firms have joined Goldman Sachs Group Inc. in announcing funds that invest in leveraged loans pegged to short-term interest rates. Investors poured more than $2.5 billion into bank loan mutual-funds in March and the first three weeks of April, more than triple the amount for March and April last year, according to Lipper FMI data.
…
The S&P/LSTA U.S. Leveraged Loan 100 Index has returned 5.68 percent this year, building on last year’s record 52 percent as lending continues to open up. New money “will provide financing, which will help” merger and acquisition deals get done, according to Invesco Ltd.’s Tom Ewald.
…
This year, $91.6 billion in leveraged loans have been underwritten, more than four times the figure from the same period in 2009, according to data compiled by Bloomberg. The interest charge on leveraged loans is typically tied to Libor.

However, the only term-criteria for inclusion in the index is:

Minimum initial term of one year

… which suggests that – as always – people are so fixated on interest-rate risk that credit risk is forgotten. It brings up a number of issues … we’ve seen (oh boy, have we ever seen) how the redemption on demand nature of mutual funds doesn’t mix too well with borrowers’ desire for long-term funding at short term rates (see Volcker to Regulate Money Market Funds as Banks? and The US Dollar Shortage & Policy Response).

This dichotomy will not play out in precisely the same manner as the USD MMF crisis, of course, since the loans have a contractual term that didn’t begin as money-market …. but a similar crunch could lead to forced selling that that will put the Credit Crunch to shame.

There are rumours that regulatory extortion works as well as ever:

After 11 hours of accusations by members of the Senate Subcommittee on Permanent Investigations, people close to the bank said Goldman is mulling closing the SEC fraud-case chapter on the belief the firm’s reputation, already damaged, might not endure a street fight with the Wall Street watchdog.

“It’s almost a certainty that there will be a settlement,” said a source.

As another person put it, the SEC has an “unlimited supply of ammunition” in the form of e-mails and records that it could release, and Goldman officials would like to avoid having those documents fired back at them the way they were on Tuesday.

Predictably, the boo-hoo-hoo brigade is in full cry. For example, there are reports that Basis Yield Alpha Fund is claiming that it did not independently analyze its investment and simply bought whatever their salesman offered:

Citing several people familiar with the matter, The FT said Basis Yield Alpha Fund was seeking compensation over its $100 million investment in Timberwolf, a so-called hybrid collateralized debt obligation that Goldman took to market in March 2007, Reuters reported.

As far as I can tell, Basis Yield Alpha Fund was run by Basis Capital. It is worthwhile to note the company’s Executive Team page; the proprietors, Steven Howell and Stuart Fowler tout their experience but not their results.

There is pressure to use German banks as a political tool:

German lawmakers considering a bill to aid Greece challenged Chancellor Angela Merkel to involve banks in the rescue, refusing to back down after her government said that would send a “fatal signal” to markets.

The main opposition Social Democratic Party threatened to withhold support for aid next week when the bill is fast-tracked through parliament unless banks are asked to contribute. Members of Merkel’s Christian Democrats said the government should ask banks to voluntarily accept losses on their investments.

After having been hammered by dumb investments in CDOs, the banks should be grateful to the politicians for pointing out better investments, eh?

So-called “Strategic Mortgage Defaults” in the States are increasing:

Decisions by U.S. homeowners to walk away from mortgages they can afford account for an increasing share of defaults, according to Morgan Stanley.

About 12 percent of all mortgage defaults in February were “strategic,” up from 4 percent in mid-2007, New York-based Morgan Stanley analysts led by Vishwanath Tirupattur wrote in a report today. Borrowers are more likely to stop paying their mortgages the higher their credit scores and the larger their loans, the analysts said.

Defaults by borrowers who owe more than their homes’ values are among the biggest risks for the housing market, according to analysts including Zelman & Associates’ Ivy Zelman and Amherst Securities Group LP’s Laurie Goodman. Last month, the Obama administration said it would adjust its anti-foreclosure program to encourage reductions to borrowers’ principal amounts, instead of just the payments they make, to address the issue.

The importance of asset-ratio relative to income-ratio in mortgage default analysis was discussed in the post Redefault on Modified Mortgages

You knew this was coming, didn’t you? The US Senate financial regulation bill says that pension fund managers are too dumb to act as principal or, to put it another way, only the sell-side has the ability to analyze financial instruments:

Fannie Mae, Freddie Mac and Harvard University are among public and private entities that could be shut out of the $605 trillion privately negotiated derivatives market they use to manage risks under legislation being debated in the U.S. Senate, according to an industry group.

The bill would impose a fiduciary duty on swaps dealers doing business with cities, states, government agencies, pension plans and endowments, applying standards that would require banks such as JPMorgan Chase & Co. and Goldman Sachs Group Inc. to put the interest of those entities ahead of their own.

But I guess it all makes sense, eh? The politicians have to do something to show they are Responding To The Credit Crunch and since the buy side was (approximately, more or less, give or take) unscathed by the horror, the sell side (which nearly destroyed itself) must take on responsibility for advising it.

A mixed day on continued heavy volume for the Canadian preferred share market, as PerpetualDiscounts were able to record a gain of 9bp, while FixedResets continued their descent, losing 17bp to bring the median average yield-to-worst up to 4.56%. That’s a point more than their yield on March 31. A full point!

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	2.53 %	2.56 %	50,886	21.06	1	0.2247 %	2,191.2
FixedFloater	4.94 %	3.01 %	45,316	20.36	1	-0.4525 %	3,237.9
Floater	1.92 %	1.67 %	46,102	23.43	4	0.2685 %	2,409.7
OpRet	4.91 %	3.79 %	103,181	1.05	10	-0.1871 %	2,301.8
SplitShare	6.38 %	6.44 %	137,077	3.57	2	0.7542 %	2,137.5
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	-0.1871 %	2,104.8
Perpetual-Premium	5.91 %	4.77 %	26,181	15.86	2	0.1641 %	1,823.1
Perpetual-Discount	6.28 %	6.35 %	218,797	13.40	76	0.0944 %	1,699.2
FixedReset	5.57 %	4.56 %	512,068	3.60	44	-0.1721 %	2,127.4

Performance Highlights
Issue	Index	Change	Notes
IAG.PR.C	FixedReset	-3.36 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-01-30 Maturity Price : 25.00 Evaluated at bid price : 25.61 Bid-YTW : 5.66 %
ELF.PR.G	Perpetual-Discount	-1.52 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-04-29 Maturity Price : 16.84 Evaluated at bid price : 16.84 Bid-YTW : 7.13 %
BNS.PR.P	FixedReset	-1.33 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2013-05-25 Maturity Price : 25.00 Evaluated at bid price : 25.21 Bid-YTW : 4.73 %
BAM.PR.J	OpRet	-1.17 %	YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2018-03-30 Maturity Price : 25.00 Evaluated at bid price : 25.30 Bid-YTW : 5.31 %
BNA.PR.D	SplitShare	1.13 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2014-07-09 Maturity Price : 25.00 Evaluated at bid price : 26.05 Bid-YTW : 6.44 %
POW.PR.B	Perpetual-Discount	1.22 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-04-29 Maturity Price : 20.70 Evaluated at bid price : 20.70 Bid-YTW : 6.53 %

Volume Highlights
Issue	Index	Shares Traded	Notes
RY.PR.L	FixedReset	111,305	Nesbitt crossed 50,000 at 26.05; RBC crossed blocks of 34,600 and 15,400 at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-26 Maturity Price : 25.00 Evaluated at bid price : 26.10 Bid-YTW : 4.28 %
TD.PR.N	OpRet	105,800	RBC crossed blocks of 50,400 shares, 27,500 and 25,000, all at 25.78. YTW SCENARIO Maturity Type : Call Maturity Date : 2010-05-30 Maturity Price : 25.75 Evaluated at bid price : 25.77 Bid-YTW : 3.43 %
TD.PR.O	Perpetual-Discount	102,357	TD crossed blocks of 50,000 and 25,000, both at 20.15. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-04-29 Maturity Price : 20.26 Evaluated at bid price : 20.26 Bid-YTW : 6.03 %
RY.PR.P	FixedReset	96,325	Nesbitt crossed 75,000 at 26.60. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-26 Maturity Price : 25.00 Evaluated at bid price : 26.55 Bid-YTW : 4.46 %
TD.PR.R	Perpetual-Discount	73,425	TD crossed 70,000 at 23.05. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-04-29 Maturity Price : 22.85 Evaluated at bid price : 23.00 Bid-YTW : 6.12 %
NA.PR.P	FixedReset	72,798	TD bought 12,500 from anonymous at 26.55, followed by blocks of 11,000 and 12,000 at 26.50. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-17 Maturity Price : 25.00 Evaluated at bid price : 26.30 Bid-YTW : 5.12 %
There were 62 other index-included issues trading in excess of 10,000 shares.

Spain’s been downgraded:

Spain had its credit rating cut one step by Standard & Poor’s to AA, putting it on a par with Slovenia, as contagion from Greece’s debt crisis spreads through the euro region.

S&P said in a statement today that the outlook on Spain is negative, reflecting the chance of a possible further downgrade if the “budgetary position underperforms to a greater extent than we currently anticipate.” Spain was last cut by S&P in January 2009.

The risk premium investors demand to hold Spanish bonds surged to the highest in more than a year today and the price of insuring Spanish bonds against default reached a record as doubts about Greece’s ability to pay its debt spilled over into Spanish and Portuguese markets.

… and S&P is making recovery-on-default estimates for Greece:

The ratings firm yesterday cut Greece three steps to BB+, or below investment grade, and said bondholders may recover only 30 percent to 50 percent of their investments if the nation fails to make debt payments. Europe’s most-indebted country relative to the size of its economy has about 296 billion euros of bonds outstanding, according to data compiled by Bloomberg.

OSFI’s Assia Billig gave a presentation on the Canada Pension Plan. Real returns on the fund’s portfolio are estimated to be 4.2% +/- 1.5% with 95% confidence. It won’t be holding a lot of government bonds!

Senator Levin is doing some more grandstanding:

Levin, who questioned Goldman Sachs executives during a hearing in Washington yesterday, said the regulatory reform bill being weighed in the Senate will address conflicts where companies have undisclosed interest in betting against clients.

Today’s FOMC statement was encouraging for fixed-income investors:

Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

Another day of poor performance on high volume for the Canadian preferred share market, as PerpetualDiscounts lost 16bp while FixedResets were down 12bp.

PerpetualDiscounts now yield 6.35%, equivalent to 8.89% interest at the standard equivalency factor of 1.4x. Long corporates (which are up 0.70% on the month-to-date and +5.76% year-to-date) now yield about 5.7% (edging towards 5.6%!) so the pre-tax interest-equivalent spread is now about 320bp, a significant widening from the 305bp reported April 22, above the recent high of +310bp reported April 7 and a big move wider than the +285bp reported on March 31.

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	2.53 %	2.57 %	52,850	21.05	1	0.0309 %	2,186.3
FixedFloater	4.92 %	2.99 %	45,873	20.39	1	-0.4504 %	3,252.7
Floater	1.92 %	1.67 %	47,982	23.43	4	-0.0488 %	2,403.2
OpRet	4.90 %	3.87 %	137,138	1.20	10	0.0507 %	2,306.1
SplitShare	6.43 %	6.75 %	138,950	3.57	2	-0.4857 %	2,121.5
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.0507 %	2,108.7
Perpetual-Premium	5.92 %	4.77 %	27,264	15.86	2	-0.0615 %	1,820.2
Perpetual-Discount	6.28 %	6.35 %	215,937	13.41	76	-0.1609 %	1,697.6
FixedReset	5.55 %	4.49 %	517,506	3.61	44	-0.1169 %	2,131.1

Performance Highlights
Issue	Index	Change	Notes
GWO.PR.M	Perpetual-Discount	-2.11 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-04-28 Maturity Price : 23.01 Evaluated at bid price : 23.15 Bid-YTW : 6.38 %
CM.PR.D	Perpetual-Discount	-1.34 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-04-28 Maturity Price : 22.46 Evaluated at bid price : 22.75 Bid-YTW : 6.35 %
POW.PR.D	Perpetual-Discount	-1.33 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-04-28 Maturity Price : 19.25 Evaluated at bid price : 19.25 Bid-YTW : 6.56 %
BMO.PR.N	FixedReset	-1.24 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-27 Maturity Price : 25.00 Evaluated at bid price : 27.01 Bid-YTW : 4.60 %
IAG.PR.F	Perpetual-Discount	-1.15 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-04-28 Maturity Price : 23.13 Evaluated at bid price : 23.28 Bid-YTW : 6.46 %
GWO.PR.I	Perpetual-Discount	-1.07 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-04-28 Maturity Price : 17.62 Evaluated at bid price : 17.62 Bid-YTW : 6.47 %
CM.PR.G	Perpetual-Discount	-1.06 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-04-28 Maturity Price : 21.37 Evaluated at bid price : 21.37 Bid-YTW : 6.36 %
ELF.PR.G	Perpetual-Discount	1.91 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-04-28 Maturity Price : 17.10 Evaluated at bid price : 17.10 Bid-YTW : 7.02 %

Volume Highlights
Issue	Index	Shares Traded	Notes
HSB.PR.E	FixedReset	144,405	RBC crossed blocks of 50,000 and 82,000, both at 27.10. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-07-30 Maturity Price : 25.00 Evaluated at bid price : 27.05 Bid-YTW : 4.68 %
PWF.PR.J	OpRet	125,828	RBC crossed blocks of 91,500 and 30,000, both at 25.60. YTW SCENARIO Maturity Type : Call Maturity Date : 2011-05-30 Maturity Price : 25.25 Evaluated at bid price : 25.47 Bid-YTW : 3.83 %
BNS.PR.O	Perpetual-Discount	125,080	Nesbitt crossed blocks of 70,000 and 40,000, both at 23.10. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-04-28 Maturity Price : 22.89 Evaluated at bid price : 23.05 Bid-YTW : 6.11 %
BNS.PR.M	Perpetual-Discount	78,874	Nesbitt crossed 60,000 at 18.58. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-04-28 Maturity Price : 18.56 Evaluated at bid price : 18.56 Bid-YTW : 6.11 %
TD.PR.N	OpRet	78,430	RBC crossed blocks of 50,000 and 25,000, both at 25.78. YTW SCENARIO Maturity Type : Call Maturity Date : 2010-05-30 Maturity Price : 25.75 Evaluated at bid price : 25.77 Bid-YTW : 3.32 %
RY.PR.X	FixedReset	54,830	TD bought 10,000 from Scotia at 26.56 and crossed 25,000 at 26.62. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-09-23 Maturity Price : 25.00 Evaluated at bid price : 26.59 Bid-YTW : 4.62 %
There were 51 other index-included issues trading in excess of 10,000 shares.