Category: Market Action

Lobbying against end-user margin requirements for OTC derivatives (mentioned on June 30) appears to have had some effect, according to Jim Hamilton’s World of Securities Regulation in a discussion of a letter from senators Dodd & Lincoln:

The Dodd-Frank Wall Street Reform and Consumer Protection Act does not authorize regulators to impose margin on end users that use derivatives to hedge or mitigate commercial risk, said Senator Chris Dodd and Senator Blanche Lincoln, who have instructed the SEC and CFTC not to make hedging so costly that it becomes prohibitively expensive for end users to manage their risks. In a letter to the Chairs of the House Financial Services and Agriculture Committees, the senators emphasized that Congress does not intend to regulate end users as major swap participants or swap dealers just because they use swaps to hedge or manage the commercial risks associated with their business. Just as Congress has heard the end user community, they said, regulators must carefully consider the impact of regulation and capital and margin on end users.

We’ll see how this works out, but the camel’s got his nose in the tent!

There’s an entertaining scuffle between Themis Trading:

A gift received by a sixth rate player. Now, we didn’t expect to be showered with gifts from the LSE but a simple “thank you” would have been nice. After all, a paper written by “two or three guys” managed to accomplish something that an organization headed by commercial director, Natan Tiefenbrun, couldn’t do by themselves.

So this brings us to the rubbish which was written by that previously mentioned commercial director. If you care to read his piece, here it is: http://tradeturquoise.blogspot.com/

It seems like Natan is tired because he read a piece written by Kate Welling about Themis Trading ([link]). If reading 16 pages gets him tired, maybe he should get some Red Bull. Much of Natan’s rant against Themis Trading sounds like a defense of HFT. Maybe that’s because he also has a very conflicted ownership structure with brokers owning almost half of his MTF.

Natan’s piece is titled Luddites Unite:

One again these self-proclaimed defenders of “fair markets” make dozens of claims about how exchanges, brokers and high-frequency traders are conniving to screw both retail and institutional investors. Here are some of my favourite excerpts:…

By me, the fundamental difference is one of philosophy, explained by Themis principal Sal Arnuk early on in the article that started the spat (which is copy protected, so no quotes for you!). He’s worried about what happened in the Flash Crash to those who panicked and those who had stop-loss orders in place. I suggest that the fact that these people lost money is a good thing. The less stupid money there is in the market, the better.

Much of the hand-wringing regarding securitization revolves around adverse selection – the idea that originators will securitize their worst loans. Credit Sights is alleging an interesting twist on that story:

Spanish savings banks may be hiding losses on home loans by taking non-performing mortgages out of securitized transactions, according to CreditSights Inc.

By carrying the bad loans on their own books the so-called cajas sidestep downgrades to their mortgage-backed securities, the independent bond research firm said in a report.
…
CreditSights follows a sample of 143 Spanish residential mortgage-backed securities collateralized by 136 billion euros ($170 billion) of loans, with about 45 percent originated by cajas. While the savings banks give little information about the state of their loan books, investor reports on the performance of the securitized debt suggest asset quality is weaker than at commercial lenders, CreditSights said.

“Caja-originated mortgages are performing much worse than those extended by Spain’s commercial banks,” analysts David Watts, John Raymond and Hana Galetova wrote. By buying mortgages out of the pools “they could have been artificially reducing the level of bad loans in RMBS while simultaneously undermining the quality of the cajas’ own assets,” they wrote.

Over a million people attended the Pride Parade in a stunning rebuke to nasty backstairs whisperers and grandstanding politicians (presumably under the influence of foreign governments). Left to itself, the City of Toronto can’t run a souvlaki cart; I suggest that in future it recognizes its total incompetence and stops interfering with the internal decisions of groups who actually bring money into the city.

Yet another power outage today … and the clowndorks are discussing who should march in somebody else’s parade.

It was a strong day in the Canadian preferred share market, with PerpetualDiscounts gaining 25bp and FixedResets up 23bp, on light volume.

The US jobs number was poor:

Employment at companies rose 83,000, less than the 110,000 gain forecast by economists in a Bloomberg News survey. Including government, payrolls fell for the first time this year because of a drop in federal census workers. The jobless rate dropped to 9.5 percent from 9.7 percent as the labor force shrank, the Labor Department reported today in Washington.

OSFI has published a presentation by Michel Montambeault, Director, to the Canada Institute of Actuaries (CIA) Annual Meeting, on the topic of “Canadian Mortality Experience”, 29 June 2010, Vancouver, British Columbia. In related news, a cluster of longevity genes has been identified:

U.S. scientists say they have discovered the genetic signature of an exceptionally long life, and with nothing more than a DNA sample they can predict – with 77 per cent accuracy – those biologically built to live beyond a century.

They also predict that such a test, based on a set of 150 genetic markers, will be available to the curious by summer’s end.

“It’s really quite revolutionary,” said Thomas Perls, associate professor of medicine at Boston University and senior author of a research paper published online Thursday by the journal Science. “With the accuracy we’ve demonstrated, companies are going to pick this up. We’ll see it on the market in a month.”

Adverse selection just became a bigger risk for the insurance companies!

I sent an eMail to the Toronto Stock Exchange:

On June 30, MFC.PR.B traded 5,792 shares on the TSX in a range of 19.63-80 and closed at 19.01-66, 10×12. The last trade was at 3:58pm, 300 shares at 19.66.

I have a number of questions:
i) Who is the market maker for this issue?
ii) Which firm employs the market maker?
iii) What committments were made regarding spreads by the market maker?
iv) How have these committments been kept over the past year?
v) How have other committments made by this market maker been kept over the past year?
vi) How have other committments made by the market maker’s firm been kept over the past year?

We’ll see what happens with that! (Fearless prediction: Nothing).

On an extremely quiet day in the Canadian preferred share market, PerpetualDiscounts lost 4bp while FixedResets gained 14bp.

Corporations are well placed to weather the next crisis:

Companies from the U.S. to Europe and Asia are selling the fewest bonds since 2004, as rising cash levels allow borrowers to weather a slowing economy.

Debt offerings fell to $1.17 trillion in the first half of the year, 39 percent less than the same period in 2009, according to data compiled by Bloomberg. The decline was led by financial companies, which issued 35 percent less debt.

Issuance is declining as borrowers with 15 percent more cash than a year earlier avoid tapping credit markets amid concern that Europe’s sovereign-debt crisis may slow the global economic recovery. Corporate bonds have returned 4.9 percent in the first half of the year, beating the MSCI World Index of stocks, which is down 8.9 percent, by the most in nine years.
…
Cash at investment-grade companies rose to $668 billion at the end of the first quarter from $580 billion a year earlier, while debt fell 2 percent to $2.3 trillion, JPMorgan Chase & Co. analysts led by Eric Beinstein in New York wrote last week.

In the midst of the sovereign debt crisis, the EU is taking firm action:

Bankers in Europe will not be allowed to take home more than a third of their bonuses in cash from the start of next year under planned new rules, a British lawmaker said Tuesday.
…
Under the negotiated agreement, cash could only constitute 30 percent of a regular bonus and one-fifth a large bonus. A new watchdog for European banks will define what constitutes a large bonus. There will also be an opportunity for a “clawback” of bonuses if deals made to reach profit targets later fell apart.

In addition, banks that have received government bailouts will have to limit bonuses paid to their managers, while directors will not be eligible to receive any bonus unless it is justified to supervisors. Banks must also set limits on bonuses in relation to salaries to avoid any windfall payouts.

What will happen, I think, is that talent will migrate to hedge funds, which will take over a significant part of the market-making function. Maybe this is a good thing. But I doubt that anybody’s thought about it.

Ms Gertrude Tumpel-Gugerell, Member of the Executive Board of the European Central Bank, spoke at the US Financial Services Roundtable, Brussels, 28 June 2010, stringing together non-sequiters to reach a politically desirable conclusion (emphasis added):

The first priority relates to the development of financial infrastructures in those markets where they are not yet sufficiently used or available, notably in OTC derivatives markets. The crisis has shown that markets with adequate infrastructures and hence proper risk management and risk provisions have proven to be more resilient than markets without such infrastructures, such as the OTC derivatives markets. Therefore, expanding the use of central counterparties (CCPs) in these increasingly systemically relevant markets is a key measure to reduce counterparty and operational risk. Another important step is the mandatory reporting of all trades to centralised trade registries, so-called trade repositories, in order to enhance market transparency. In my view, if CCPs and trade repositories for credit default swaps had been available before the Lehman default, Lehman’s CDS exposures could have been managed in a much more transparent and resilient way and could have mitigated the negative chain reaction on CDS markets that followed the demise of Lehman.

CCPs and trade repositories for OTC derivatives are ultimately beneficial for all stakeholders. Still, there are the well-known challenges of effective collective action in the context of the provision of public goods. Hence, private sector efforts alone may not suffice to foster sufficient progress towards the use of CCPs and trade repositories for OTC derivatives. It is therefore important to adopt and implement the regulatory requirements for the mandatory central clearing of all eligible products and the reporting of trades to trade repositories in a timely manner. Given, however, the global nature of OTC derivatives markets, it is clear that such regulatory tools will only be successful if they are applied in a coordinated manner around the globe. I strongly support the recently launched work of the Financial Stability Board to develop common approaches to fostering the central clearing of eligible OTC derivatives as well as to expand the range of potentially clearable products through enhanced standardisation.

Quite frankly, I don’t understand her use of the word “therefore”!

The OSC has published a new edition of Perspectives. Articles feature:

• CSA publishes proposed amendments to mutual fund regulations
• CSA publishes frequently asked questions about order protection and locked and crossed markets
• OSC updates registrant section of its website

There’s some more reaction to mandatory margining proposals, this time from ISDA:

A change in the wording of the financial reform bill now being finalized in the US Congress could cost US companies as much as $1 trillion in capital and liquidity requirements, according to research by the International Swaps and Derivatives Association, Inc. (ISDA). About $400 billion would be needed as collateral that corporations could be required to post with their dealer counterparties to cover the current exposure of their OTC derivatives transactions. ISDA estimates that $370 billion represents the additional credit capacity that companies could need to maintain to cover potential future exposure of those transactions. If markets return to levels prevailing at the end of 2008, additional collateral needs would bring the total to $1 trillion.

That will be a nice little profit centre for the banks – setting up credit lines dedicated to collateralization! Now, is this a good thing, or a bad thing? Nobody knows. It hasn’t been discussed.

Naturally, some companies will be affected more than others:

Berkshire [Hathaway Inc.] owns derivatives with a notional value of about $62 billion and has “negligible” collateral requirements, Barclays analyst Jay Gelb said today in a report. [Warren] Buffett’s firm, based in Omaha, Nebraska, may need to post $6 billion to $8 billion in collateral under rules being debated by the U.S. Congress, he said.

The SEC has announced new rules to discourage political corruption in the investment advisory business. Sadly, there are no rules disallowing the hiring of former SEC employees.

CM has issued CHF 500-million in 5-year covered bonds at 1.75%. Bonds OnLine is reporting 5-year Swiss governments at a rather alarming -0.26% (that’s right, negative twenty-six beeps); the only data I can find for 5-years on the Swiss National Bank site is dated May 31. DBRS rates them AAA:

The ratings are based on several factors. First, the Covered Bonds are senior unsecured direct obligations of CIBC, which is the fifth largest bank in Canada and rated AA and R-1 (high) with a Stable trend by DBRS. Second, in addition to a general recourse to CIBC’s assets, the Covered Bonds are supported by a diversified collateral pool of first-lien prime residential mortgages insured by Canada Mortgage and Housing Corporation (CMHC) (the Cover Pool). CMHC is an agent of Her Majesty in right of Canada and is rated AAA by DBRS.

MFC.PR.B traded 5,792 shares on the TSX today in a range of 19.63-80 and closed at 19.01-66, 10×12. The last trade was at 3:58pm, 300 shares at 19.66. I can only suppose the market maker decided to get an early start on his weekend.

Much the same thing happened with GWO.PR.J: traded 3,400 shares in a range of 26.62-85 before closing at 25.92-62, 20×7.

BAM.PR.G traded 145 shares, all at 21.40, and closed at 20.91-40, 15×10. I can only imagine that the market maker was overwhelmed by the volume.

These are particularly annoying incidents, because it’s not just month-end, it’s quarter-end.

PerpetualDiscounts squeaked out a win today, gaining 4bp, while FixedResets gained 7bp on light volume and, as we have seen, a surprising and probably spurious amount of volatility.

PerpetualDiscounts now yield 5.97%, equivalent to 8.36% interest at the standard conversion factor of 1.4x. Long corporates now yield an astonishing (to me) 5.45%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) now stands at about 290bp, the same level reported on June 23, but a narrowing of 25bp from the 315bp spread reported on May 31.

And that’s a wrap for June, 2010!

The Bank for International Settlements released its annual report with chapters on:

• Beyond the rescue: exiting intensive care and finishing the reforms
• From the emergency room to intensive care: the year in retrospect
• Low interest rates: do the risks outweigh the rewards?
• Post-crisis policy challenges in emerging market economies
• Fiscal sustainability in the industrial countries: risks and challenges
• The future of the financial sector
• Macroprudential policy and addressing procyclicality
• The BIS: mission, activities, governance and financial results

Naturally enough, the sections that dealt with regulation are in complete alignment with the G-20 communique. What a coincidence that is!

There’s a hiccup on the way to the US Bank Bill:

U.S. Representative Barney Frank may reconvene the House-Senate financial-overhaul conference today to address Republican protests over a $19 billion bank fee in the bill, according to a scheduling announcement sent to lawmakers.
…
One plan under consideration would instead cover the shortfall in the bill with an increase in the fund that the Federal Deposit Insurance Corp. maintains to repay customers their deposits when a bank fails. Another would save money by closing the Troubled Asset Relief Program two months early, according to the announcement.

Changing the bank fee could end an impasse that threatened to delay the final Senate vote on the bill after the death of Senator Robert Byrd, a West Virginia Democrat. Byrd’s absence left Democrats in need of all four Republicans who previously backed the measure. One of those Republicans, Senator Scott Brown of Massachusetts, withdrew his support earlier today, citing the fee.

PrefBlog has added to its list of interesting things to do while drunk:

Mr Perkins, who worked for City brokers PVM Oil, had gone on a golfing weekend organised by the company.

Then he took the Monday off work and continued to binge drink from midday onwards.

By the evening, Mr Perkins had made his first batch of unauthorised trades.
…
In his stupor, he casually notched up thousands of trades worth a total of $520million (£345million).

He drunkenly bought a net 7.13million barrels of oil during the typically quiet overnight period, and at times was personally responsible for 69 per cent of the overall volume of Brent crude being traded globally.

His actions sent prices surging by more than $1.50 to $73.50 for a barrel of Brent crude oil – the highest it had been for eight months.

The deals ended up costing his company £6million and potentially cost companies worldwide more than £100million.

Westcoast did a 10-year bond issue:

Westcoast Energy Inc. raised C$250 million from an issue of 10-year bonds maturing July 2020, pricing the offering at 138.5 basis points over the relevant benchmark for a yield of 4.571%, according to a person familiar with the matter.

The bonds carry a coupon of 4.57%.

Westcoast is owned by Spectra Energy Corp. (SE).

There’s an odd lawsuit against the Greater Toronto Hockey League claiming not that try-outs were rigged, or anything like that, but that everybody should get a chance to play (70-odd players tried out for 17 positions):

“Their direct actions have caused irreparable psychological damage to Daniel Longo’s self esteem as an impressionable teenager and demoralized Daniel as an athlete and team hockey player with his peers,” the Longo statement of claim reads. “The conduct by all defendants destroyed the dignity of my son, whom in good conscience gave his team nothing but his best efforts.”

Valela’s statement of claim states: “When Christopher was advised of his termination by my wife and I, he vowed never to play the game he loved since childhood. And, morevoer, his misguided group of defendants demoralized my wife and I, whom had gone well beyond the call of duty as parents in support of the Toronto Avalanche hockey team for two seasons.”

I know a teenager who quit an activity after finding out he wasn’t good enough. Has it always been this way, or is all the fashionable self-esteem crap raising a nation of quitters?

Tragedy struck the Canadian preferred share market today, as PerpetualDiscounts suffered their first loss since May 20. The PerpetualDiscount index gained on twenty-six consecutive trading days, for a total return of +7.43% as median weighted average yield declined from 6.39% to 6.01%. Over the same period, FixedResets had a total return of +1.68%.

I had been hoping to close the quarter with a full month’s run of gains … but you can’t win them all!

PerpetualDiscounts lost 4bp while FixedResets gained 11bp today. Volume picked up to above-average levels, perhaps related to portfolio shuffling with respect to PWF.PR.P and TRP.PR.C, which both closed today.

The Federal Reserve Bank of Boston has released a Public Policy Brief by Jeffrey C. Fuhrer and Giovanni P. Olivei titled The Role of Expectations and Output in the Inflation Process: An Empirical Assessment:

This brief examines two issues of current interest concerning inflation: (1) whether “well-anchored” expectations will help to restrain inflation’s decline and whether an “un-anchoring” of expectations could lead to undesirably high inflation and (2) to what extent output (or utilization) gaps are useful components of empirical models of inflation and, if they are useful, to what extent current gaps might counterbalance the effect of expectations on inflation. The goals of conducting this examination are to articulate a reasonably coherent framework for the discussion, highlight the key areas of uncertainty, and provide new empirical evidence that sheds some light on these areas.

Nothing much happened in the credit markets, so I’ll discuss Toronto politics. Why not?

I am pleased to see that Queers Against Israeli Apartheid is being readmitted to the Pride Parade:

Pride Toronto has announced that its recent resolution to restrict the use of certain language during the 2010 Parade has been replaced by the requirement that each participating group read, sign and agree to abide by the City of Toronto’s Declaration of a Non-Discrimination Policy, and that all groups that uphold this policy are welcome to participate in the 2010 Pride Parade.

The requirement to “read, sign and agree to abide by the City of Toronto’s Declaration of a Non-Discrimination Policy” is more than just a little bit precious, but if Pride wants to jump through those hoops, that’s their business. To me, it just shows there’s not much point in getting involved with any sponsored civic activity.

Two mayoral hopefuls seem to think this is an issue in which the city should be involved:

“I want to express my disappointment and disgust with Pride Toronto’s decision to allow this hateful group to march,” said mayoral hopeful Rob Ford.

Giorgio Mammoliti, who is also running for mayor, will introduce a motion at council demanding that Pride return all city funding, about $250,000.

Pride’s done a lot more to bring money into the city than either of those two clowns ever have! I think they should concentrate a little more on how to get a souvlaki cart licensed in less than three years.

PerpetualDiscounts gained 14bp today to keep the streak alive – two more days and they will have gone the entire month of June without a loss. FixedResets were flat; volume was moderate; volatility was almost non-existent.

It looks like tranche retention will become law, as proposed by the SEC and supported by John Hull, among others:

Private lenders will be required to keep at least a 5 percent stake in loans they package and sell under an agreement reached by House and Senate lawmakers who are negotiating the financial-regulatory bill.

Lawmakers said the goal of the risk retention rule, also known as the skin-in-the-game provision, is to raise the quality of loans by keeping companies tied to the loans they make. Lax underwriting on subprime mortgages helped fuel the mortgage market collapse in 2007.

The measure would affect credit-card debt, auto loans, mortgages and other securitized debt. Issuers of asset-backed debt and the originators who supply them with pools of loans would be forced to retain at least 5 percent of the credit risk.

Lawmakers exempted many mortgages from the rules after lobbying by brokers and community banks, who said forcing lenders to keep loans on their books would tie up capital and lead to higher interest rates.

So higher interest rates is OK for credit-card debt, auto loans and other things, but not for Holy Mortgages? Haven’t I heard this song before?

The basic problem with the proposal is that tranche retention was the actual problem during the crisis – if the investment banks had be forced to sell their holdings to arms-length third parties, price discovery and lack of appetite would have been apparent much, much sooner.

I have even more disdain for the proposed underwriting rules:

Dodd proposed adding language based on the Merkley-Levin proposal to curb conflicts of interest by preventing firms that underwrite an asset-backed security from placing bets against the security.

The conflict-of-interest provision is aimed at addressing the fraudulent activity alleged in the Securities and Exchange Commission’s lawsuit against Goldman Sachs Group Inc. The SEC is alleging the bank created and sold collateralized debt obligations linked to subprime mortgages without disclosing that hedge fund Paulson & Co. helped pick the underlying securities and bet against the vehicles.

Every time a dealer sells me something as principal, he’s betting against it. Every single time! What’s the big deal here?

The congressional panel has approved a reconciled bill; most is as reported above, but there’s another thing:

An amendment introduced by Senator Susan Collins, the Maine Republican who joined Democrats in voting for the broader bill, will bar bank holding companies from keeping less capital than their bank subsidiaries. That will have an impact on the use of trust preferred securities, known as TruPS. Lawmakers bowed to pressure from banks, agreeing to a transition period for large firms and grandfathering of the securities for smaller lenders.

Banks with assets of at least $15 billion will get five years to replace TruPS with common stock or other securities that count as capital. Community banks that have raised cash through TruPS since 2000 will, in effect, get 20 years to make the switch because most of the securities have 30-year maturities. Smaller lenders sold roughly $45 billion of the $150 billion in TruPS issued by U.S. banks, which packaged them into collateralized debt obligations.

I’m not sure yet, but I think that this outlaws double leverage, at least as far as banks are concerned.

Importantly, there is a job-creation scheme for ex-regulators:

Large hedge and private equity funds will be forced to register with the SEC, subjecting them to mandatory federal oversight for the first time. Venture capital funds were exempted from the registration rule.
…
Any firm with $150 million or more in assets, such as ESL Investments Inc. and Soros Fund Management, will be covered by the law. Funds also must hire a chief compliance officer and set up policies to avoid conflicts of interest.
…
Complying with registration rules may cost hedge funds as much as $500 million in the first year, said Judith Gross, founder of JG Advisory Services LLC, a New York-based consulting firm to the hedge-fund industry. The estimate is based on 2,000 new registrants and reflects the cost of implementing necessary compliance procedures.

Salesmen are still salesmen, at least for a while:

Lawmakers scrapped a proposal that would have made securities firms more accountable to individual investors. Instead, the SEC is required to study whether changes are necessary.

The debate focused on whether stock brokers who offer clients investment advice should have a fiduciary duty that requires disclosure of all conflicts and restricts marketing to products that are in customers’ best interests. Currently, brokers must only ensure that a stock or bond is suitable before selling it to a client.

There is a States-rights turf battle brewing over insurance:

The bill creates a new Federal Insurance Office within the Treasury to monitor insurers, and requires a study that will recommend ways to further overhaul regulation of the industry. Industry groups say a new layer of oversight may complicate compliance and increase costs.
…
Insurers, which are mainly regulated by states, will now have to deal with a national watchdog. State insurance commissioners are concerned federal oversight will interfere with rules already in place. Insurers are concerned that they will have to devote more resources to answer to multiple officials.

Morningstar is rating fundcos on how precious they are. To hell with performance!

Today’s lesson is on “getting it”, as explained by Kenneth Feinberg:

New government oversight should avert a return to the “good old days” of outsize bonuses and lavish perks on Wall Street even if bankers still don’t “get it,” Obama administration paymaster Kenneth Feinberg said.
…
Earlier this week, Feinberg said he will step down from his Treasury Department pay post by the end of August to focus on his new job as the government-appointed administrator of BP Plc’s $20 billion fund to pay claims stemming from the Gulf of Mexico oil spill.

Feinberg gets it!

Turkey has announced that Mustafa Kemal Ataturk’s reputation is so dubious it requires special protection:

Furious over Internet insults of the country’s beloved founder, Turkey has gone on the offensive against Google, tightening a ban on YouTube and cutting public access to a host of Google-owned sites.
…
The country began blocking access to websites in 2007, after parliament adopted an a law against cyber crime in an effort to curb child porn, prevent the dissemination of terrorist propaganda and stamp out illegal gambling. Websites deemed to be disrespectful of Turkey’s founder, Mustafa Kemal Ataturk, and of religious beliefs were also outlawed.

Under court order, Turkey’s telecommunications authority banned access to YouTube, the video-sharing site, in May 2008, after users complained that some videos insulted Ataturk. Earlier this month, Turkey expanded the ban to include some Google pages that use the same Internet Protocol addresses as YouTube, to prevent users from circumventing the ban. The search giant Google Inc. is YouTube’s parent company.

Volume was light today as all the part-timers stayed home to play with their dollies (though, to be fair, it is possible that somebody might be wearing a T-shirt with a slogan that might have made them uncomfortable (see May 18)). PerpetualDiscounts made another gain, 7bp this time, to keep the streak alive, while FixedResets gained 8bp.

How ’bout them Greek swaps, eh?:

Credit-default swaps on Greece rose 38 basis points to an all-time high of 970 basis points, according to CMA DataVision. Contracts on Portuguese government securities climbed 16 basis points to a two-week high of 336.5, while Spain rose 4 to 269.

The politicians have come up with a solution of how to solve their GSE mess: make the banks pay:

Bank executives were panicking last night over a proposed fix to Title II of financial reform literally penciled in at the last minute. The fear is that that the proposed change to the orderly liquidation authority could leave banks on the hook for a possible wind-down of Fannie Mae and Freddie Mac that could cost as much as $400 billion. In the House counter-offer below, Fannie and Freddie are penciled in as falling under the definition of ‘financial company,’ meaning they could be resolved by the orderly liquidation process. This process is paid for by the sale of the failing company’s assets and/or through assessments on other financial companies, possibly putting the Street in line to pay for the liquidation of the troubled housing giants.

Competition between Treasury and the FDIC to deal with private equity purchasers of banks was mentioned on April 30. That trend is continuing:

Buyout firms thwarted by regulators from taking over failed banks have found a solution: Acquire lenders that are still in business.

Moelis Capital Partners LLC, Thomas H. Lee Partners LP and the Carlyle Group are among firms that agreed to buy stakes in at least five U.S. banks since April. While most are small, with assets of less than $1 billion, their status as banks means they can buy more distressed lenders that can be merged and sold later — a tactic that made some private-equity investors billionaires in the 1990s.
…
In at least three cases, the shift in tactics requires approval from the Treasury, which owns stakes in small banks through its injection of U.S. bailout funds. Capital infusions for Pacific Capital, Hampton Roads and Sterling are all contingent on the government writing down its investment.

The Canadian preferred share market continued to move ahead on lower than average volume today, with PerpetualDiscounts and FixedResets both gaining 7bp.

American real estate agents are going hungry:

Purchases of U.S. new homes fell in May to the lowest level on record after a tax credit expired, showing the market remains dependent on government support.

Sales collapsed an unprecedented 33 percent from April to an annual pace of 300,000, less than the median estimate of economists surveyed by Bloomberg News and the fewest in data going back to 1963, figures from the Commerce Department showed today in Washington. Demand in prior months was revised down.

Like the Fed says:

Business spending on equipment and software has risen significantly; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months.
…
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.

But fear not! Fannie Mae is tightening standards:

Borrowers who have the means to make mortgage payments and don’t work with lenders to restructure loans will be banned from obtaining new mortgages backed by Fannie Mae for seven years from the date of foreclosure, the company said today in a statement.
…
Homeowners walking away from mortgages they can afford accounted for about 12 percent of U.S. mortgage defaults in February, New York-based Morgan Stanley said in an April report.

It would be much more to the point if non-recourse mortgages carried a penalty rate; but that would be too logical.

Argentina is showing Greece how it’s done:

The results of Argentina’s debt swap offer exceeded the government’s expectations and will help close a chapter on the country’s record $95 billion default in 2001, Economy Minister Amado Boudou said.

Creditors holding about $12.1 billion of $18.3 billion in defaulted debt tendered their securities in the restructuring, which Boudou said was the result of “hard” negotiating on the part of Argentina. Combined with the results of a 2005 restructuring, a total of 92.4 percent of the defaulted debt has been swapped for a mix of new bonds, he said.
…
The government has no fiscal need to issue debt and can wait until it is able to sell bonds that yield less than 10 percent, Boudou said.

Yields on the country’s benchmark dollar bonds due in 2015 rose 11 basis points, or 0.11 percentage point, to 12.86 percent at 10:59 a.m. New York time.

The question is … will a serial defaulter ever be able to issue bonds at less than 10%?

All the money that’s being dropped on the G-20 is having an effect.

PerpetualDiscounts kept the streak alive in the Canadian preferred share market, gaining 11bp, while FixedResets were down 11bp. Volume was moderate.

PerpetualDiscounts now yield 6.02%, equivalent to 8.43% interest at the standard equivalency factor of 1.4x. Long Corporates are now at about 5.55% so the pre-tax interest equivalent spread (also called the Seniority Spread) is now about 290bp, a significant widening from the +270bp reported on June 16 due to the sharp decline in long yields.

Click for big

Nothing happened today.

The Canadian preferred share market was fairly well-behaved today, with PerpetualDiscounts up 7bp to keep the streak alive (only six more trading days until month-end!) and FixedResets down 6bp. Volume was slighly above average, but there is only one entry in the performance highlights.

Good article in The Atlantic about algorithmic and high-frequency trading, titled Monsters in the Market. I was a little disappointed by the precious tone of their comments:

At least a few high-frequency traders have learned to make a killing by detecting the more simplistic algo strategies deployed by basic pension funds and mutual funds, buying the next stock the funds plan to buy, and then selling it to them at a higher price. This may not be illegal, but it’s almost certainly unfair to the funds’ investors. “It is increasingly clear that there are quite a number of high-frequency bandits in the high- frequency-trading community who pump up volume statistics, front-run investor orders, increase transaction costs, and hurt real liquidity,” David Weild, an adviser at Grant Thornton and a former vice chairman of Nasdaq, told me. *

I would have been much more interested in an expose of just why basic pension funds and mutual funds are using the “more simplistic algo stretegies”. My guess is that they can’t be bothered; the money is much better spent on marketting.

It should also be noted that David Weild’s use of the term “front-run” is moronic. There is no misappropriation of client information in these strategies. One wonders what Mr. Weild’s performance track record is like! Vice Chairman of NASDAQ? Big deal, Madoff was chairman.

The UK will probably be getting a bank tax:

U.K. Chancellor of the Exchequer George Osborne is pushing ahead with plans to tax banks in his first budget, according to three people with knowledge of the plans, an announcement to go along with spending cuts that may prompt forecasters to lower economic-growth estimates.

The tax, which may be imposed on assets or liabilities, could raise at least 2 billion pounds ($3 billion), one of the people said. Osborne has said the June 22 budget statement would set the stage for the deepest spending reductions since the 1980s.

There is some reporting of the dissent regarding the ECB’s bond-buying:

On May 10, just hours after the European Central Bank stepped into government bond markets for the first time, Axel Weber broke ranks with most of his colleagues on the ECB’s Governing Council — including his boss, President Jean-Claude Trichet.

“The purchase of government bonds poses significant stability risks, and that’s why I’m critical of this part of the ECB council’s decision,” said Weber, president of Germany’s Bundesbank.
…
“Weber’s public opposition to a policy move by the ECB that the politicians are presumably very keen on could make his appointment a bit difficult,” says David Mackie, chief European economist at JPMorgan Chase & Co. in London. “They might feel: ‘Do we really want this guy to be in charge?’”

Weber was nonetheless right to warn about the danger of buying bonds, Mackie says. By taking the helm of the world’s second-most-important central bank, Weber would face “huge” challenges, says Nouriel Roubini, the New York University economist who predicted the financial crisis.

Quite right. The sovereign debt problem (crisis?) is not one that can be solved with liquidity injections, like the banks’ crisis. The banks, to a large extent, simply needed time for the markets to reflect values and for their short-term assets to run off the books … in such a case, Bagehot’s principle of supplying liquidity to an illiquid, but solvent, bank is the correct prescription. For the sovereigns, however, the problem is of spending and structural deficits and while bond-buying may buy time, it does not even begin to address the underlying problem.

Those puzzled by the SEC’s handling of the Goldman lawsuit can rest assured that yes, sometimes the SEC does manage to make allegations of genuine wrongdoing:

ICP kept some bonds in one of AIG’s CDOs after the New York-based insurer rejected them in October 2007, the SEC said. “In late 2008, after AIG complained about unauthorized trades, ICP was compelled to stop nearly all reinvestments by the Triaxx CDOs,” the complaint said.
…
[ICP founder and CEO Thomas] Priore also backdated trades of mortgage-backed bonds in 2008, using prices from a year earlier, causing one of the Triaxx vehicles to overpay by about $3.5 million, the SEC said.

The Canadian preferred share market rally just kept on going today, the PerpetualDiscounts up 15bp and FixedResets up 10bp, with a slight uptick in volume. The performance highlights table is sparsely populated and the volume highlights are dominated by PerpetualDiscounts.