Category: Market Action

Market Action

May 18, 2010

One of the guys who ran Basis Yield Alpha Fund (mocked on PrefBlog on April 30 is haranguing the regulators for a crusade:

THE man who blew the whistle on Wall Street banking giant Goldman Sachs has urged Australia’s corporate watchdog to follow the lead of the US Securities and Exchange Commission in suing the investment bank for fraud.

David Mapley, a former non-executive director of the local Basis Yield Alpha Fund, said the Australian Securities & Investments Commission should closely examine the role of the investment bank’s local arm, Goldman Sachs JBWere, in marketing a mortgage-related investment product that ultimately led to the fund’s demise in August 2007.
…
He confirmed that he had approached the SEC with his concerns shortly after the decision was made to place the fund in liquidation.
…
“Myself and a colleague examined the trade and we had a strong belief that that the security was fraudulently concocted and then sold to us,” Mr Mapley said.

Maybe Mr. Mapley and his colleague should have examined the trade before plunking their clients’ money down!

BIS has released a working paper by Nikola Tarashev, Claudio Borio and Kostas Tsatsaronis titled Attributing systemic risk to individual institutions. Their conclusion supports PrefBlog’s notion of progressive capital surcharges on risk-weighted assets:

The analysis also suggests that, once risk characteristics have been controlled for, charges imposed on financial institutions would need to increase faster than their size.

but, I confess, I have not reviewed the paper in sufficient detail to determine whether the premises that lead to this conclusion are supportable.

OSFI’s Ted Price gave a speech at the Centre for Monetary and Financial Economics Conference at Carleton University titled Developments in Bank Supervision – a Canadian Perspective. Nothing new, just a reiteration of the party line. That’s one superiority of the US system of bank regulation, which is run by the Fed, which is run by a Board of Governors who are independently selected for the board by the regional banks. This means that there is not only a diversity of opinion at the table, it means that these guys’ speeches can be much more informative as they engage in public diplomacy, at least to some extent.

Quick! What’s more important – knowledge or political correctness?

“Some of Professor Katz’s controversial writings have become a distraction from the critical work of addressing the oil spill,” Stephanie Mueller, a spokeswoman for the Energy Department, said in an e-mail today. “Professor Katz will no longer be involved in the department’s efforts.”
…
While Katz’s early work focused on astrophysics, he now consults on a variety of physics puzzles, he said. Katz wrote articles on his personal website, including, “What Is Political Correctness,” “In Defense of Homophobia” and “Why Terrorism Is Important.”
…
He was fired from the panel this morning, he said. He declined to specify which articles triggered the dismissal.

Fed up with the spectacle of mere investors taking a view on economics, BaFin will introduce short-selling bans:

Germany’s BaFin financial-services regulator said that it will introduce a temporary ban on naked short-selling and naked credit-default swaps of euro-area government bonds starting at midnight.

The ban will also apply to naked short-selling in shares of 10 banks and insurers including Allianz SE and Deutsche Bank AG, BaFin said today in an e-mailed statement.

The markets instantly panicked:

Credit-default swaps soared as a move by German Chancellor Angela Merkel to ban speculation on European government bonds with the contracts sparked anxiety among investors about increasing government regulation
…
“The market sees an inadequate policy such as this as an act of desperation and a refusal to address the fundamental problems at hand,” said Brian Yelvington, head of fixed-income strategy at broker-dealer Knight Libertas LLC in Greenwich, Connecticut.

Prohibiting speculation in the contracts may cause trading in the market for swaps tied to Europe government bonds to freeze up, possibly increasing borrowing costs or limiting the flow of capital, said Tim Backshall, the chief strategist at Credit Derivatives Research LLC in Walnut Creek, California.

Same thing as I always think when reading about bloggers being jailed for “disrespecting the state” or “insulting the president” (or even just cutting funding to a parade because the word “Apartheid” makes the boo-hoo-hoo brigade feel uncomfortable; geez, I wish those morons would spend less time sucking up to foreign governments and more time trying to figure out how to license a souvlaki cart in less than three years), as often happens in the Mid-east: if you have to make criticism illegal, then maybe you simply have no better answer.

There’s more!

The proposal backed by finance ministers at the European Council calls for fund managers to be authorized by national governments. National authorities will also review the trading activities of funds and approve their internal risk-management practices.

The SEC & CFTC have rushed out a preliminary report on the bungee jump:

At this point, we are focusing on the following working hypotheses and findings–
…
(5)
the use of market orders, stop loss market orders and stop loss limit orders that, when coupled with sharp declines in prices, for both equity and futures markets, might have contributed to market instability and a temporary breakdown in orderly trading;
…
Stop Loss Market Orders. An additional hypothesis as to why some securities suffered more severe declines than the broader market on May 6 is that they were particularly affected by stop loss market orders. These orders have stop prices that, for sell orders, are lower than current prices. When the stop price is reached, such orders turn into market orders to sell. In fast-falling market conditions, stop loss market orders could potentially trigger a chain reaction of automated selling if they are in place in significant quantity for a particular stock. We are investigating whether such a chain reaction led to abnormally large declines for some stocks on May 6.

There was continued heavy volume today, as PerpetualDiscounts edged downwards another 2bp, while FixedResets continued to impress, gaining 21bp. The Floating Rate sector continued its recent slide, so there are conflicting signals being emitted!

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	2.68 %	2.77 %	46,774	20.64	1	-0.1900 %	2,064.4
FixedFloater	5.24 %	3.30 %	40,147	19.97	1	-1.6106 %	3,056.9
Floater	2.14 %	2.46 %	104,241	21.13	3	-0.0544 %	2,266.0
OpRet	4.90 %	3.88 %	94,200	1.75	11	-0.0426 %	2,302.4
SplitShare	6.36 %	6.30 %	119,205	3.52	2	0.3523 %	2,144.6
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	-0.0426 %	2,105.4
Perpetual-Premium	5.53 %	4.78 %	25,081	15.80	1	0.0000 %	1,823.5
Perpetual-Discount	6.33 %	6.38 %	215,849	13.33	77	-0.0174 %	1,689.4
FixedReset	5.51 %	4.26 %	493,756	3.57	44	0.2087 %	2,150.0

Performance Highlights
Issue	Index	Change	Notes
ELF.PR.G	Perpetual-Discount	-2.18 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-18 Maturity Price : 16.63 Evaluated at bid price : 16.63 Bid-YTW : 7.25 %
PWF.PR.H	Perpetual-Discount	-2.00 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-18 Maturity Price : 21.56 Evaluated at bid price : 21.56 Bid-YTW : 6.75 %
BAM.PR.G	FixedFloater	-1.61 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-18 Maturity Price : 25.00 Evaluated at bid price : 20.77 Bid-YTW : 3.30 %
W.PR.H	Perpetual-Discount	1.15 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-18 Maturity Price : 21.05 Evaluated at bid price : 21.05 Bid-YTW : 6.63 %
CM.PR.K	FixedReset	1.86 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-08-30 Maturity Price : 25.00 Evaluated at bid price : 26.23 Bid-YTW : 4.18 %
ELF.PR.F	Perpetual-Discount	1.93 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-18 Maturity Price : 19.01 Evaluated at bid price : 19.01 Bid-YTW : 7.08 %
PWF.PR.L	Perpetual-Discount	2.34 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-18 Maturity Price : 19.70 Evaluated at bid price : 19.70 Bid-YTW : 6.55 %

Volume Highlights
Issue	Index	Shares Traded	Notes
CM.PR.M	FixedReset	84,715	Desjardins crossed 38,900 at 27.21, then blocks of 22,000 and and 20,000 at 27.24. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-08-30 Maturity Price : 25.00 Evaluated at bid price : 27.25 Bid-YTW : 4.30 %
HSB.PR.E	FixedReset	55,734	TD bought 16,700 from RBC at 16,700 at 27.25, then crossed 15,700 at the same price. RBC crossed 20,100 at the same price again. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-07-30 Maturity Price : 25.00 Evaluated at bid price : 27.24 Bid-YTW : 4.54 %
RY.PR.L	FixedReset	41,277	Nesbitt crossed 16,000 at 26.30. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-26 Maturity Price : 25.00 Evaluated at bid price : 26.25 Bid-YTW : 4.16 %
BAM.PR.H	OpRet	32,706	TD crossed 15,000 at 25.35 and 12,300 at 25.36. YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2012-03-30 Maturity Price : 25.00 Evaluated at bid price : 25.36 Bid-YTW : 5.38 %
MFC.PR.D	FixedReset	27,695	Desjardins crossed 10,100 at 27.00. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-07-19 Maturity Price : 25.00 Evaluated at bid price : 26.95 Bid-YTW : 4.44 %
BMO.PR.J	Perpetual-Discount	25,955	Desjardins crossed 15,000 at 18.63. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-18 Maturity Price : 18.62 Evaluated at bid price : 18.62 Bid-YTW : 6.08 %
There were 44 other index-included issues trading in excess of 10,000 shares.

Market Action

May 17, 2010

Government financial problems are all the dealers’ fault!

The state’s securities division sent letters today to 10 underwriters of municipal bonds, asking them to detail their trading of credit-default swaps linked to state and local government bonds they’ve underwritten in Massachusetts since 2003. Recipients have until May 28 to respond. The letter asked each bank to “identify the entity that purchased CDS from your firm for each Massachusetts state or municipal bond offering.”
…
The probe follows a similar inquiry in California, where Treasurer Bill Lockyer asked banks to say whether they bet against the state with credit-default swaps. The U.S. Securities and Exchange Commission is also exploring conflicts of interest for banks that sold municipal bonds and bet the securities would fail, the Wall Street Journal reported, citing people familiar with the matter who it didn’t name.

IIROC has released a a new version of the consolidated UMIR, with updated annotations.

Somehow, you just knew that Greek deficits are the banks’ fault, didn’t you?

Greece is considering taking legal action against U.S. investment banks that might have contributed to the country’s debt crisis, Prime Minister George Papandreou said.

“I wouldn’t rule out that this may be a recourse,” Papandreou said, in response to questions about the role of U.S. banks in the crisis, in an interview on CNN’s “Fareed Zakaria GPS.” The program, scheduled to air tomorrow, was taped on May 13. Neither Papandreou nor Zakaria mentioned any banks by name.
…
Papandreou said the decision on whether to go after U.S. banks will be made after a Greek parliamentary investigation into the cause of the crisis.

“Greece will look into the past and see how things went,” Papandreou said. “There are similar investigations going on in other countries and in the United States. This is where I think, yes, the financial sector, I hear the words fraud and lack of transparency. So yes, yes, there is great responsibility here.”

Pity he couldn’t think of anything suspicious! I suggest that his parliamentary investigation focus on Mr. Micawber’s Principle:

Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Meanwhile, European banks are having trouble raising funds:

Banks were locked out of the credit markets as the eurozone debt crisis escalated this month. A week after the European Union and International Monetary Fund’s €750bn ($935bn) bailout was announced, concerns remain.
The shockwaves from the debt woes in Europe mean that all but a few highly rated banks will find bond issuance tougher over the rest of the year, according to bankers.

Following a strong first quarter when European banks sold $243.5bn in bonds, so far this month they have sold bonds worth only $879m, according to data provider Dealogic.

Domestic banks in Greece, Portugal and Spain have been hit over the past six weeks by movements in spreads on their governments’ bonds. For example, credit default swap spreads on National Bank of Greece more than doubled between April 5 and May 6, climbing to a high of 890bp.

James Hamilton of Econbrowser passes on some fascinating observations on the European shadow economy:

Aruoba’s paper notes some interesting regularities in a data set of 118 different countries. One measure he looks at is the size of the underground economy in different countries. If you carry out your business in the underground economy, you will benefit by avoiding taxation, but you lose the legal and contract protection that you would have had if you’d instead been working in the formal sector. If only the first effect mattered, you’d expect to see countries with higher tax rates have a greater role for the informal sector. But Aruoba finds just the opposite– the bigger the informal sector, the lower tax receipts as a percent of formal-sector GDP. Aruoba attributes this to the fact that in countries with better legal institutions, the benefits of conducting business above board outweigh the taxation costs, and the governments can afford to raise more of their revenue through traditional taxation.

Mind you, banks are already being punished for Greece:

Royal Bank of Scotland Plc and Barclays Plc led financial firms punished by rising borrowing costs, British Bankers’ Association data show. The cost to hedge against losses on European bank bonds is 63 percent higher than a month earlier. Investment-grade corporate debt sales in the region plummeted 88 percent last week to $1.2 billion from the prior period, according to data compiled by Bloomberg.

The rate banks say they charge each other for three-month loans in dollars is the highest in nine months, even after a government-led rescue designed to prevent Greece from defaulting on its debt and a new financial crisis. The euro is trading at its weakest level versus the dollar since the aftermath of Lehman Brothers Holdings Inc.’s collapse, and stocks tumbled.
…
The three-month London interbank offered rate in dollars, or Libor, rose to 0.445 percent last week, the highest level since August, from 0.428 percent on May 7 and 0.252 at the end of February, according to the British Bankers’ Association.

This is why the Fed has restarted the dollar swap lines, as noted May 10.

A Bloomberg story illustrates one of the hazards of contingent capital: if it converts, there might be tears:

A JPMorgan Chase & Co. reverse- convertible note paying 64 percent annualized interest plunged in value on May 14, three days after being sold, showing the risks of these products usually bought by individual investors.

The structured notes offered 10.7 percent in interest payments over their two-month term and a return of principal, as long as shares of TiVo Inc. didn’t fall more than 25 percent, according to a prospectus. TiVo dropped 42 percent on May 14 after an adverse court ruling, triggering a provision that will leave investors holding the possibly depressed stock at maturity.

Banks including JPMorgan, Morgan Stanley and Barclays Plc sold $656 million of reverse convertibles in the U.S. last month, according to data compiled by Bloomberg. The securities, which combine features of bonds and stock options, are often sold to individuals who don’t understand the risks, said Jake Zamansky, a New York-based attorney who represents investors.

“It’s being sold as a bond, an income-generating product, and I don’t think it’s being explained to people that you can get stuck with the stock,” the securities lawyer at Zamansky & Associates said in a telephone interview on May 14. He has represented investors in lawsuits related to the products.

The Canadian preferred share market resumed its slide today, with PerpetualDiscounts down 17bp and FixedResets down 10bp, with a return to highly elevated volume. Equity markets were enlivened by the scheduling and subsequent cancellation of the end of the world.

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	2.68 %	2.76 %	46,273	20.65	1	-2.0930 %	2,068.4
FixedFloater	5.15 %	3.22 %	40,125	20.07	1	-0.4245 %	3,106.9
Floater	2.14 %	2.46 %	105,774	21.12	3	-0.0181 %	2,267.2
OpRet	4.90 %	3.84 %	93,612	1.01	11	0.1209 %	2,303.4
SplitShare	6.39 %	6.46 %	119,891	3.52	2	0.3314 %	2,137.1
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.1209 %	2,106.3
Perpetual-Premium	5.53 %	4.78 %	26,119	15.81	1	-0.0399 %	1,823.5
Perpetual-Discount	6.32 %	6.38 %	213,824	13.33	77	-0.1652 %	1,689.7
FixedReset	5.52 %	4.33 %	497,129	3.57	44	-0.0965 %	2,145.5

Performance Highlights
Issue	Index	Change	Notes
BAM.PR.E	Ratchet	-2.09 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-17 Maturity Price : 21.68 Evaluated at bid price : 21.05 Bid-YTW : 2.76 %
CM.PR.K	FixedReset	-1.53 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-17 Maturity Price : 23.45 Evaluated at bid price : 25.75 Bid-YTW : 4.66 %
IAG.PR.F	Perpetual-Discount	-1.52 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-17 Maturity Price : 22.59 Evaluated at bid price : 22.71 Bid-YTW : 6.65 %
IAG.PR.C	FixedReset	-1.45 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-01-30 Maturity Price : 25.00 Evaluated at bid price : 26.44 Bid-YTW : 4.74 %
IAG.PR.A	Perpetual-Discount	-1.45 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-17 Maturity Price : 17.69 Evaluated at bid price : 17.69 Bid-YTW : 6.62 %
CL.PR.B	Perpetual-Discount	-1.34 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-17 Maturity Price : 23.94 Evaluated at bid price : 24.22 Bid-YTW : 6.55 %
PWF.PR.L	Perpetual-Discount	-1.33 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-17 Maturity Price : 19.25 Evaluated at bid price : 19.25 Bid-YTW : 6.70 %
PWF.PR.F	Perpetual-Discount	-1.24 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-17 Maturity Price : 19.91 Evaluated at bid price : 19.91 Bid-YTW : 6.67 %
GWO.PR.I	Perpetual-Discount	-1.19 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-17 Maturity Price : 17.46 Evaluated at bid price : 17.46 Bid-YTW : 6.56 %
MFC.PR.E	FixedReset	1.13 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-10-19 Maturity Price : 25.00 Evaluated at bid price : 25.99 Bid-YTW : 4.52 %
ELF.PR.G	Perpetual-Discount	1.13 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-17 Maturity Price : 17.00 Evaluated at bid price : 17.00 Bid-YTW : 7.09 %

Volume Highlights
Issue	Index	Shares Traded	Notes
SLF.PR.D	Perpetual-Discount	82,218	RBC crossed blocks of 36,000 shares, 12,100 and 10,000, all at 17.35. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-17 Maturity Price : 17.30 Evaluated at bid price : 17.30 Bid-YTW : 6.55 %
TD.PR.K	FixedReset	53,100	RBC crossed 40,000 at 27.05. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-08-30 Maturity Price : 25.00 Evaluated at bid price : 27.06 Bid-YTW : 4.24 %
TRP.PR.B	FixedReset	51,300	RBC crossed blocks of 27,900 and 12,500 at 24.65. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-17 Maturity Price : 24.58 Evaluated at bid price : 24.63 Bid-YTW : 4.01 %
TD.PR.R	Perpetual-Discount	44,150	Nesbitt crossed 30.000 at 23.18. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-17 Maturity Price : 23.00 Evaluated at bid price : 23.16 Bid-YTW : 6.10 %
BMO.PR.M	FixedReset	43,935	Nesbitt crossed 30,000 at 25.75. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-09-24 Maturity Price : 25.00 Evaluated at bid price : 25.75 Bid-YTW : 3.97 %
SLF.PR.C	Perpetual-Discount	38,441	RBC crossed 27,000 at 17.35. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-17 Maturity Price : 17.28 Evaluated at bid price : 17.28 Bid-YTW : 6.55 %
There were 49 other index-included issues trading in excess of 10,000 shares.

Market Action

May 14, 2010

Econbrowser‘s James Hamilton writes a good piece on Greece:

I suspect that the key fear has to do with the consequences of a default or restructuring of the debt itself. Willem Buiter estimates that French and German banks have &#8364 110 billion exposure to Greek debt, and total exposure to a potential domino effect could be huge. The WSJ today has further breakdowns, and Dow Jones reports that JP Morgan’s holdings of non-U.S. government bonds increased by $36.5 billion in 2009, while Citigroup’s increased by almost $40 B.
…
And, as was the case in the 2008 difficulties, one can either view this primarily as a liquidity problem, for which we simply need the central banks to step in boldly to arrest the jitters, or as a solvency problem, in which case the policy decision is how to allocate the unavoidable capital losses among bank owners, bank creditors, and the government so as to minimize collateral damage to innocent bystanders. The fundamentals facing Greece suggest there is an overwhelming solvency component to the current problems. And the policy response so far seems to be choosing to allocate 100% of losses to the European and U.S. taxpayers.

Chatter about the potential disintegration of the Euro is starting to be heard from respected sources:

“You have the great problem of a potential disintegration of the euro,” former Federal Reserve Chairman Paul Volcker, 82, said yesterday in London. “The essential element of discipline in economic policy and in fiscal policy that was hoped for” has “so far not been rewarded in some countries.”

That story, by the way, leads off with an anecdote about dairy products:

Romano Prodi recalls how he persuaded Germany to allow debt-swamped Italy into the euro: support our membership and we’ll buy your milk, he said.

When Prodi toured Germany’s agricultural heartland after becoming Italian leader in 1996, he pitched “a big milk pipeline from Bavaria,” pointing to a three-year, 40 percent plunge in the Italian lira that was hurting dairy sales.

See? That’s the source of the problem! Here in smug Canada, we know how to do it properly … charge single mums and their kids extortionate prices for dairy products, so quota owners may continue to enjoy a bucolic lifestyle.

Click for Big

OSFI’s Mark White gave a speech reviewing the P&C industry.

A little more detail has emerged regarding the futures sale suspected to be the proximate cause of last week’s bungee jump.

Comrade Peace Prize’s administration has made it clear that it regards Swap pricing to be a public utility and that the role of government is to ensure that incompetent portfolio managers may continue to earn a good living:

Removing the Derivatives Trading Requirement to Protect Wall Street Profits. Under the current bill, standard derivatives would have to be traded on exchanges or other electronic trading platforms. Expect amendments to eliminate this trading requirement. Why? Because not everyone likes transparency. Today, the big derivatives dealers make big profits by charging end-users extra spreads and hidden fees, and they don’t want that to change.

This administration has learned nothing from TRACE. As soon as you get transparency, liquidity disappears. An ultimately, you will create more bungee jumps. On a positive note, however, it appears that regulatory capture is becoming an issue, albeit in a different field:

Obama said the federal government also shares some of the blame [for the Gulf of Mexico underwater oil blowout]. He faulted the Minerals Management Service for having too close a relationship with the industry it regulates. BP got an exclusion from a National Environmental Policy Act review by the agency for its damaged well in the Gulf.

“It seems as if permits were too often issued based on little more than assurances of safety from the oil companies,” Obama said. “That cannot and will not happen anymore.”

He ordered Interior Secretary Ken Salazar to “conduct a top-to-bottom reform” of the agency, including a review of its procedures for assessing the environmental impact of an offshore drilling plans.

Salazar said in a statement that will be “an important part of the ongoing comprehensive and thorough investigation of this incident.”

Obama previously announced plans to split the service’s responsibilities, which now include both enforcing rig safety rules and joining with companies such as BP and Exxon Mobil Corp. to develop oil and gas reserves while collecting royalties.

Volume on the Canadian preferred share market was way down today, reaching normal levels, as PerpetualDiscounts gained 4bp and FixedResets lost 8bp.

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 %	42,832	20.86	1	0.0000 %	2,112.6
FixedFloater	5.13 %	3.19 %	40,557	20.11	1	-0.1413 %	3,120.2
Floater	2.14 %	2.46 %	105,392	21.13	3	-1.2710 %	2,267.6
OpRet	4.91 %	4.15 %	94,607	1.76	11	-0.1349 %	2,300.6
SplitShare	6.41 %	6.40 %	120,294	3.53	2	0.4661 %	2,130.0
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	-0.1349 %	2,103.7
Perpetual-Premium	5.53 %	4.77 %	24,187	15.82	1	0.0000 %	1,824.2
Perpetual-Discount	6.31 %	6.38 %	212,539	13.36	77	0.0360 %	1,692.5
FixedReset	5.51 %	4.27 %	513,929	3.58	44	-0.0775 %	2,147.6

Performance Highlights
Issue	Index	Change	Notes
BAM.PR.K	Floater	-2.42 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-14 Maturity Price : 16.10 Evaluated at bid price : 16.10 Bid-YTW : 2.46 %
MFC.PR.E	FixedReset	-2.13 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-10-19 Maturity Price : 25.00 Evaluated at bid price : 25.70 Bid-YTW : 5.15 %
BAM.PR.B	Floater	-1.66 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-14 Maturity Price : 16.04 Evaluated at bid price : 16.04 Bid-YTW : 2.47 %
MFC.PR.D	FixedReset	-1.43 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-07-19 Maturity Price : 25.00 Evaluated at bid price : 26.80 Bid-YTW : 5.01 %
ELF.PR.F	Perpetual-Discount	-1.33 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-14 Maturity Price : 18.50 Evaluated at bid price : 18.50 Bid-YTW : 7.27 %
MFC.PR.A	OpRet	-1.02 %	YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2015-12-18 Maturity Price : 25.00 Evaluated at bid price : 25.24 Bid-YTW : 4.05 %
PWF.PR.K	Perpetual-Discount	1.06 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-14 Maturity Price : 19.00 Evaluated at bid price : 19.00 Bid-YTW : 6.59 %

Volume Highlights
Issue	Index	Shares Traded	Notes
SLF.PR.D	Perpetual-Discount	58,915	RBC crossed blocks of 17,000 and 15,000, both at 17.35. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-14 Maturity Price : 17.33 Evaluated at bid price : 17.33 Bid-YTW : 6.53 %
BNS.PR.Y	FixedReset	39,150	Desjardins crossed 24,000 at 24.16. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-14 Maturity Price : 23.96 Evaluated at bid price : 24.00 Bid-YTW : 3.83 %
BNS.PR.K	Perpetual-Discount	19,480	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-14 Maturity Price : 19.61 Evaluated at bid price : 19.61 Bid-YTW : 6.19 %
BAM.PR.B	Floater	19,345	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-14 Maturity Price : 16.04 Evaluated at bid price : 16.04 Bid-YTW : 2.47 %
TRP.PR.A	FixedReset	18,646	YTW SCENARIO Maturity Type : Call Maturity Date : 2015-01-30 Maturity Price : 25.00 Evaluated at bid price : 25.31 Bid-YTW : 4.45 %
TRP.PR.B	FixedReset	18,495	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-14 Maturity Price : 24.58 Evaluated at bid price : 24.63 Bid-YTW : 4.01 %
There were 27 other index-included issues trading in excess of 10,000 shares.

Market Action

May 13, 2010

Credit ratings may be politicized:

The Senate in a 64-35 vote today approved an amendment to the financial overhaul legislation that would create a ratings board overseen by the Securities and Exchange Commission. The panel would assign a credit-rating company to rank an offering.
…
Under Franken’s amendment, the SEC would determine the size of the board. The majority of members would be investors, at least one member would be from a credit-rating company and at least one member would be from an investment bank.

The board would conduct an annual assessment of each credit-rating company to scrutinize the firm’s accuracy in grading debt compared with competitors, according to the amendment. While credit-rating companies would set fees, the SEC would have authority to make sure payments are “reasonable.”

For the proposal to form a credit-rating board to become binding, lawmakers would have to approve the broader financial reform measure and President Barack Obama would have to sign the legislation.

Not quite as bad as the EU’s plan to create a government-run agency that won’t be so mean to poor old Greece, but close!

The Canadian preferred share market was quieter today, with PerpetualDiscounts gaining 4bp and FixedResets losing 1bp. Volume was down to levels only slightly above normal – whatever normal means! – but the day was enlivened by the announcement of a Sun Life Financial FixedReset, 4.35%+141, to settle May 25.

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 %	44,471	20.87	1	0.0000 %	2,112.6
FixedFloater	5.12 %	3.18 %	40,563	20.12	1	-0.5621 %	3,124.6
Floater	2.11 %	2.40 %	102,084	21.30	3	-0.3568 %	2,296.8
OpRet	4.90 %	3.85 %	90,744	1.76	11	0.3170 %	2,303.7
SplitShare	6.44 %	6.44 %	124,665	3.53	2	0.3341 %	2,120.1
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.3170 %	2,106.6
Perpetual-Premium	5.53 %	4.77 %	24,342	15.82	1	0.0000 %	1,824.2
Perpetual-Discount	6.32 %	6.39 %	213,425	13.34	77	0.0370 %	1,691.9
FixedReset	5.51 %	4.30 %	516,152	3.58	44	-0.0112 %	2,149.2

Performance Highlights
Issue	Index	Change	Notes
HSB.PR.C	Perpetual-Discount	-1.71 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-13 Maturity Price : 19.51 Evaluated at bid price : 19.51 Bid-YTW : 6.65 %
PWF.PR.O	Perpetual-Discount	-1.10 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-13 Maturity Price : 22.39 Evaluated at bid price : 22.50 Bid-YTW : 6.51 %
ENB.PR.A	Perpetual-Discount	-1.08 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-13 Maturity Price : 23.49 Evaluated at bid price : 23.76 Bid-YTW : 5.79 %
HSB.PR.D	Perpetual-Discount	-1.03 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-13 Maturity Price : 19.30 Evaluated at bid price : 19.30 Bid-YTW : 6.59 %
TD.PR.M	OpRet	1.09 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2010-06-12 Maturity Price : 25.75 Evaluated at bid price : 25.88 Bid-YTW : 0.39 %
ELF.PR.F	Perpetual-Discount	1.19 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-13 Maturity Price : 18.75 Evaluated at bid price : 18.75 Bid-YTW : 7.17 %
CIU.PR.A	Perpetual-Discount	2.18 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-13 Maturity Price : 18.75 Evaluated at bid price : 18.75 Bid-YTW : 6.16 %

Volume Highlights
Issue	Index	Shares Traded	Notes
PWF.PR.M	FixedReset	140,000	RBC crossed blocks of 25,000 shares, 24,500 and 50,000, all at 26.50. Nesbitt crossed 25,000 at the same price and bought 10,000 from National at 26.45. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-02 Maturity Price : 25.00 Evaluated at bid price : 26.50 Bid-YTW : 4.36 %
TRP.PR.B	FixedReset	119,175	RBC crossed blocks of 25,000 shares, 40,000 and another 25,000, all at 24.65. RBC bought 13,000 from TD at the same price. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-13 Maturity Price : 24.71 Evaluated at bid price : 24.76 Bid-YTW : 4.09 %
PWF.PR.K	Perpetual-Discount	42,070	Desjardins sold 36,000 to anonymous at 19.10. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-13 Maturity Price : 18.80 Evaluated at bid price : 18.80 Bid-YTW : 6.66 %
BNS.PR.Y	FixedReset	41,280	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-13 Maturity Price : 24.01 Evaluated at bid price : 24.05 Bid-YTW : 3.93 %
BNS.PR.R	FixedReset	34,345	National crossed 25,000 at 25.49. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-02-25 Maturity Price : 25.00 Evaluated at bid price : 25.50 Bid-YTW : 4.48 %
CM.PR.H	Perpetual-Discount	33,043	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-13 Maturity Price : 18.85 Evaluated at bid price : 18.85 Bid-YTW : 6.43 %
There were 34 other index-included issues trading in excess of 10,000 shares.

Market Action

May 12, 2010

Worries regarding Greek debt are affecting Argentina:

Argentine bonds tumbled last week, with the yield on 7 percent dollar bonds due in 2015 soaring 2.36 percentage points in three days, amid concern that Greece’s financial crisis would spread across Europe. The debt rallied since European leaders unveiled an almost $1 trillion bailout plan, climbing for a third day today as yields fell 17 basis points, or 0.17 percentage point, to 12.55 percent.

[Economy Minister Amado] Boudou, in New York to meet with creditors ahead of tomorrow’s deadline for institutional investors to tender their defaulted bonds without penalty, said the government is convinced the proposal for restructuring $20 billion of defaulted debt held out of a 2005 settlement is “the last opportunity” for investors.
…
Argentina hasn’t tapped international credit markets since defaulting on $95 billion of debt in 2001.
…
Argentina’s offer included securities due in 2033 worth 33.7 cents on the dollar, warrants linked to gross domestic product and past due interest with the 2017 bonds. The government didn’t offer to include past-due payments on the GDP warrants, and said it was considering a concurrent sale of $1 billion in additional 2017 bonds as part of the exchange.

Argentina’s offer — as measured in net-present value terms — is worth about 45.5 cents on the dollar for institutional investors, according to RBS Securities Inc. debt strategist Siobhan Morden. The value of the 2005 exchange was 59.63 cents on the dollar, Credit Suisse Group AG said.

Investigators of the May 6 Bungee Jump have identified a candidate trigger point:

Regulators examining the causes of the brief stock market free fall last Thursday are looking closely at heavy selling in the market for stock-index futures by a single trader, beginning 10 minutes before stock prices began to plummet.

Gary Gensler, the chairman of the Commodity Futures Trading Commission, said at a Congressional hearing on Tuesday that during that crucial time period, the futures trader, whom he would not identify, accounted for about 9 percent of trading volume in the most actively traded stock-index derivative contract, known as the 500 e-mini futures contract.

All of the trader’s orders were to sell, Mr. Gensler said, while most of the other 250 traders who were active in the same market that day were both buying and selling securities.
…
The identity of the trader remained unclear. Terrence A. Duffy, executive chairman of the CME Group, which operates the Chicago exchange, said on Tuesday: “We obviously won’t divulge that market information. We are in contact with the folks that did the trade. There is no question that it is a bona fide hedger” and not someone intending to disrupt the markets.

There have been previous reports that the proximate cause was a $7.5-million options trade.

SEC Commissioner Luis Aguilar has released statement on fiduciary responsibility which aims to “clarify” earlier remarks (discussed on PrefBlog on April 30:

Currently, investors are receiving investment advice from broker-dealers who are not fiduciaries. This has serious and real consequences for investors who may not receive advice that is in their best interest. Moreover, investors may not be told that the broker-dealer registered representative sitting across from them may receive undisclosed compensation from the investment option he or she just recommended.

The big problem I have is his earlier insistence that institutional investors need the protection of a fiduciary relationship – which simply adds another layer to costs. Retail investors, as well, should be allowed to invest for themselves (if they’re not fiduciary to themselves, who is?) if they want to; or choose a fiduciary relationship.

I highlighted the savage effects of credible action in Greece on April 30. Moody’s is expecting credit effects to be severe:

Moody’s Investors Service lowered 22 billion euros ($28 billion) of Greek bonds backed by loans to consumers and companies as the country adopts austerity measures to qualify for European aid, leaving the notes under review for further downgrades.

The cuts “were prompted by Moody’s expectations of significant pool performance deterioration due to the stressed economic environment in Greece as well as increased operational risk due to the weakened financial strength of Greek banks,” the New York-based ratings company said today in a statement.

The securities, which are part of 23 transactions, included 10.7 billion euro of notes backed by residential mortgages, 3.9 billion euro of collateralized loan obligations, and an additional 7.2 billion euro of other asset-backed debt, according to the statement. The bonds appear less creditworthy considering “Greece’s austerity package and the resulting impact on the Greek economy and collateral performance,” Moody’s said.

Continued heavy volume today and, wonder of wonders, PerpetualDiscounts gained 11bp, while FixedResets gained 29bp. Volatility was high.

PerpetualDiscounts now yield 6.40%, equivalent to 8.96% interest at the standard equivalency factor of 1.4x. Long corporates now yield about 5.7%, so the pre-tax interest-equivalent spread is now about 325bp, a mild (and perhaps spurious) decline from the 330bp reported on May 5.

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 %	44,700	20.86	1	0.0000 %	2,112.6
FixedFloater	5.09 %	3.16 %	42,229	20.15	1	-1.7487 %	3,142.3
Floater	2.11 %	2.39 %	102,274	21.33	3	-1.4763 %	2,305.0
OpRet	4.92 %	4.02 %	91,863	2.88	11	0.1570 %	2,296.5
SplitShare	6.46 %	6.61 %	125,177	3.53	2	0.5599 %	2,113.1
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.1570 %	2,099.9
Perpetual-Premium	5.53 %	4.77 %	24,637	15.82	1	0.0000 %	1,824.2
Perpetual-Discount	6.32 %	6.40 %	218,567	13.31	77	0.1078 %	1,691.2
FixedReset	5.51 %	4.29 %	521,629	3.58	44	0.2910 %	2,149.5

Performance Highlights
Issue	Index	Change	Notes
BAM.PR.K	Floater	-2.53 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-12 Maturity Price : 16.57 Evaluated at bid price : 16.57 Bid-YTW : 2.39 %
BAM.PR.B	Floater	-2.43 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-12 Maturity Price : 16.44 Evaluated at bid price : 16.44 Bid-YTW : 2.41 %
BAM.PR.G	FixedFloater	-1.75 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-12 Maturity Price : 25.00 Evaluated at bid price : 21.35 Bid-YTW : 3.16 %
PWF.PR.L	Perpetual-Discount	-1.68 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-12 Maturity Price : 19.32 Evaluated at bid price : 19.32 Bid-YTW : 6.67 %
PWF.PR.K	Perpetual-Discount	-1.47 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-12 Maturity Price : 18.78 Evaluated at bid price : 18.78 Bid-YTW : 6.66 %
MFC.PR.C	Perpetual-Discount	-1.42 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-12 Maturity Price : 18.04 Evaluated at bid price : 18.04 Bid-YTW : 6.35 %
PWF.PR.F	Perpetual-Discount	-1.14 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-12 Maturity Price : 19.89 Evaluated at bid price : 19.89 Bid-YTW : 6.67 %
RY.PR.T	FixedReset	1.04 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-09-23 Maturity Price : 25.00 Evaluated at bid price : 27.13 Bid-YTW : 4.10 %
ELF.PR.G	Perpetual-Discount	1.08 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-12 Maturity Price : 16.80 Evaluated at bid price : 16.80 Bid-YTW : 7.17 %
PWF.PR.O	Perpetual-Discount	1.20 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-12 Maturity Price : 22.63 Evaluated at bid price : 22.75 Bid-YTW : 6.43 %
CL.PR.B	Perpetual-Discount	1.28 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-12 Maturity Price : 24.26 Evaluated at bid price : 24.57 Bid-YTW : 6.45 %
RY.PR.N	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 : 4.06 %
PWF.PR.I	Perpetual-Discount	1.40 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-12 Maturity Price : 22.93 Evaluated at bid price : 23.22 Bid-YTW : 6.51 %
IAG.PR.A	Perpetual-Discount	1.76 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-12 Maturity Price : 17.92 Evaluated at bid price : 17.92 Bid-YTW : 6.52 %
IAG.PR.F	Perpetual-Discount	2.44 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-12 Maturity Price : 22.91 Evaluated at bid price : 23.05 Bid-YTW : 6.54 %

Volume Highlights
Issue	Index	Shares Traded	Notes
PWF.PR.D	OpRet	238,038	TD crossed 33,500 at 25.71; RBC crossed 50,000 at the same price. Nesbit crossed 89,600 and RBC crossed 62,000, both at 25.71. YTW SCENARIO Maturity Type : Call Maturity Date : 2010-06-11 Maturity Price : 25.60 Evaluated at bid price : 25.70 Bid-YTW : 2.35 %
RY.PR.A	Perpetual-Discount	138,484	Nesbitt crossed blocks of 32,000 and 75,000 at 18.65. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-12 Maturity Price : 18.70 Evaluated at bid price : 18.70 Bid-YTW : 5.98 %
CM.PR.M	FixedReset	104,290	RBC crossed 25,000 and TD crossed 20,000, both at 27.10. TD crossed 50,000 at 27.20. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-08-30 Maturity Price : 25.00 Evaluated at bid price : 27.15 Bid-YTW : 4.38 %
GWL.PR.O	Perpetual-Premium	102,400	Nesbitt crossed 100,000 at 25.15. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-12 Maturity Price : 24.66 Evaluated at bid price : 25.09 Bid-YTW : 4.77 %
PWF.PR.J	OpRet	101,380	Nesbitt crossed 100,000 at 25.55. YTW SCENARIO Maturity Type : Call Maturity Date : 2011-05-30 Maturity Price : 25.25 Evaluated at bid price : 25.52 Bid-YTW : 3.78 %
TD.PR.E	FixedReset	84,545	Nesbitt crossed 75,000 at 27.00. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-05-30 Maturity Price : 25.00 Evaluated at bid price : 26.92 Bid-YTW : 4.30 %
There were 53 other index-included issues trading in excess of 10,000 shares.

Market Action

May 11, 2010

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.

Market Action

May 10, 2010

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 Action

May 7, 2010

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.

Volume Highlights
Issue	Index	Shares Traded	Notes
TRP.PR.A	FixedReset	58,280	Nesbitt crossed two blocks of 20,000 shares each, at 25.24 and 25.19. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-20 Maturity Price : 25.13 Evaluated at bid price : 25.18 Bid-YTW : 4.55 %
SLF.PR.C	Perpetual-Discount	35,475	RBC crossed blocks of 10,000 and 14,000 at 17.35 each. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-20 Maturity Price : 17.36 Evaluated at bid price : 17.36 Bid-YTW : 6.53 %
BMO.PR.N	FixedReset	27,021	Desjardins crossed 24,600 at 27.25. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-27 Maturity Price : 25.00 Evaluated at bid price : 27.03 Bid-YTW : 4.19 %
TD.PR.O	Perpetual-Discount	25,720	Nesbitt crossed 11,000 at 20.10. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-20 Maturity Price : 20.15 Evaluated at bid price : 20.15 Bid-YTW : 6.09 %
CM.PR.H	Perpetual-Discount	24,870	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-20 Maturity Price : 18.85 Evaluated at bid price : 18.85 Bid-YTW : 6.44 %
SLF.PR.B	Perpetual-Discount	24,175	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-20 Maturity Price : 18.56 Evaluated at bid price : 18.56 Bid-YTW : 6.59 %
There were 28 other index-included issues trading in excess of 10,000 shares.

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