Category: Market Action

The Kansas City Fed has published a working paper by Pier Asso, George Kahn and Robert Leeson titled The Taylor Rule and the Practice of Central Banking, a review of the manner in which policymakers’ views have been shaped by the availability of a simple tool for prescribing systematic policy actions. Unfortunately, the KC Fed has seen fit to encrypt the file and content copying is not allowed … so if you want to learn a little more, you’ll have to read it yourself, because I’m sure not going to do all that retyping.

There may be funding pressure on the UK mortgage market:

British banks will struggle to refinance 319 billion pounds ($500 billion) of bonds backed by home loans as the government prepares to withdraw two aid programs, Moody’s Investors Service said.

“It is highly uncertain that the mortgage-backed securities market will have the capacity to absorb the level of refinancing needed in the required timeframe,” according to the report.
…
Banks have raised about 10 billion pounds of mortgage- backed securities publicly since mid-2009 without state aid, Moody’s said.

“The funding gap may once again put financial pressure on mortgage originators, in particular smaller lenders, ” according to the report.

Spend-Every-Penny announced new mortgage rules today:

The Government will therefore adjust the rules for government-backed insured mortgages as follows:

• Require that all borrowers meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term. This initiative will help Canadians prepare for higher interest rates in the future.
• Lower the maximum amount Canadians can withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes. This will help ensure home ownership is a more effective way to save.
• Require a minimum down payment of 20 per cent for government-backed mortgage insurance on non-owner-occupied properties purchased for speculation.

The backgrounder elucidates:

These adjustments to the mortgage insurance guarantee framework are intended to come into force on April 19, 2010. Exceptions would be allowed after April 19 where they are needed to satisfy a binding purchase and sale, financing, or refinancing agreement entered into before April 19, 2010.

My first impulse is to laugh. First, the politicians decide that borrowing for real estate is more socially worth-while than borrowing for (e.g.) capital investment, so subsidize it by writing cheap Credit Default Swaps out of the CMHC. Then they pretend to be surprised when the distorting effects of these subsidies become apparent. Finally, instead of yanking the price on the CDSs to reflect their contribution to overall systemic risk (a very cool phrase to use nowadays) they create new rules instead, to gratify their central planning instincts.

However, there was no announcement of one rule that needs action: extending deposit insurance to cover GICs and term deposits with more than a five-year term.

Testimony of Daniel K Tarullo of the Federal Reserve to the Senate Subcommittee on Security and International Trade and Finance,
Committee on Banking, Housing, and Urban Affairs lays out the case that the best possible institution to regulate systemic risk is (surprise!) the Federal Reserve. There was one item of note:

One key feature of the recent crisis was the heavy reliance on short-term sources of funds to purchase long-term assets, which led to a poor match between the maturity structure of the firms’ assets and liabilities. Such maturity transformation is inherently fragile and leaves institutions and entire markets susceptible to runs.

In Canada, of course, we address the problem, in part, by offloading the problem onto consumers of mortgages – by making 5-year terms standard – thus exacerbating housing price responses to changes in five-year rates. It’s a funny old world.

Prof Lars E O Svensson, Deputy Governor of the Sveriges Riksbank delivered a speech titled Inflation targeting after the financial crisis in which he opined:

Many have claimed that excessively easy monetary policy by the Federal Reserve after 2001 helped cause a bubble in house prices in the U.S., a bubble whose inevitable bursting proved to be a major source of the financial crisis.5However, as I see it, the crisis was mainly caused by factors that had very little to do with monetary policy and were mostly due to background macro conditions, distorted incentives in financial markets, regulatory and supervisory failures (also when central banks have been responsible for regulation and supervision), information problems and some specific circumstances, including the U.S. housing policy to support home ownership for low-income households.

Footnote: See Bean (2009) for an extensive and excellent discussion of the crisis, including the credit expansion and housing boom, the macroeconomic antecedents, the distorted incentives, the information problems, the amplification and propagation of the crisis into the real economy, the policy responses and the lessons for monetary policy and economics generally. The Bank for International Settlements (2009) provides a more detailed account of the possible macro- and microeconomic causes of the crisis.

Reference: Bean, Charles R. (2009), “The Great Moderation, the Great Panic and the Great
Contraction”, Schumpeter Lecture, Annual Congress of the European Economic Association,
www.bankofengland.co.uk.

A solid day for preferreds, with both PerpetualDiscounts and FixedResets gaining about 7bp on the day, amidst an uptick in volume. Floaters continued to astonish.

Looks like Toyota learned lessons from the securities industry:

Former regulators hired by Toyota Motor Corp. helped end at least four U.S. investigations of unintended acceleration by company vehicles in the last decade, warding off possible recalls, court and government records show.

Comrade Peace-Prize’s regulatory reforms are bogging down:

Senator Bob Corker, the lead Republican negotiator on legislation to overhaul financial regulation, said he is considering removing the Federal Reserve’s power to oversee banks.
…
Corker made clear that his agreement to work with Senator Christopher Dodd, the Connecticut Democrat who leads the Senate Banking Committee, would require President Barack Obama to make significant concessions to get his long-stalled financial reform proposal through the Senate.

Beyond reducing the Fed’s bank supervisory role, Corker said he could not support a standalone Consumer Financial Protection Agency, a top priority for Obama. In addition, Corker appeared unwilling to back the president’s call for mandatory limits on banks’ size and trading activities. And he suggested he was nearing agreement with Dodd on using bankruptcy laws to wind down large, failing companies, rather than the out-of-court resolution process Obama prefers.

There’s moral hazard in Greece:

BlackRock Inc., the world’s biggest asset manager, increased its Greek bond holdings, betting the European Union won’t allow the nation to default as Prime Minister George Papandreou cuts the bloc’s biggest deficit.
…
“They won’t allow a Lehman-type crisis,” said [Blackrock co-head of European fixed-income Michael] Krautzberger, who helps oversee BlackRock’s $3.35 trillion of assets. “The market has worried too much about an imminent government default in Europe that will not happen because of the solidarity.”

I wonder if countries will be required to produce “living wills”, hold liquid assets, have their management removed, vilified and investigated for fraud, or any of the other fun games we’ve had recently?

Light volume today, as traders were too busy watching money be thrown away to be bothered trying to make any. PerpetualDiscounts were off 6bp, but FixedResets were up 11bp, with yields on the latter issues again beginning to flirt with the 3.50% level.

The Fed is plotting its exit strategy:

The Federal Reserve is in talks with money-market mutual funds on agreements to help drain as much as $1 trillion from the financial system as policy makers prepare for the first interest-rate increase since June 2006, according to a person familiar with the discussions.

The central bank is looking to the $3.2 trillion money- market mutual-fund industry because the 18 so-called primary dealers that trade directly with the Fed have a capacity limited to about $100 billion, estimates Joseph Abate, a money-market strategist at Barclays Capital in New York.
…
The Fed is also considering reverse repurchase agreements with mortgage lenders Fannie Mae and Freddie Mac, said the person familiar with the discussions. Freddie Mac spokeswoman Sharon McHale declined to comment. Fannie Mae spokesman Brian Faith also declined to comment.

Meanwhile, the situation in Europe is having knock-on effects:

Investment-grade debt sales are drying up and returns on high-yield bonds have turned negative for the year as investors wait to see whether Europe will bail out Greece.

Borrowers in the U.S. and Europe sold $3.94 billion of high-grade securities this week, the least this year and less than … the average $52.9 billion, according to data compiled by Bloomberg.
…
Investors are avoiding credit risk as European Union leaders meet to hammer out an aid package for Greece. While relative borrowing costs in the U.S. remained steady yesterday and prices to insure against defaults fell, Huntsville, Alabama- based telephone service provider ITC Deltacom Inc. canceled a $325 million bond sale, citing “current market conditions.”
…
Corporate bonds have returned 1.39 percent this year, according to the Merrill index. Junk bonds lost 1.58 percent so far this month, the most in a year, the bank’s U.S. High Yield Master II Index shows.

The High Frequency Traders are taking over!:

Getco LLC, the high-frequency trading specialist founded a decade ago, agreed to become a so- called designated market maker at the New York Stock Exchange, a move that will add liquidity as the biggest U.S. equity venue seeks to halt share losses.

Getco purchased rights to handle floor trading in 350 stocks from Barclays Plc, according to a statement today from NYSE Euronext, owner of the New York Stock Exchange. The designation means Getco will be obligated to buy and sell shares at the national best bid and offer price, as well as participate in opening and closing trading sessions.

The agreement formalizes Getco’s role as a market maker with the NYSE after acting as one on electronic platforms through computer-driven strategies that produce hundreds of buy and sell orders every second.

This is a pleasant change from the usual state of affairs; normally it would be a big bank buying a private technology firm, rather than selling a chunk of their business to it. As far as I can tell from Getco’s website it’s a private company founded by two guys who, being capable of thought, were not suitable for employment at a big bank.

Off Topic! Giambrone has decided he does not wish to be laughingstock of Toronto for the next ten months, but will concentrate his efforts on solidifying his status as laughingstock of the TTC. Despite his young age, he has a distinguished record of sticking his hand up when Mayor Miller tells him to.

Another good day for the Canadian preferred share market, as PerpetualDiscounts gained 16bp while FixedResets squeezed out a gain of 1bp. Volume was relatively light and the market was well-behaved, with only four entries in the Performance highlights table – two of them BAM Floaters.

PrefBlog’s influence over global capital markets is proved yet again as Temasek is setting up an in-house investment firm:

Temasek Holdings Pte, Singapore’s state investment firm, is setting up a wholly owned multibillion dollar investment company with its own money, three people with knowledge of the matter said.

Seatown Holdings International will employ a multistrategy to invest in assets from stocks to bonds, targeting absolute returns, the people said, asking not to be identified because the information is private.

In-house is the only way to go for outfits that are big enough. Hire the best people, hold them accountable for results, let all layers of management concentrate on returns … you’ll do fine.

This is completely off-topic, but Toronto Distric School Board trustee Josh Matlow is in trouble again:

The showdown began last week when trustee Josh Matlow, the outspoken rogue of the TDSB, accused the board of going on a “drunken spending binge.”

The TDSB’s new sheriff, chair Bruce Davis, promptly demanded an apology and attached a deadline, Monday at 4 p.m., leaving Mr. Matlow the weekend to contemplate his fate.

Bruce Davis should take a civics course – he doesn’t appear to understand that cabinet solidarity only applies if one is in cabinet. However, I’m sure his responsibilities in ensuring seven-year olds are properly punished if they should, for instance, throw a snowball against a wall preclude any useful or intelligent use of time.

Today’s Treasury auction didn’t go all that well:

Treasuries tumbled after the U.S. sold a record-tying $25 billion of 10-year securities, the second of three note and bond auctions this week totaling $81 billion, and as investors weighed the prospects of European aid for Greece.
…
The yield on the current 10-year note climbed six basis points, or 0.06 percentage point, to 3.71 percent at 1:30 p.m. in New York, according to BGCantor Market Data. It increased as much as nine basis points yesterday, the most this year. The 30- year bond yield rose six basis points to 4.65 percent.

A marginally good day for Canadian preferred shares today, in constrast to all the recent marginally bad ones. PerpetualDiscounts gained 6bp and FixedResets gained 11bp, taking the yield on the latter down to 3.58%. The market was well-behaved as volume moderated, with only four performance highlights – three of them BAM issues in the Floating Rate class. The best of these, BAM.PR.K, also made it to the volume highlights.

PerpetualDiscounts now yield 5.87%, equivalent to 8.22% interest at the standard equivalency factor of 1.4x. Long Corporates continue to yield about 5.8%, so the pre-tax interest-equivalent spread has now widened to about 240bp, a slight widening from the 235bp reported February 3.

Lucas van Praag, World’s Greatest Corporate Spokesman, writes a rebuttal to the New York Times’ assertions in the Huffington Post. The most intruiging dispute is:

NYT assertion: “In addition, according to two people with knowledge of the positions a portion of the $11 billion in taxpayer money that went to Societe Generale, a French bank that traded with A.I.G, was subsequently transferred to Goldman under a deal the two banks had struck.”
The facts: The assertion is false and misleading. Goldman Sachs provided financing to many counterparties, but in that role we would not have known whether a counterparty had obtained credit default protection, let alone from whom or in what amount.

I have heard of things like this taking place. For instance, say Goldman wanted to do a deal with AIG but could not do so directly because of their risk management procedures. What they would do is call up their good friends at another bank – let’s call it the Clearly Idiotic Bunch of Clowns, or “Clowns” for short – and tell them the story. Goldman would do its deal with the Clowns and the Clowns would then lay off their exposure to AIG. The Clowns would take a spread of 15-25 bp on the transaction, record their profit, pad their bonus, shake hands and move on.

What the clowns didn’t consider important when doing the deal, however, was the fact that their deal with Goldman was collaterallized but their deal with AIG wasn’t. So as the value of the underlying instruments declined, they were getting margin calls from Goldman without being able to offset them with collateral from AIG … and, of course, as AIG itself went south, their exposure to AIG started looking more and more like a loss.

Fortunately for the Clowns, the Fed Fairy waved its magic wand and their contract with AIG was honoured. They honoured their contract with Goldman – but they would have done so anyway. The Fed Fairy’s action simply meant they could do so without taking the loss themselves.

Goldman did nothing wrong or even underhanded in this story, which is probably the explanation of the SocGen story that van Praag discusses. SocGen, of course, is renowned for it’s meticulous risk management procedures, as discussed by Jerome Kerviel.

Shed no tears for the Clowns, however! Nobody ever gets fired, or anything Dickensian like that. Only evil banks, such as Goldman, would ever dream of firing somebody for incompetence. They’ll get some extra coaching on risk management, between the “Respect in the Workplace” seminar and the workshop on throwing cream pies, and live happily ever after.

John Varley of Barclay’s testified to the UK’s Treasury Select Committee today. One of his startling revelations was that nice things cost money:

Barack Obama’s plans to stop banks engaging in risky trading activities will not stop another banking crisis, John Varley, chief executive of Barclays, said today.

Speaking before the Treasury select committee, Varley also tried to calm concerns that the crack down on proprietary trading, known as the Volcker rule, would knock Barclays’ profits.

“This initiative [Volcker] on its own will not lead to a safer system,” Varley said. “It is inconsequential. It is completely irrelevant [to Barclays].”
…
As he made a staunch defence of big banks like Barclays not being broken up by regulators, Varley warned MPs on the committee that the implication of demands that banks hold more capital and more liquid assets such as government bonds was that they would increase interest rates charged to customers.

“The cost of credit is going in one direction only – it’s going higher,” said Varley.

Bombardier is considering a new medium term note, but the terms are not yet final:

DBRS has today assigned a BB rating, with a Stable trend, to the proposed issuance of up to $1 billion in Senior Unsecured Notes (Notes) by Bombardier Inc. (BBD or the Company). The Notes are expected to be due before 2020. Proceeds from the issuance are likely to be used largely toward debt repayment, with no material change in the Company’s financial profile. Bombardier announced today that it has commenced a cash tender offer to purchase up to $550 million aggregate principal amount of its 6.75% Notes due 2012, 6.30% Notes due 2014 and Floating Rate Senior Notes due 2013. DBRS notes that the Company has the option to increase the tender offer to $1.25 billion.

Notes:
All figures are in U.S. dollars unless otherwise noted

The tender offer was announced yesterday. Regulators insist that this be kept secret from Italians so remember: if you’re Italian, you didn’t learn about the tender from me, OK?

Trading volumes picked up substantially today, but PerpetualDiscounts continued their slow descent, losing 8bp, while FixedResets were able to pick up 3bp.

Alessandro Beber and Marco Pagano have summarized their recent paper on short-selling bans in a VoxEU article Short-selling bans in the crisis: A misguided policy:

The evidence suggests that the knee-jerk reaction of most stock exchange regulators around the globe to the financial crisis – imposing bans or regulatory constraints on short-selling – was at best neutral in its effects on stock prices. The impact on market liquidity was clearly detrimental, especially for small-cap and high-risk stocks. Moreover, it slowed down price discovery.

Perhaps the main social payoff of this worldwide policy experiment has been that of generating a large amount of evidence about the effects of short-selling bans. The conclusion suggested by this evidence is best summarised by the words of the former SEC Chairman Christopher Cox on 31 December 2008: “Knowing what we know now, [we] would not do it again. The costs appear to outweigh the benefits”. We hope that this lesson will be remembered when security markets face the next crisis.

Also on VoxEU, Hans Gersbach makes an interesting proposal in Double targeting for Central Banks with two instruments: Interest rates and aggregate bank equity:

The central bank would have two instruments at its disposal:

(a) the short-term interest rate and

(b) the aggregate equity ratio of the banking sector defined as the ratio of total end-borrower lending (credit for non-financial firms, households, and governments) plus other non-bank assets to total equity in the banking sector. The aggregate equity ratio is the measure of the capital cushion of the banking sector.

As a consequence, there are two policy rules for the central bank: an interest rate rule and an aggregate equity ratio rule. The former is a traditional interest rate rule (see for example Gali (2008, Chapter 3)) that may include an additional variable capturing the current state of money and credit, as discussed below. The latter relates the required equity ratio of the banking system in the next period to the current aggregate equity ratio and to the state of money and credit.
…
The current proposal aims at separating the responsibilities and instruments regarding capital requirements and bank supervision. The proposal places a substantial burden on the shoulders of central banks with regard to inflation and financial stability. Together with current events, the function of central banks as a lender of last resort indicates that this burden cannot be avoided. Accordingly, it makes good sense to equip the central bank with two instruments (short-term interest rates and aggregate equity ratios of the banking system) to help them bear this burden, while leaving detailed bank regulation and supervision activities to separate authorities.

In other words, counter-cyclical capital requirements would be set by empirical judgement, rather than with any of the various formula-based currently being discussed.

Citigroup is developing a new derivative:

the CLX is constructed as a sum of the Sharpe ratio – deviations from the mean divided by volatility – of various market factors, such as equity volatilities, Treasury rates, swap spreads, corporate bond swaption-implied volatilities, and structured credit spreads. Citi will make the CLX tradable by using fixed historical values for the mean and volatility parameters, eliminating the need for costly recomputation from lengthy time series.
…
“The great thing about the index is that it hedges your funding costs while being very simple to trade. I believe it will reduce the systemic risk in the industry, akin to how the advent of swaps means people don’t worry about interest-rate exposures any more – they just pay a fee to hedge it,” [Terry Benzschawel, a managing director of quantitative credit trading strategy at Citi in New York and head of the team researching the product] says.
…
Chris Rogers, chair of statistical science at Cambridge University, said the only participants able to sell CLX-based products would probably be those who are too big to fail.

I have to wonder about the statement that funding costs can be hedged by the index … the only sure way of doing that is by borrowing longer in the first place and in a crisis funding costs are going to be highly company specific. And I must admit that I am deeply suspicious of an index based partly on “structured credit spreads” – not just idiosyncratic by instrument but also by whoever’s providing the quote and how much they want to quote firm.

Another day of relatively light trading; PerpetualDiscounts lost 4bp while FixedResets gained 3bp in a reasonably well-behaved market.

BofA / Merrill Lynch Plot Thickens!

When Bank of America Corp.’s board met to approve the acquisition of an investment bank on Sept. 15, 2008, members thought they were going to buy Lehman Brothers Holdings Inc., not Merrill Lynch & Co., according to New York Attorney General Andrew Cuomo.

However, the story has some support for my thesis that large corporations are riskier than smaller ones, on the grounds that you get ahead by telling your boss what he wants to hear:

[Company eMails and notes] also show Merrill kept [BofA ex-Chief Financial Officer Joe] Price informed of the losses as they grew, yet he resisted pressure from his lawyers to disclose them to shareholders.
…
When Price asked for a review of whether the [October 2008] losses — then $5 billion after taxes — should be disclosed to shareholders, his general counsel Timothy Mayopoulos said they should.
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Mayopoulos was later fired by Price and replaced by Brian Moynihan, who later became CEO, Cuomo said.

This is just a hair off-topic, but I’ve often wondered what the big deal is about atmospheric CO₂ levels. I mean, assuming they’re causing problems, why not just fix it? Genetically engineer some yeast cells, or other bug, so that they eat CO₂ and excrete sugar, put them in a tank and Bob’s your uncle! If you want to get fancy, put some other bugs in the tank that eat sugar and excrete polysaccharides; if you want to make some money, sell the kits in one-liter sizes so that Mr. & Mrs. Precious can reduce their carbon footprint. Why can’t this be done? Converting CO₂ to sugar is no big deal – plants do it all day long and have time left over for sex with bees.

So it was a great relief to read Neil Reynolds column today, Profit motive is the solution to CO2 emissions:

A Santa Barbara, Calif., company called Carbon Sciences Inc. provides a convenient prototype. The company announced last week that it has developed a “breakthrough technology” that converts atmospheric carbon dioxide into commercial-grade gasoline, diesel fuel and jet fuel. Founded in 2006, Carbon Sciences had previously converted CO-2 into low-grade methanol using an enzyme-based technology. Now, it said, it has combined chemical and biological engineering in a bio-catalytic process that transforms carbon emissions into “a cost-efficient” energy resource.

Is the process really commercially viable, or at least on the way there? Is Carbon Sciences (OTCBB: CABN) a decent investment? I don’t know and I’d need to hire some expertise before I ventured an opinion. But I’m just glad I’m not the only person in the world who’s thought of this.

PerpetualDiscounts continued to slide today, losing 27bp on a day with sharply reduced volume. FixedResets were able to squeak out a gain of 2bp. There were only three entries for the Performance Highlights table!

Deutsche Bank is using the compensation hysteria to put golden handcuffs on the peons:

A significant proportion of compensation will, where applicable, be deferred. Deferred compensation will be a combination of restricted equity awards (75%) and restricted incentive awards (25%).

* The restricted equity award will vest in nine equal instalments over 3¾ years, while the restricted incentive award will vest in three equal instalments over three years.

* All restricted equity and restricted incentive awards will continue to be subject to claw-back in the case of policy/regulatory breach.

And, of course, if they don’t feel like living up to their side of the bargain, inventing a policy/regulatory breach is easy enough. The best job of the brave new world? Employment contract litigator.

Some players are reducing their risk:

Two Citigroup Inc. executives running a proprietary-trading unit quit to join hedge fund Moore Capital Management LP, amid concern the government might order U.S. banks to exit trading businesses that don’t cater to customers, people briefed on the matter said.

Matthew Carpenter, a 15-year Citigroup veteran who had assembled the unit over the past three years, is leaving the bank along with his deputy, Matthew Newton, Citigroup spokesman Alex Samuelson said. The group trades U.S. stocks in several industries, Samuelson said.

In yet another instance of regulatory extortion, the SEC has admitted that State Street did nothing wrong but is paying $300-million anyway. Nobody’s been fired, nobody’s lost their license, back to business as usual. The trend towards bureaucratic ursurpation of the role of the courts, in all aspects of life, continues.

PerpetualDiscounts continued to slide today, losing 17bp, while FixedResets were down slightly less than 1bp. Volume continued to be on the heavy side.

In yet another example of PrefBlog’s trendsetting nature, Citigroup has started a blog.

The market responded to my deprecating remarks about FixedResets by selling off PerpetualDiscounts, which lost 28bp on the day and buying FixedResets, which gained 5bp, on fairly heavy volume.

PerpetualDiscounts now yield 5.83%, equivalent to 8.16% interest at the standard equivalency factor of 1.4x. Long corporates continue to yield about 5.8%, so the pre-tax interest-equivalent spread is now about 235bp, which is where it was at month-end.

Paul Krugman writes an op-ed in the New York Times, Good and Boring, lauding the resilience of Canadian banks:

Canada has an independent Financial Consumer Agency, and it has sharply restricted subprime-type lending.

Above all, Canada’s experience seems to support those who say that the way to keep banking safe is to keep it boring — that is, to limit the extent to which banks can take on risk.
…
More specifically, Canada has been much stricter about limiting banks’ leverage, the extent to which they can rely on borrowed funds. It has also limited the process of securitization, in which banks package and resell claims on their loans outstanding — a process that was supposed to help banks reduce their risk by spreading it, but has turned out in practice to be a way for banks to make ever-bigger wagers with other people’s money.
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Actually, the financial reform bill that the House of Representatives passed in December would significantly Canadianize the U.S. system. It would create an independent Consumer Financial Protection Agency, it would establish limits on leverage, and it would limit securitization by requiring that lenders hold on to some of their loans.

I suggest that Dr. Krugman has selected features of Canada’s system to further his domestic political arguments. The IMF has published suggestions that a critical factor is the stable deposit base of Canadian banks – which, I believe, is related to their national scope and oligopolistic position. Another major factor has been the banks’ control over the mortgage market – limited competition (no GSE’s here in Canada!) has allowed them to extract rents from hapless Canadian mortgagees, leaving much less necessity of reaching for yield. The sole Canadian bank that did fail during the crisis, Dundee Bank, failed because its lack of mortgage distribution channels encouraged it to go out on a limb provided by ABCP.

Paul Volcker testified to the Senate banking committee today:

Given strong legislative direction, bank supervisors should be able to appraise the nature of those trading activities and contain excesses. An analysis of volume relative to customer relationships and of the relative volatility of gains and losses would go a long way toward informing such judgments. For instance, patterns of exceptionally large gains and losses over a period of time in the “trading book” should raise an examiner’s eyebrows. Persisting over time, the result should be not just raised eyebrows but substantially raised capital requirements.

This is much more in line with my thinking than a flat prohibition, which will be subject to interpretation.

More generally, proprietary trading activity should not be able to profit from knowledge of customer trades.

That’s what the SEC’s supposed to be worrying about.

Mr. Volcker also noted that he had attached an essay to his official testimony, but I can’t find it!

A relatively directionless day for Canadian preferred shares, with PerpetualDiscounts losing 5bp and FixedResets gaining 1bp on moderate volume.