Category: Market Action

OSFI published its Report on Plans and Priorities today. I continue to be amused by their performance targets: under the programme target “Accurate risk assessments”, they set a target of 70% for “Percentage of knowledgeable observers who agree that their institution’s Composite Risk Rating is appropriate.”. “Knowledgeable observers” are defined as “Senior Executives and professionals who act on behalf of federally regulated financial institutions.” Sounds pretty cosy! Don’t hold your breath waiting for a politician to ask any questions – that would screw up their chances of post-public-servant employment.

Heavy volume AGAIN, PerpetualDiscounts down AGAIN (this time 20bp) and FixedResets up AGAIN – this time by 11bp, taking the median average weighted YTW down to a new low of 3.31%. Good volatility.

The Ontario Securities Commission has released the new edition of Perspectives, which provides information on regulatory initiatives.

We have a new poster-boy for the banks’ pursuit of mediocrity, rivalling Canada’s David Berry. Ladies & Gentlemen, let’s hear it for Raphael Geys!

Raphael Geys, former managing director of European fixed income sales for French bank Societe Generale, claims he was summarily dismissed without cause in November 2007.

He said that during his three years at the bank he was responsible for more than doubling the gross revenue of his division, from 205 million euros to 440 million euros.

Deputy Judge George Leggatt QC was told at a hearing earlier this month: “He was dismissed for being too successful in that role because the provisions in his contract were considered by the bank to be too generous.”

It was claimed that the bank’s termination of the contract “raised issues about the claimant’s entitlement to termination and other payments due under the contract. Very substantial sums are at stake”.

These have been reported as being 12.5 million euros (£11.3 million).

The bank claims he is not entitled to any “termination payment” under the contract because he has taken legal action.

And now, he’s passed the first milestone:

Societe Generale SA, France’s second-largest bank, lost a U.K. court decision over whether an 8 million-euro ($10.6 million) severance package it offered a former employee was less than what he was owed.

Raphael Geys, a former managing director of European fixed income sales at Societe Generale, sued and claimed at a trial that began last week in a London court that under his contract’s terms he was owed more severance than the bank offered.

If a severance value can’t be negotiated, a trial will be held to determine the amount, Judge George Leggatt said in the ruling today. Geys, who was fired in November 2007, said he was entitled to more than 12.5 million euros under his contract. Societe Generale argued it no longer owes Geys any severance because suing breached his contract.

“I reject the bank’s arguments that the claimant has lost any right to receive a termination payment, or any other payment, as a result of making or pursuing any claims,” Leggatt said.

The bank may have saved itself about 2.5 million euros had it “appropriately” worded a November 2007 letter firing Geys, according to the judge. Leggatt said the company didn’t properly end Geys’s contract until months later, meaning Societe Generale owed him a year-end bonus.

Sarah Butcher of eFinancial News reports It’s not unusual for banks to fire over-performers:

Bizarrely, lawyers say it’s not at all unusual for banks to eject high performers with large pay claims, even if they’re making a profit for the firm.

“You’d think that banks would recognise that it’s sensible to keep these people onboard,” says Charles Ferguson, a solicitor who specialises in the representation of traders. “However, there are some banks where there’s a limit to what they’re willing to pay. If someone takes them above that, they’ll look for an excuse to back out.”

Most banks include clauses in their contracts specifying that you need to be in employment and not under notice at the bonus date in order to be eligible for a payment. As a result, redundancies in the run up to bonuses are abnormally common.

Equally, Ferguson says some contracts specify that profit sharing entitlements will disappear if salespeople or traders are sacked for gross incompetence. He says this is also a favourite reason for dismissal.

Hah! Us proud Canadians can teach them a thing or two about justification for firing, eh?

The Ontario 2010-11 Budget was introduced today. Not a word about dividends – probably a good thing! More worrisomely, they proudly announce that the current deficit will be eliminated in a mere eight years – which stands a good chance of being the next completely unexpected and totally unforecasted recession. In that time, a mere $88.9-billion will be added to the provincial debt … and debt charges will rise from 9.35% of revenue to 11.3%.

In the Canadian preferred share market, volume was heavy AGAIN, Perpetual Discounts were down AGAIN (losing 21bp) and FixedResets were up AGAIN (gaining 5bp). Yields on FixedResets are now at 3.38%.

Covered bonds are recovering:

Europe’s banks are selling covered bonds at the fastest pace in four years in a sign that debt investors are betting Europe’s economy is strong enough to weather the budget crisis in Greece.

Caja Ahorros Barcelona, Spain’s largest savings bank, and Westdeutsche Immobilienbank AG, a unit of Germany’s third- biggest state-owned lender, are among the mainly European financial companies that issued 87.5 billion euros ($118 billion) of the notes this year, according to data compiled by Bloomberg. That’s the most since 95.4 billion euros of the bonds were sold in the same period of 2006.
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Covered bond spreads have tightened at a slower pace than those on other senior corporate debt. Typically carrying top ratings, they also widened less at the onset of the deepest financial crisis since the Great Depression.

The extra yield on the mortgage- and public sector-backed securities is still more than double the 36 basis-point average for the past 12 years, according to Bank of America Merrill Lynch’s EMU Covered Bonds Index. Investment-grade corporate bond spreads narrowed to 148 basis points as of March 22, compared with an average 92 basis points since 1997, index data show.

Covered bond sales fell as the credit market seized up, when investors shunned hard-to-value securities such as those backed by real estate. Issuance tumbled to 228.4 billion euros in 2008, from a record-high 347.8 billion euros in 2007, according to data compiled by Bloomberg.

It’s hard to interpret shifts in covered bonds in isolation, or with highly aggregated data such as the above. If it means more investor interest – good! If it means the banks are locked out of the unsecured market – bad!

It is possible to have your CFA Charter pulled for pornography.

Volume continued heavy in the Canadian preferred share market today as the ACO.PR.A redemption took effect. PerpetualDiscounts lost 1bp and FixedResets gained 9bp – which did not affect the median weighted average yield, which remains at 3.40%. That’s the trouble with using medians – sometimes things simply don’t move in-line!

PerpetualDiscounts now yield 6.01%, equivalent to 8.41% interest at the standard 1.4x equivalency factor. Long Corporates now yield about 5.7% (showing a total return of 0.35% on the month-to-date, +4.46% YTD), so the pre-tax interest-equivalent spread (also called the seniority spread) is now about 270bp, a slight widening from the 265bp reported March 17 and edging closer to their one year high in the low 290s.

After skirmishing over the Greek bail-out, France has surrendered to Germany:

Germany and France have agreed to back International Monetary Fund aid for Greece, a German Finance Ministry official said, signaling a joint position after weeks of dispute over how to resolve the Greek crisis.

Germany and France, the euro region’s two biggest economies, are now pulling together before a two-day EU summit in Brussels beginning March 25, the official said on condition of anonymity. Greece has pressed the EU to make specific commitments on aid to help lower its borrowing costs.

Apparently, the IMF money will be spent on armanents:

In a bizarre twist to the Greek debt crisis, France and Germany are pressing Greece to buy their gunboats and warplanes, even as they urge it to cut public spending and curb its deficit.

Indeed, some Greek officials privately say Paris and Berlin are using the crisis as leverage to advance arms contracts or settle payment disputes, just when the Greeks are trying to reduce defense spending.

“No one is saying ‘Buy our warships or we won’t bail you out’, but the clear implication is that they will be more supportive if we do what they want on the armaments front,” said an adviser to Prime Minister George Papandreou, speaking on condition of anonymity because of the diplomatic sensitivity.

Ten-Year swap spreads are negative:

The 10-year U.S. swap spread turned negative for the first time on record amid rising demand for higher-yielding assets such as corporate and emerging market securities.

The gap between the rate to exchange floating- for fixed- interest payments and comparable maturity Treasury yields for 10 years, known as the swap spread, narrowed to as low as negative 2.5 basis points, the lowest since at least 1988, when Bloomberg began collecting the data. The spread narrowed 5.38 basis points to negative 2.38 basis point at 3:12 p.m. in New York.

A negative swap spread means the Treasury yield is higher than the swap rate, which typically is greater given the floating payments are based on interest rates that contain credit risk, such as the London interbank offered rate, or Libor. The 30-year swap spread turned negative for the first time in August 2008, after the collapse of Lehman Brothers Holdings Inc. triggered a surge of hedging in swaps. The difference narrowed to negative 20.5 basis points today.

“It’s hedge-related activity related to new corporate issuance,” said Christian Cooper, an interest-rate strategist at Royal Bank of Canada in New York, one of 18 primary dealers that trade with the Federal Reserve. “As more and more institutions receive, then swap rates will go lower.”

PerpetualDiscounts slid again on a day of elevated volume, losing 10bp, while FixedResets roared ahead, gaining 12bp and taking weighted median average yield down to 3.40%.

The Office of the Chief Actuary (part of OSFI) has released its eighth actuarial study, titled Technical Aspects of the Financing of the Canada Pension Plan, complete with OSFI’s usual dollop of patronizing paternalistic Panglossian pablum:

The review panel expressed concern that most readers would be unduly distressed that the Canada Pension Plan (CPP or the “Plan”) is not expected to ever be even one-third funded. As such, the panel recommended minimizing or removing “point-in-time” funded status indicators from the actuarial report and to focus instead on the fact that the adequacy and stability of the steady-state contribution rate is the critical tool for judging the sustainability of the CPP, and that the funded ratio (ratio of assets to liabilities), if kept in the report, is at most an indicator of the projected mprovement in the funded level. This paper was thus written with the purpose of analyzing and comparing the financing of the CPP using different measures, in particular, the unfunded obligations (liabilities less assets) and funded ratios of the Plan under various closed and open group methodologies, including a methodology more consistent with that used for occupational defined benefit pension plans.

Let’s donate the Chief Actuary to Europe – he can help advise them on what to do about those CDS-trading terrorists, who caused the Greek crisis all by themselves.

Speaking of the Greek crisis:

Europe’s stalemate over possible aid for debt-encumbered Greece deepened as European Central Bank President Jean-Claude Trichet spoke out against offering low- interest loans for which the Greek government has pressed.

Trichet’s demand for stringent terms and German Chancellor Angela Merkel’s push for sanctions against nations that breach deficit limits heightened the chance that Greece will leave a March 25-26 summit empty-handed. That could force Prime Minister George Papandreou to decide whether he’s ready to fulfill his threat and turn instead to the International Monetary Fund.

Looks like there might finally be some action on the Fannie & Freddie front:

U.S. Treasury Secretary Timothy F. Geithner said the government should end the “ambiguity” over the government’s involvement in mortgage finance companies Fannie Mae and Freddie Mac.

“Private gains can no longer be supported by the umbrella of public protection, capital standards must be higher and excessive risk-taking must be appropriately restrained,” Geithner said in testimony prepared for the House Financial Services Committee that was obtained today by Bloomberg News. The hearing is scheduled for tomorrow at 10 a.m. in Washington.

Volume jumped up as PerpetualDiscounts got hammered again, losing 36bp, while FixedResets continued to show strength, gaining 3bp which took yields on the latter down to 3.42%. Volatility was also pretty good.

Spend-Every-Penny gave a speech to the UK Chamber of Commerce deemed to be too boring for the Department of Finance website. Highlights were:

“Issues like the concept of ‘too big to fail’ and ‘systemically important’ — quite frankly our view is that these are not useful discussions, and at the end of the day that these concepts are not workable.”

“We are against capital tax, we are against the tax on financial transactions, we are prepared to consider certain issues on contingent capital.”

“When you look at the causes of the crisis, one of the clear causes was excessive leverage, not only in some of the American institutions, but also some of the European institutions.

“Our primary concern overall is to get the leverage rules right and to try and get an agreement on that among our colleagues.”

Boston Fed boss Eric Rosengren also endorsed the idea when giving a speech on March 3, but only when answering a question; it was not part of his prepared remarks.

There was a good long article on the US TruPS CDO market today, albeit a little short on what I consider the interesting detail:

Hildene is part of a lawsuit seeking to prevent a TPG Credit Management LP affiliate from buying trust preferred securities from CDOs for pennies on the dollar. The firm tried to fire Cohen & Co. from managing deals in which Hildene invests. It’s attempting to block BankAtlantic Bancorp from retiring debt held by CDOs at a fraction of face value.

The moves by TPG Credit and BankAtlantic have in part kept the $50 billion market for CDOs backed by the trust securities, known as TruPS, from rebounding, according to Citigroup Inc., even as credit markets recover from the biggest financial crisis since the Great Depression. Since 2000, 1,813 banks and thrifts sold TruPS and other debt that were packaged inside the deals, according to Fitch Ratings.
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Financial institutions relied on TruPS before credit markets began to seize up in 2007 because interest on the securities is paid from pre-tax income and may be suspended without penalty. The securities, which rank between senior bonds and common equity for repayment in a bankruptcy, also count toward regulatory capital requirements. New York-based Citigroup, 27 percent owned by the U.S. government, sold $2 billion of TruPS last week after repaying bailout funds.

Community banks need the CDO market to revive to issue TruPS because they sell debt in increments of as little as $10 million, which insurers or mutual funds won’t buy. CDOs bought the most TruPS issued by smaller banks before credit markets froze, according to Citigroup.

European CDS spreads are increasing:

French President Nicolas Sarkozy is opposing Germany’s push for an International Monetary Fund loan to Greece, favoring a European solution for the nation as it struggles to lower the region’s biggest budget deficit. Greek bonds fell as the EU divisions widened.
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Swaps on Greece jumped 22 basis points to 337.5, according to CMA DataVision prices. Contracts on Portugal climbed 14 to 138, Ireland rose 11 to 135.5, Italy increased 7.5 to 105.5 and Spain was up 11 basis points at 112. These countries are collectively known as the PIIGS.

PerpetualDiscounts got hammered today, losing 52bp, while FixedResets gained 7bp to set a new all-time yield low for that index. Volume was good, and there were a lot of entries on the performance highlights. Volatility = Good!

Brinksmanship regarding the Greek bail-out is getting … er … brinkier:

Greek Prime Minister George Papandreou set a one-week deadline for the European Union to craft a financial aid mechanism for Greece, challenging Germany to give up its doubts about a rescue package.

Papandreou said he may turn to the International Monetary Fund to overcome Greece’s debt crisis unless leaders agree to set up a lending facility at a summit March 25-26. The IMF option has already been dismissed by European Central Bank President Jean-Claude Trichet and French President Nicolas Sarkozy, who say it would show the EU can’t solve its own crises.
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Papandreou toyed with the idea of going to the Washington- based fund, saying today that Greece is already living in an IMF-style fiscal corset without the financing that goes along with it.

“We are under a basically IMF program,” he told a European Parliament committee earlier. “We don’t want to be in a situation where we have the worst of the IMF, if you like, and none of the advantages of the euro.”

The IMF stands ready to respond to a Greek aid appeal, which hasn’t come yet, spokeswoman Caroline Atkinson told reporters in Washington today. Papandreou said he still prefers a European solution and that the EU announcing more explicit support for Greece would be enough to bring down borrowing costs without the need to actually tap emergency funds.

That poor little boy who said the Emperor had no clothes! Now he’s a terrorist!

Germany’s Finance Minister Wolfgang Schaeuble told the Bundestag on March 16 that the country may have to consider ordering “intelligence agencies to set up surveillance of who is getting together with whom for which kinds of speculative processes, and where” to protect the euro.

“I find it sinister and silly, it is a complete overreaction,” said Philip Whyte of the Centre for European Reform, a pro-European Union research institute in London. “There is a certain school of thought in continental Europe that everything is always the fault of hedge funds.” Schaeuble’s comments reflected “a longstanding paranoia about the Anglo-Saxon model of capitalism.”

European politicians blamed speculators after the euro tumbled against the dollar and the cost of insuring Greek government debt rose by a third this year, causing budget cuts that triggered street protests in Athens. Greek Prime Minister George Papandreou and French President Nicolas Sarkozy said that trading in credit default swaps exacerbated the crisis.

I’ve previously noted international problems in bank regulatory reform … but there are also national problems:

If the Senate can produce sweeping bank-reform legislation, expect House and Senate lawmakers to continue squabbling at least a year more or longer, said House Republican Leader John Boehner on Wednesday.

“If the Senate is able to produce a bill, I think it’s just as likely that we’ll be talking about the same issue a year from now as we are right now,” Boehner, R-Ohio, told an enthusiastic crowd of bankers at the American Bankers Association government relations summit.
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Senate Banking Committee Chairman Christopher Dodd, D-Conn., on Monday introduced a revised bank-reform bill without Republican support. He plans to have the panel vote on the bill next week and hopes to have the bill considered by the Senate in April.

“I don’t know how they ever come to an agreement on some kind of a bill they can bring back to both houses and pass,” Boehner said.

Summers has defended his staff.

Good volume in the Canadian preferred share market today, led by the two TD OperatingRetractibles, with the selling dominated by National Bank. There was also a decent bit more price volatility, with six entries on the Performance Highlights, while PerpetualDiscounts lost 3bp at the same time as FixedResets gained 8bp. That took the FixedReset median weighted average yield down to 3.46%, equal (to five significant figures) to its all-time low on January 11.

Former Lehman executives (and note that an “executive” can be anybody with a title) who, it would seem, prefer to remain anonymous, are trying to play down Repo 105, discussed on PrefBlog on March 12. But it’s a tangled web we weave…:

The only people who would worry about using an old trick to reduce leverage from 13.9 to 12.1, the second executive said, are “yappers who don’t know anything.”

Again, the examiner’s report takes pains to show otherwise. It quotes a senior vice president calling Lehman’s leverage targets “a very hot topic.” The firm’s own definition of a material leverage shift was one-tenth of a point.

In my experience, 95% of the sell-side are yappers who don’t know anything, and the other 5% are simply disingenuous.

And, of course, blind faith in the regulators is misplaced:

Securities and Exchange Commission Chairman Mary Schapiro said her agency’s oversight of Lehman Brothers Holdings Inc. was “terribly flawed,” days after a bankruptcy examiner found the SEC didn’t try to stop the firm’s exaggeration of liquid assets.

“It was so terribly flawed in design and execution,” Schapiro testified to a Congressional committee today, referring to SEC examinations aimed at monitoring the soundness of Wall Street’s biggest investment banks. “We were ill-suited because of our enforcement and disclosure mentality.”
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Valukas’s March 11 report describes a gap between how Lehman and the SEC viewed the firm’s so-called liquidity pool, used to pay bills in a pinch, in the firm’s final months. Behind the scenes, the SEC questioned how quickly some assets could really be tapped. Still, Lehman didn’t tell investors that a growing share of the pool was being pledged as collateral to clearing firms, the report found.

The SEC deemed assets to be liquid only if they were convertible to cash within 24 hours. Lehman afforded itself five days. The SEC told Lehman it preferred the shorter limit and never enforced it, according to the report.

In another instance, the SEC didn’t take action after determining in June 2008 that Lehman had counted a $2 billion deposit at Citigroup Inc. among cash-like assets available in an emergency, according to the report. SEC analysts deemed the deposit’s designation as “problematic,” because withdrawing the money could have impaired Lehman’s trading.
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The silence of examiners, who focused more on stability than honesty with investors, was invoked as a defense as Valukas quizzed more than 100 executives and other witnesses about the financial health and reporting at Lehman, based in New York.

The Bloomberg story doesn’t explore the regulators’ obsession with “stability” in detail, or even define what it is. Stability of the Financial System? Stability of Lehman? Stability of their jobs? What? One way or another … so much for the third pillar!

Greece is still trying to extract better terms for its EU bail-out:

As long as “Greece is still borrowing at an unreasonably high interest rate, over 6 percent,” the country will keep “all options open” while preferring an EU solution, Papandreou said at a press conference in Brussels today with European Commission President Jose Barroso.

Bad news at the trough on St. Patrick’s day! The little green piggies haven’t spent enough on lobbying:

“Until government policies favor renewable energy over dirty coal, solar may seem too risky now for some investors,” said Landis, whose $260 million fund include SunPower Corp. and Suntech Power Holdings Co. “Coal may make sense short term.”

Solar companies’ profitability is falling because of competition from China and cuts to state support in Germany and Spain, where about 72 percent power-producing photovoltaic panels were installed in 2008.
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Germany may install 3,000 megawatts, or about a third of the world’s total, Simonek said. In the Czech Republic, a country of 10 million people, about 900 megawatts of solar power will be deployed, almost matching existing U.S. installations.

The rising global demand will help some companies weather the slump in panel prices caused by Chinese manufacturers stepping up production and cuts in solar subsidies in Germany and Spain known as feed-in tariffs, said Richard Caldwell, chairman of Australia’s Dyesol Ltd., which makes a conductive dye that produces electricity on glass and sheet metal.

“Companies in the industry like First Solar have had a shocker,” he said. “The Chinese have been flooding the market with cheap product. And we’re still getting over the change to the German feed-in tariff. It hasn’t been a good market.”

Who woulda thunk it? Competition in solar panels! And there we all were, thinking it was all about peace, love, granola and subsidized green jobs to replace all those subsidized auto jobs that have evaporated! Just think, if they can cut costs by another 90%, maybe it will even be worth thinking about!

Volume was good in the Canadian preferred share market today, but PerpetualDiscounts fell by 7bp. FixedResets gained 2bp to take yields to within a hairsbreadth of their all-time lows … another tenth of a beep in yield and we’ve got a new record.

PerpetualDiscounts now yield 5.97%, equivalent to 8.36% interest at the standard equivalency factor of 1.4x. Long Corporates now yield about 5.7% (maybe a little bit more) so the pre-tax interest equivalent spread (also called the seniority spread) now sits at about 265bp, a significant widening from the 245bp reported on March 10. I consider it highly peculiar that the spread should be so wide in the absence of any serious credit-based panics; I can only conclude that retail has decided that massive inflation is imminent – which is consistent with low yields on FixedResets – contrary to the beliefs of institutional bond investors. I note that Long Canadas now yield 4.02% while long RRBs yield 1.57% real, for a breakeven of 245bp.

Click for Big

…. and you can call the recent rocketing in the breakeven spread either a return to normalcy or a harbinger of hyperinflation, depending on what answer you want to get … or what your client wants to hear.

The IMF has released the March 2010 edition of Finance & Development.

Europe will bail out Greece, if necessary:

Europe’s blueprint for a financial lifeline to Greece amounts to an unprecedented bet by finance ministers that they can avert a euro crisis by sidestepping the no-bailout rules intended to sustain the 11-year-old currency.

Improvising their way through the euro’s harshest test since its debut in 1999, officials meeting in Brussels late yesterday and today worked out a strategy for emergency loans in case Greece’s plan for 4.8 billion euros ($6.6 billion) in tax increases and wage cuts fails to stave off fiscal disaster.

There is no word as to whether the EU will demand management changes, vilify the top guys, claw back pay or threaten criminal charges. S&P affirmed Greece at BBB+.

Moody’s is shift municipal ratings to the global scale:

Municipal bond issuers led by California Treasurer Bill Lockyer began pressing companies that rate their debt two years ago to show investors how they would be rated on a corporate scale. They claimed that the scale cost them more in interest rates because state and local borrowers default at a lower rate than higher-rated corporations.

U.S. Representative Barney Frank, a Massachusetts Democrat who chairs the House Financial Services Committee, called the different rating scales “ridiculous” at a hearing on the $2.8 trillion market in May 2008.

This cosmetic change was last reported on PrefBlog in September 2008 in Global Scale for Municipal Credit Ratings a Bust?. So, the story so far is: CDOs, etc., must get their own scale because global scales are ridiculous. Municipalities must get their own scale because the global scale is ridiculous. Can’t tell your players without a political programme, can you?

In a speech at the Heyman Center on Corporate Governance, Julie Dickson acknowledged the issue of regulatory capture, but didn’t offer any insights:

Simon Johnson, a professor at MIT, says that the failure of supervisory judgement is often linked to regulatory capture. Regulatory capture refers to supervisors thinking like the industry they regulate because they either come from industry, or hope to work in the industry. In some cases there may be a belief that it is easier to just agree with industry rather than to fight their lobbying efforts. He has written many articles on this, which I read with great interest as they contribute to the debate around regulators, incentives, and judgement.

My own view is that clear mandates and accountabilities, independence, resources, and international assessment programs are key to getting the incentives right. I would also say that I have seen some very courageous supervisors in my time, and that sometimes people recruited from industry are even more demanding, having experienced first hand some of the dynamics within institutions. So this issue is rather complex.

There was an interesting and unusual note in today’s FOMC release:

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability.

A good day in the Canadian preferred share market, with volume at above-average levels. Six issues traded more than 100,000 shares on the Toronto Exchange. PerpetualDiscounts gained 3bp and FixedResets were up 8bp, which took yields of the latter down to 3.47%, the second-lowest on record.

Under proposed legislation, the New York Fed will be politicized:

The Federal Reserve Bank of New York president, who supervises five of the seven largest U.S. banks, would be subject to White House appointment and lawmakers’ approval under legislation proposed today.

Also, one member of the Fed Board of Governors would be designated vice chairman for supervision, and no firm under Fed oversight would be allowed to vote for or have past or present employees serve as directors of regional Fed banks, according to the bill to overhaul financial regulation. Senate Banking Committee Chairman Christopher Dodd, a Democrat from Connecticut, unveiled the proposed legislation in Washington.

This might make a bit of sense if one could point to elements of the Credit Crunch and make a case that Fed failure to regulate was responsible. Unfortunately for logic lovers, however, it was basically Fed-regulated entitites who bailed out Non-Fed-regulated entities (JPM/BSC, BAC/MER) and the spectactular bankruptcies (AIG, LEH) were non-regulated. But it’s not logic, it’s politics!

CLOs are coming back!:

The market for collateralized debt obligations backed by high-yield, high-risk loans is poised to reopen in the U.S. for the first time in a year after losses on mortgages prompted investors to flee bundled securities.

Citigroup Inc. is underwriting a $500 million fund managed by New York-based WCAS Fraser Sullivan Investment Management LLC, scheduled to price as soon as this week, according to people familiar with the offering, who declined to be identified because terms are private. The deal refinances an existing collateralized loan obligation and increases its size by more than 50 percent.

The offering would mark the first new issue backed by widely syndicated loans in the $440 billion market for CLOs since last March and a return to investments that contributed to $1.76 trillion of writedowns and credit losses at the world’s largest financial institutions. Citigroup and WCAS Fraser Sullivan are marketing the deal after prices on CLO debt staged a record rally on signs of economic recovery.
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JPMorgan Chase & Co., Bank of America Corp. and Deutsche Bank AG have also been approaching managers of leveraged loans since last year to offer terms for new CLOs to restart the market, according to people familiar with the discussions. CLOs pool loans and slice them into securities of varying risk intended to provide higher returns than similarly rated investments.

Volume slackened off today, with only twenty-two issues trading more than 10,000 shares. PerpetualDiscounts lost 9bp on the day – yields are approaching 6.00% – and FixedResets hovered at their 3.50% yield level.