Category: Market Action

A very nice day for the Canadian preferred share market, with PerpetualDiscounts up 29bp and FixedResets gaining 4bp, on continued moderate volume. There were no losers in the Performance hightlights!

Patric Edspar is now running the investment banking unit of Citadel Investment Group; there are two reasons that the Bloomberg story is instructive. The first is the mere existence of an investment banking unit at a hedge fund; this is good for the financial system and bad for the regulators. The second is his nickname “Juggernaut” and its origins:

People who know Edsparr describe him as outspoken, with a forceful personality. He earned the nickname “juggernaut” during his first job at Lehman Brothers Holdings Inc., where one of his tasks in the research unit was to collect daily price data from senior traders, one of the people said. Most of his predecessors failed because they were too intimidated to interrupt the traders, who would shout at them. Edsparr would stand behind them, often for up to two hours, until they gave him the data.

This is indicative of horrible management practices that are endemic in the industry. Anyone with a brain doesn’t hire a guy with three degrees to stand behind a trader for two hours begging for information. A well run firm will decide whether or not information transfer needs to take place and if it does, transfer it. As well, a well run firm does not permit any of its employees to treat other employees like that – as I recall, that was one of the major reasons why RT Capital blew up.

William C Dudley of FRBNY made a speech at the Center for Economic Policy Studies (CEPS) Symposium. Nothing particularly new, but I was very pleased to see him note that all these wonderful stabilizing ideas have a cost:

Higher capital requirements work to reduce the risk of liquidity runs, but potentially at the cost of making the process of financial intermediation much more expensive. In particular, a requirement that firms must hold more capital increases intermediation costs. Moreover, banks may respond to higher capital requirements by taking on greater risk. If an increase in risk-taking were to occur, the movement of the probability distribution to the right in Figure 2 might be offset by an increase in the degree of dispersion. Thus, higher capital requirements might not necessarily be sufficient to push all of the probability distribution above zero.

Second, regulators could require greater liquidity buffers. These buffers would help protect the firm against having to liquidate assets under duress, and would therefore help prevent the probability distribution from sliding left toward the zero line in Figure 2. But there is a cost to the firm from holding greater liquidity buffers in terms of lower returns on capital. So, requiring greater liquidity buffers would also tend to drive up intermediation costs. And, just as in the case of higher capital requirements, banks could respond by taking greater risks.

It doesn’t happen very often, but occasionally there’s a glimmer of sense in the world:

The U.K. government will oppose a European Union plan to impose the same pay restrictions on hedge-fund managers and private-equity firms that it proposed for bankers, the Treasury said.

The EU last week added the pay rules to alternative investment fund legislation that under review in the European Council and European Parliament. It suggests that senior managers defer a minimum of 40 percent of bonuses for at least three years and a “substantial amount” is paid in shares.

A spokesman for the Treasury said the last-minute addition to the rules failed to properly distinguish between funds and banks. He said regulation should be proportionate to the risk funds pose to the financial system. Hedge funds don’t take retail deposits and haven’t required bailouts despite a number of failures, the Treasury said.

Still no word on the results of the DFN / DFN.PR.A Rights Issue. The unit value was 18.98 on November 13, compared with the exercise price of 19.75, so success seems a little dubious … but there’s a twist: DFN closed at 12.51 on the announcement date, October 16, and stayed above $10 for the next two weeks, trading about 350,000 shares in the interim. One strategy might have been to short the hell out of the capital units (which were well above NAV at the time), aiming to replace with either a subscription to the rights or taking the chance. Still, I’ll bet a nickel that exercise was negligible.

A good solid day for preferreds, with PerpetualDiscounts up 15bp and FixedResets gaining 13bp. Volume continued to be relatively light, without much volatility.

Take that! How long will it be before official Chinese pronouncements include the phrase ‘Helicopter Ben’?

China’s banking regulation chief joined Hong Kong’s leader in blaming the Federal Reserve’s interest-rate policy for fueling speculative capital flows that may spur asset-price inflation.

“The continuous depreciation in the dollar, and the U.S. government’s indication that, in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation,” Liu Mingkang, chairman of the China Banking Regulatory Commission, said in Beijing yesterday.
…
“I’m scared and leaders should look out,” [Chief Executive of Hong Kong Donald] Tsang said in Singapore Nov. 13. “America is doing exactly what Japan did last time,” he said, adding that Japan’s zero interest rate policy contributed to the 1997 Asian financial crisis and U.S. mortgage meltdown.

Bernanke himself points out that bubbles are a little easier to spot in hindsight:

Federal Reserve Chairman Ben S. Bernanke said it’s “not obvious” that asset prices in the U.S. are out of line with underlying values after a 64 percent jump in the Standard & Poor’s 500 Index from its March low.

“It is inherently extraordinarily difficult to know whether an asset’s price is in line with its fundamental value,” he said today in response to audience questions after a speech in New York. “It’s not obvious to me in any case that there’s any large misalignments currently in the U.S. financial system.”
…
“The best approach here if at all possible is to use supervisory and regulatory methods to restrain undue risk-taking and to make sure the system is resilient in case an asset-price bubble bursts in the future,” Bernanke said.

His prescription is entirely sensible and will therefore be ignored.

DBRS has published an amusing letter to the SEC:

The Commission initially put these proposals out for comment last year. With very few exceptions, the proposals elicited an overwhelmingly negative response from the public commenters, including DBRS. The Commission recently adopted the few proposed rule changes that the public found unobjectionable. However, instead of heeding the cogent arguments the commenters put forth regarding the rest of the proposals, the Commission has asked for more comments, hoping this time to elicit a different response.
…
Footnote: For example, with regard to the proposed elimination of NRSRO references from Regulation M, the Commission says, “In light of the uniform opposition in the comment letters and the Commission’s remaining concern regarding the undue influence of NRSRO ratings, the Commission is seeking additional comment.” Re-proposing Release, at 6, 74 Fed. Reg. at 52375.

No word yet on the DFN / DFN.PR.A Rights Issue. Maybe tomorrow.

The preferred share market continued its rally today, with PerpetualDiscounts up 8bp and FixedResets gaining 17bp. Not much price volatility, volume was lukewarm.

A good solid day for the Canadian preferred share market, with PerpetualDiscounts up 15bp while FixedResets gained 4bp … reasonably close to a parallel shift in yields, given the difference in their weighted-median average modified duration. Not a lot of price volatility, not a lot of volume.

The SEC is casting aspersions on the hedge fund industry:

U.S. Securities and Exchange Commission Enforcement Director Robert Khuzami said the recent insider-trading cases among hedge funds including Galleon Group reflect “systemic behavior” in the industry.

“You have funds whose business model consisted of vigorous attempts to collect information from corporate insiders and to utilize that information to trade,” Khuzami said today at the Bloomberg Washington Summit. The cases point to “a more systemic approach to the problem and therefore potentially more dangerous.”

Whether that’s true or not I couldn’t say, but based on some of the people I’ve met in the industry … it doesn’t surprise me.

Canadian Pacific Railway has issued a thirty-year MTN with a 6.45% coupon:

DBRS has today assigned a BBB rating, with a Stable trend, to the $400 million in Medium-Term Notes (Notes) issued today by Canadian Pacific Railway Company (CP or the Company). The 6.45% Notes are due in November 2039, will rank pari passu with the Company’s existing senior unsecured debt, and include change of control provisions. The debt will be offered under the Company’s base shelf prospectus dated June 26, 2009 for up to $1.5 billion in medium-term notes. Proceeds from the issuance are expected to be used for general corporate purposes, which may include the funding of pension plan obligations and the reduction and restructuring of indebtedness.

There’s a speech by Julie Dickson on Lifeco regulation that demands it’s own post … but I don’t know if I’ll get to it tonight.

I note that NS Power and its tidal technology partner OpenHydro have successfully deployed the first commercial scale in-stream tidal turbine in the Bay of Fundy today. Thank heaven! I heard about those plans so often in high school that I achieved deep understanding of the term “tidal bore”.

It was a “little” day today … the market edged up a little; volume recovered a little.

To my embarassment, I must correct the November 9 mention of the G-20 and the proposed Tobin tax. A Reuters story quotes a somewhat irritated Gordon Brown on the controversy:

“I think if you read my speech on Saturday, what I was talking about was the social responsibility of financial institutions,” Brown said at his regular news conference.

The actual speech:

But what we need to consider is whether in fact we need to go further in recognising the social and economic responsibility of the financial system not least in mitigating the risks to the rest of society.
…
So I believe we should discuss whether we need a better economic and social contract to reflect the global responsibilities of financial institutions to society.

There have been proposals for an insurance fee to reflect systemic risk or a resolution fund or contingent capital arrangements or a global financial transactions levy.

Any measures we consider would have to be set against four core principles.

First, they would have to be global: to reflect the existence of the world’s first truly global sector and thereby create a level playing field for its operation.
…
Second, they would have to be non-distortionary to avoid damaging reductions in liquidity, inefficient allocation of capital and the temptation of avoidance.

Third, any measures should complement – and reinforce – the action we are already taking to enhance the stability of the international financial system and the global economy.

Fourth the contribution we ask the global financial services sector to make must be fair, measured and enable financial services to make their necessary contribution to future economic growth.

*sigh* That’s what I get for trusting a reporter instead of going straight to source documents.

The Dodd banking bill, briefly mentioned yesterday in the context of regulatory / monetary policy separation (I don’t believe arguments for either separation or combination are compelling, although I lean towards separation on the grounds that no institution should have too much power), also undermines Fed independence:

The financial-regulation overhaul proposed yesterday by Senator Christopher Dodd would strip the Fed of its role as a bank supervisor and give Congress a greater voice in naming the officials who set interest rates. The measure opens the door to interference from politicians who might disagree with any move by the Fed to raise rates from record lows, former central bank officials said.
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Under the proposal, commercial banks would lose their power to appoint directors of the 12 regional Fed banks. Instead, directors would be chosen by the Fed’s Senate-confirmed governors, and each board chairman would be subject to Senate approval. Currently, two-thirds of directors are chosen by private-sector banks and one-third by the Washington-based governors.

Robert Benmosche of AIG, last mentioned on PrefBlog on August 31, is just about the only super-CEO who’s coming through the post-crisis recriminations with a good reputation. That reputation was burnished today:

American International Group Inc. Chief Executive Officer Robert Benmosche told the insurer’s board of directors that he may quit because of government limits on what the company can pay employees, according to a person familiar with the matter.

Benmosche made the comments at a board meeting last week, about three months after joining the company, said the person, who declined to be identified because the meeting was private. The CEO’s remarks were an expression of frustration, and Benmosche, 65, hasn’t acted on his declaration, the person said.

Can you imagine that? A CEO who actually stands up for his guys! Incredible, isn’t it?

Mark Pengelly of Risk Magazine has some interesting technical notes on the CIT CDS Recovery auction in CIT auction not likely to be heavily bid.

BIS has released its Regular OTC Derivatives Statistics:

Key developments:

• •notional amounts of all types of OTC contracts rebounded somewhat to stand at $605 trillion at the end of June 2009, 10% above the level six months before,
• •gross market values decreased by 21% to $25 trillion,
• •gross credit exposures fell by 18% from an end-2008 peak of $4.5 trillion to $3.7 trillion,
• •notional amounts of CDS contracts continued to decline, albeit at a slower pace than in the second half of 2008 and
• •CDS gross market values shrank by 42%, following an increase of 60% during the previous six-month period.

More gains for Canadian preferreds today, as PerpetualDiscounts were up 13bp while FixedResets advanced 2bp, on thin volume. There were no losers in the Performance Highlights table.

PerpetualDiscounts now yield an average 5.95%, equivalent to 8.33% interest at the standard equivalency factor of 1.4x. Long Corporates continue to yield about 6.0%, so the pre-tax interest-equivalent spread (also referred to as the Seniority Spread) is about 235bp, slightly tighter than the 240bp reported on November 4.

The question of whether central banking and bank regulation functions should be separated or not is heating up again in the States:

Senator Christopher Dodd will propose creating a single U.S. regulator that would strip the Federal Reserve and Federal Deposit Insurance Corp. of bank- supervision authority, said a person familiar with the matter.

Dodd, chairman of the Senate Banking Committee, would eliminate the Office of the Comptroller of the Currency and the Office of Thrift Supervision and fold the Treasury Department units into the new bank regulator, according to the person, who spoke on condition of anonymity because the plan isn’t public. The Connecticut Democrat is scheduled to release a draft of his financial-regulation overhaul plan today in Washington.

Deutsche Bank sees a big increase in hedge fund assets coming:

Hedge fund assets may top the previous $2 trillion high by the end of next year as double-digit average returns lure investors, said Barry Bausano, Deutsche Bank AG’s global co-head of prime finance.

Hedge fund assets parked with Deutsche Bank have risen recently and global investors plan to allocate new capital next year, New York-based Bausano said during a visit to Hong Kong on Nov. 6. His division provides services and products ranging from securities lending to financing and derivatives to the industry.

As the banks retreat – and are forced away, like Citigroup / Philbro – from proprietary trading, I think it entirely reasonable to suppose that hedge funds will take their place. Naturally, there are all kinds of hedge funds, just as there are all kinds of investment manager: most of the principals will just be jumped-up stockbrokers, but some of them will know what they’re doing.

I am pleased to see Dealbreaker taking a stand against lousy programming practices, but I can’t help feeling that it’s more complex than they state. Surely writing wrappers around external APIs, formats and codes is standard?

Integrity. Character. Forthrightness. These are the regulatory buzzwords today. And Senator Dodd (STASI, Connecticut) will lead the way to Nirvana:

Securities and Exchange Commission employees would get $50,000 awards for snitching on each other, under Senate Banking Committee Chairman Christopher Dodd’s proposed legislation to overhaul financial regulation.

Ralph Cioffi and Matthew Tannin, whose hedge fund at Bear Stearns collapsed and presaged the onset of the credit crunch, are not guilty:

A jury of eight women and four men deliberated less than a day before reaching a verdict this afternoon. Cioffi, 53, the portfolio manager for the hedge funds, and Tannin, 48, their chief operating officer, went on trial Oct. 13 in federal court in Brooklyn, New York, on charges of conspiracy, securities and wire fraud. Each faced as many as 20 years in prison if convicted. When the verdicts were read, the two men didn’t visibly react. Their wives burst into tears.
…
Juror Aram Hong said e-mails sent by Cioffi and Tannin showed that the men were working “24-7” to save the funds in the months before they collapsed.

“Just because you’re the captain of a ship and it gets hit doesn’t mean you should be blamed,” Hong said.

I have had no opinion on their guilt or innocence. There have been, and will be, convictions by the barrel related to the crisis; there’s always crime. But I also know that the US justice system is extraordinarily vindictive, that bursting into tears is ex-post de rigeur when things go wrong, that prosecutors are desperate for scalps to brandish during their next electoral campaign, and that the (shielded) regulators are desperate to divert attention from their own incompetence (who’s gone to jail for missing Madoff? Not criticized, not demoted, not fired … I want to know who has been charged with a criminal offense. Nobody? Golly, what a surprise). So I’m pleased by the verdict.

Another good strong day for preferreds, with PerpetualDiscounts gaining 19bp and FixedResets picking up 18bp. Volume recovered to good levels (GWO issues were a highlight), but I suspect that to get things really moving again we need more issuance.

The G-20 discussed a Tobin tax:

Group of 20 governments split on whether to tax financial trading as part of a broader strategy to ensure the global economy’s expansion is less crisis-prone.

U.K. Prime Minister Gordon Brown told a meeting of finance chiefs in St. Andrews, Scotland today that such a levy could prevent excessive risk taking and fund future bank rescues, adding momentum to a debate begun by France. U.S. Treasury Secretary Timothy Geithner said a “day-by-day” tax on speculation is “not something we’re prepared to support.”

Clearly a lunatic view. Or populist. Or … perhaps even pre-emptive, to spike the guns of the French! Because after all, even the speaker states:

Brown, who didn’t say whether he’d ultimately endorse such a levy, said any policy would need to be implemented by all financial centers including those in the Middle East, Asia and Switzerland.

There’s nothing wrong in principal with taxing the financial sector in order to pay for bail-outs – but a Tobin tax will kill liquidity and encourage buy-and-hold carry trades – which are precisely the trades that killed the brokerages and banks in the first place. Much better is a beefed-up deposit insurance scheme – which has been proposed by Treasury in connection with the multi-nationals.

Mind you, in Canada we can’t even fund the deposit insurance we have properly. There’s a capital tax on banks, but the government blows it on useless garbage.

BIS has published the Report to G20 Finance Ministers and Governors: Guidance to Assess the Systemic Importance of Financial Institutions, Markets and Instruments: Initial Considerations, which is the missing reference in Julie Dickson’s recent speech.

The Financial Post ran an article regarding Canadian Alternative Trading Systems, Men of Shadows.

The Canadian preferred share market edged up today, with PerpetualDiscounts ahead by 3bp on the day while FixedResets were up 8bp. Volume dropped off again, with FixedResets dominating what little action there was.

Another good day for preferreds, with PerpetualDiscounts gaining 17bp and FixedResets picking up 24bp. Volume remained subdued.

Lord Turner of the UK Financial Services Authority made a speech on Nov. 2 to the Turner Review Conference titled Large systemically important banks: addressing the too-big-to-fail problem:

Clearly we can and must reduce the probability of failure of large systemically important banks (Slide 6) and our key lever to achieve that is the capital and liquidity requirements we impose. In the past, as I have shown, we actually allowed larger banks to operate with slightly lower capital requirements: we need to reverse that approach. We are committed to higher capital across the whole banking system, but there is also a strong case for demanding higher still capital standards from our largest systemically important banks.

That could mean more quantity of capital in total, or a higher quality capital, a higher proportion of equity rather than debt. One of the defining characteristics of the ‘too-big-to-fail’ problem has been our unwillingness, for fear of systemic consequences, to impose any losses on debt capital, even though it is meant to be there to absorb losses. This clearly creates a moral hazard danger for the future. One obvious solution is therefore to accept that debt capital has little or no role in the required capital of large systemically important banks, addressing the moral hazard problem by increasing the commitment of equity, the element in the capital structure which investors clearly recognise will suffer loss in any rescue.

Or, to create a role for contingent capital, debt capital which will without doubt convert to equity if the equity ratio falls below a predefined level – effectively defining in advance the terms of a debt-to-equity swap.

These capital regime reforms are now being considered by the Basel Committee and the FSB, and will themselves make a very major contribution to addressing the ‘too-big-to-fail’ problem. Essentially, such measures amount to a tax on size or on other measures of systemic importance. If despite them, large and complex banks remain competitive, that is fine because they will be safer: if in response banks choose to remain smaller and simpler, that is fine also.

… but as Anousha Sakoui of the Financial Times reports in An experiment in the role of contingent capital:

“The FSA is no doubt rubbing its hands in a satisfied manner but there is a question over whether the ECNs will fly commercially,” said one regulatory specialist. “Investors are already nervous about bank exposure and this will not make them any less nervous. It is a silver bullet for regulators, but only if the market agrees.”

“ECN” [Enhanced Capital Note] is the nerd nomenclature for contingent capital. I have argued, most recently in the post Lloyds Contingent Capital Poorly Structured, that rational, non-coerced, buyers will demand a coupon so high that rational sellers won’t want to pay it … which is why it’s so important to get it into the indices – passive investors will buy ANYTHING, as long as you promise not to make them think about it.

John Palmer, head of OSFI from 1994-2001, has been appointed to the MFC board of directors. His successor, Nicholas Le Pan, is a director of CIBC. His predecessor, Michael Mackenzie, was on the board of ING Canada.

PerpetualDiscounts put in a solid day’s work today, gaining 24bp, while FixedResets lost 7bp. Strength in the BAM OperatingRetractibles more than offset a decline by GWO.PR.X, which was called for redemption. Volume continued to be on the lightish side.