Category: Market Action

The SEC has released statements regarding the Dark Pool debate discussed yesterday.

Chairman Schapiro says:

Transparency is a cornerstone of the U.S. securities market. That is why I asked the staff earlier this year to begin a comprehensive review of dark pools, as well as other types of dark liquidity.

We should never underestimate or take for granted the wide spectrum of benefits that come from transparency. In particular, transparency plays a vital role in promoting public confidence in the honesty and integrity of financial markets.

Although dark liquidity always has existed in one form or another in the equity markets, the Commission must assure that the public markets and non-public trading venues operate within a balanced regulatory framework. This means that as markets evolve, the Commission must continually seek to preserve the essential role of the public markets in promoting efficient price discovery and investor confidence.

Commissioner Aguilar says:

With this responsibility in mind, I turn to the proposals before us today. As our proposing release notes, some dark pools share order information selectively with certain market participants. This concerns me, because it may create two-tiered access to information that is neither fair nor transparent. That’s why, today, I support proposing rules to require that actionable indications of interest be publicly displayed as quotations and to lower the volume threshold that triggers an ATS’s order display and execution access obligations.

I also, however, recognize the interest of large institutional investors, such as the pension funds and mutual funds that represent many individual investors, to be able to trade large blocks of securities without tipping their hand and allowing other traders to take advantage of them. For that reason, I support the staff’s proposal to balance this interest with the general goal of improved price discovery by providing a limited exception to display requirements for orders of substantial size, i.e., those orders of $200,000 or more.

Commissioner Paredes says:

Markets are complex systems comprised of numerous components and features that must work together to ensure a well-functioning “whole.” I am concerned that by taking steps now to regulate particular aspects of market structure, the Commission will frustrate its ability to undertake a more constructive comprehensive review of market structure. I am concerned that considering particular features of dark pools in isolation increases the risk of unintended adverse consequences and will not yield the best results for our markets. The release acknowledges that, in the relatively near term, the Commission is expected to consider a concept release covering numerous aspects of market structure. As an initial step in considering reforms that may be warranted, perhaps the dark pool issues before the Commission today should be deferred and instead addressed in the concept release.
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The demand for non-displayed liquidity presumably will continue, despite any regulatory changes that may be adopted. If the regulatory regime significantly impinges dark pools, what type of trading activity might replace current dark pool trading? Where might current non-displayed trading interest go? To foreign markets? As I already suggested, it may not be correct to presume that it becomes displayed.

I suggest that the most likely sink for non-displayed trading interest will be private equity. We have certainly seen how, for instance, a decline in dealer trading profits due to TRACE has led to increased private issuance and the explosion of the CDS market … why shouldn’t the same mechanism apply to equities?

Canadian bond investors will appreciate that the beloved regulators have protected them to such an extent that on-line offerings of corporate bonds to retail are … somewhat skimpy.

Back to the usual grind today, with PerpetualDiscounts down 5bp and FixedResets losing 9bp. PerpetualDiscounts now yield 6.05%, equivalent to 8.47% interest at the standard equivalency factor of 1.4x. Long Corporates are now yielding a little under 6.0%, so the pre-tax interest-equivalent spread is now about 250bp, a continued widening from the 240bp reported on October 14.

Volume was quite strong today, with 52 index-included issues trading 10,000 shares while still falling short of the volume highlights table, while the six top issues were all FixedResets trading more than 50,000 shares. On the other hand, the market showed its thinness with blocks of HSB.PR.E and CM.PR.M changing hands at well below the closing bid. Market impact costs will always kill the cowboys in the end!

Here’s a scary thought from Comrade Peace Prize:

Obama administration advisers said U.S. banks bailed out with taxpayer funds have responsibility to support the president’s effort to overhaul the rules for Wall Street and avoid future financial crises.

White House officials say they are frustrated that major financial firms are fighting President Barack Obama on the regulatory overhaul after taxpayer bailouts helped firms restore profits and near-record compensation for executives.
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“The American people have a right to be frustrated and angry,” Chief of Staff Rahm Emanuel said on CNN’s “State of the Union” yesterday. Banks receiving aid are “literally going and fighting the very type of regulations and reforms that are necessary to prevent, again, a crisis like this happening.”

After reading the promise that this legislation will tame the business cycle, do you have to read any more? I wouldn’t link to a blog that made that claim … but this is the White House Chief of Staff who’s being quoted!

I haven’t studied the legislation in any detail – but if the best supporting argument they can come up with is ‘You guys screwed up last time, therefore this is right” then it must be pretty bogus.

The SEC is proposing to restrict dark pool trading:

The commission will propose lowering the amount of daily volume in a company’s shares that can be executed in private on any of the networks to 0.25 percent from 5 percent at a hearing tomorrow in Washington, said the people, who declined to be identified because the discussions weren’t public. John Nester, an SEC spokesman, declined to comment.

The rule change may curtail the number of transactions on dark pools, off-exchange platforms run by firms such as Goldman Sachs Group Inc. and Getco LLC that have drawn scrutiny from Democratic Senators Ted Kaufman of Delaware and Charles Schumer of New York. The systems usually shut down trading in a security when they approach the current 5 percent limit.

I’m not sufficiently familiar with dark pools to have a definite opinion on the matter, but my knee-jerk reaction is that this is simply the established exchanges using the current ‘Regulation = Good’ hysteria to advance their interests. The OSC has highlighted a CSA / IIROC Request for Comments on the topic. Interestingly, support for giving the regulators a blank cheque is waning:

A poll conducted for Public Strategies and Politico found that 32 percent of voters support new regulations, while 68 percent say better enforcement of existing regulations is the best approach.
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The top pollster for the survey, David Iannelli, said a previous poll conducted in December during the height of the Wall Street meltdown found that 67 percent of those surveyed believed more regulations were needed.
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The poll can be found at www.pstrategies.com.

State Street is alleged to have been naughty:

The case was originally filed under seal by whistleblowers – “Associates Against FX Insider Trading,” who alleged that State Street added a secret and substantial mark-up to the price of interbank foreign currency trades. The interbank rate is the price at which major banks buy and sell foreign currency.

Subsequently, Brown launched an independent investigation into the allegations.

Brown’s investigation revealed that State Street was indeed overcharging the two funds. Despite being contractually obligated to charge the interbank rate at the precise time of the trade, State Street consistently charged at or near the highest rate of the day, even if the interbank rate was lower at the time of trade.

So my question is: who was authorizing the FX trades on the pension fund side? who was checking the trades on the pension fund side? Have they been fired? If nobody was checking and portfolio managers are executing really cool trades without nailing down the FX conversion, has the CEO been fired? This isn’t “the latest example of how clever financial traders violate laws and rip off the public trust”; given that it’s been happening routinely for eight years, its just the latest example of brain-dead portfolio managment.

Red letter day today, as PerpetualDiscounts were up … a whole half bp! FixedResets gained 7bp; there wasn’t much price volatility, but volume was good, with the volume highlights table being entirely FixedResets.

CIT has amended its restructuring plan:

The amended terms of the restructuring plan include, among others:

• A comprehensive cash sweep mechanism to accelerate the repayment of the new notes;
• The shortening of maturities by six months for all new notes and junior credit facilities;
• An increased amount of equity offered to subordinated debt holders reflecting agreements with holders of the majority of its senior and subordinated debt;
• The inclusion of the notes maturing after 2018 that had previously not been solicited as part of the exchange offer or plan of reorganization;
• An increase in the coupon on Series B Notes, to 9% from 7%, being issued by CIT Delaware Funding; and
• Provided preferred stock holders contingent value rights in the plan of reorganization, and modified the allocation of common stock in the recapitalization after the exchange offers, as part of an agreement with the United States Department of Treasury.

CreditSights has condemned the amendments to the CIT restructuring:

CIT “has done very little to meaningfully enhance the offer” to the majority of senior unsecured bondholders of the holding company, said Adam Steer, an analyst at CreditSights Inc. in New York.

Under the revised terms, maturities on new notes issued in exchange for existing bonds will be shortened by six months, CIT said Oct. 16. The New York-based company will also boost the amount of equity offered to subordinated debt holders and include notes due after 2018 that previously weren’t part of the exchange offer or reorganization plan that was announced Oct. 1.
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CreditSights continues to question why holders of longer- dated senior unsecured bonds would prefer the exchange over the prepackaged bankruptcy offer, Steer said.

And Carl Icahn says he can give the company a better deal:

Billionaire investor Carl Icahn offered CIT Group Inc. a $6 billion loan as an alternative to what he called an “incompetent and unconscionable” proposal by the board of directors to avert collapse.

Icahn, who said he is CIT’s largest creditor, offered to underwrite a loan to the New York-based company that he said would save as much as $150 million in fees compared with the bank’s proposed financing.
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Bondholders should reject any offer less than 90 cents on the dollar, according to analysts at Egan-Jones Ratings Co. in Haverford, Pennsylvania.

“Forget Icahn, forget the exchange,” the analysts said in a report today. “Neither Icahn’s offer nor the revised exchange (which reduces maturities by six months) provides the best value to creditors.”

“Icahn’s letter is in line with our view that the best way of maintaining value is by running off CIT’s book and gracefully winding down the portfolio over time,” said Adam Steer, an analyst at CreditSights Inc. in New York. “The proposed change or prepack plan does not leave the company with a lot of hope for running the company viably.”

Same old same old for the preferred share market today, as PerpetualDiscounts lost 22bp while FixedResets gained 5bp. Volume was off a bit, but still entirely respectable; almost all FixedResets.

The New York Times considers the sale of Philbro to be a public policy success:

Bankers will surely say “we told you so.” Citigroup’s sale of its profitable energy trading unit Phibro is exactly the kind of unintended consequence that the nation’s financiers warned us would happen when the Obama administration set out to limit their pay.

We see it as a public policy success. Phibro is a high-risk, high-reward hedge fund. It has no place on the books of one of the nation’s too-big-to-fail banks. If a policy to cap bankers’ pay forces all banks to get rid of their hedge funds, it will be a winning policy.

I’m a simple kind of guy. I figure, if the real problem is highly leveraged hedge funds within banks, then the regulators should concentrate their attention on highly leverage hedge funds within banks. But I guess that kind of fuzzy thinking is getting a little old fashioned in these modern times.

Investments can be a really dirty business:

A fund associated with TPG is exploiting an unintended wrinkle in the $650 billion market for CDOs by asking holders of the riskiest portions to allow asset sales in exchange for millions of dollars in fees. While equity holders have the right to decide which assets the CDOs sell because they’re first in line for losses, they may no longer have the incentive to ensure that assets are sold at fair value because their investments have been wiped out by the worst financial crisis since the Great Depression.
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TPG Credit, a Minneapolis-based firm founded by former Cargill Inc. executive Rory O’Neill and associated with private equity firm TPG, has offered in the past week to buy $470.8 million of bank trust preferred securities from seven different CDOs for 5 cents on the dollar, according to trustee reports obtained by Bloomberg News. TPG Credit will pay holders of so- called equity portions another $23.5 million in fees to allow the sales, the documents say.

The slide continued today, with PerpetualDiscounts down 17bp and FixedResets losing 6bp, on slightly lower volume dominated by FixedResets.

A day enlivened by the settlement of IAG.PR.E.

Otherwise, we were back to same-old, same-old, with PerpetualDiscounts losing 26bp and FixedResets gaining 4bp, total return. Volume was good, with PerpetualDiscounts being the majority of the volume highlights table.

US Municipal defaults are not at record levels, but still high:

Municipal bond defaults soared past $4 billion for the year through the end of September, driven partly by the bursting of the real estate bubble, according to the Distressed Debt Securities Newsletter.

There were 137 defaults totaling $4.2 billion in the period, including more than $1 billion in the third quarter, according to the Miami Lakes, Florida-based newsletter. The pace trails the 12-month record of 2008, when there were 150 defaults totaling $7.8 billion, including a $3.8 billion sewer bond issue by Jefferson County, Alabama, according to the newsletter.

One is tempted to call this a good day, with PerpetualDiscounts losing only 7bp, while FixedResets lost 11bp! Volume was very good, with over 50 issues trading in excess of 10,000 shares and seven issues trading in excess of 100,000 shares – only four of them FixedResets. Some good volatility as well, with a fair number of names in the performance highlights.

PerpetualDiscounts closed yielding 6.01%, equivalent to 8.41% interest at the standard equivalency factor of 1.4x. Long Corporates are close as dammit to 6.0% so the pre-tax interest-equivalent spread is now about 240bp, a slight increase from the 235bp recorded October 7.

Econbrowser has a guest-post touting the Wisconsin Foreclosure and Unemployment Relief Plan:

The WI-FUR plan (here for details) specifies that all unemployed receiving UI benefits also receive a housing voucher that can be used to pay the mortgage. The housing voucher would be computed such that, on average in each state, homeowners pay 30% of their UI benefits on their mortgage — the voucher would cover the balance. In Wisconsin, for example, we advocate for an average voucher of about $764. This would make up for the shortfall in a $1,200 mortgage payment if households pay 30% of their UI benefit ($436 = 0.30 × $1,452) towards their mortgage.

The supporting argument is good, but I would be more inclined to support the idea if the government was getting something for its largesse: say, a chunk of equity in the house – maybe even computed against the price of the house when the mortgage was taken out. So, for instance, if Joe Unemployed uses twelve vouchers for $1,000 each in order to maintain ownership of his $400,000 house, the government then owns 3% of the house as equity, to be recovered when the house is next sold, at latest.

In another part of the post, they reference Lehman’s ‘Housing Meltdown Scenario’ which has been … er … somewhat overtaken by events and has been discussed on PrefBlog.

Accrued Interest writes an interesting post that is almost evenly divided between debt monetization via Fed Agency buy-backs and the low level of American political debate:

I don’t have a problem with claims that the Fed is conducting de facto monetization through its QE efforts. I don’t agree. I think Quantitative Easing is a legitimate monetary policy tool. But I readily admit that the distance between QE and monetization is no more than three meters wide. I think the Fed is still on the correct side of that line, but it is a perfectly legitimate and important public policy debate. I’m open minded to the possibility that the Fed could cross that line at some point. I welcome rational and objective discussion aimed at convincing me and others that the line has already been crossed.

To be fair, I don’t read Zero Hedge, so I am loathe to generalize about the opinions held on that site. However its obvious that the author is of the opinion that the Fed has crossed the line. Fine. Let’s hear the case. But instead, Zero Hedge tries to link this particular buy back with debt monetization, when I’ve clearly shown above that this particular buy back doesn’t indicate anything either way. Zero Hedge is presenting non-evidence as evidence.

So one of two things must be going on. Either Zero Hedge is ignorant of all the above facts, or he’s intentionally ignoring the facts to make his argument more sensationalist.

He has a follow-up today answering complaints from those who feel quantitative easing is the same thing as monetization. And it is; it’s simply a question of the environment. Right now the former appellation is appropriate because there is a demonstrable risk of disinflation, if not full deflation. If they keep it up for long enough, then yes, it will be monetization.

Looks like Central Bankers are are moving towards a new world reserve currency:

Policy makers boosted foreign currency holdings by $413 billion last quarter, the most since at least 2003, to $7.3 trillion, according to data compiled by Bloomberg. Nations reporting currency breakdowns put 63 percent of the new cash into euros and yen in April, May and June, the latest Barclays Capital data show. That’s the highest percentage in any quarter with more than an $80 billion increase.

Reuters claims that the CIT restructuring is in trouble:

CIT Group Inc is seeing little interest from bondholders in a debt exchange offer aimed at repairing its fragile balance sheet, making bankruptcy increasingly likely, sources familiar with the matter said.
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CIT is now more likely to try a prepackaged bankruptcy, two people familiar with the matter said. They declined to be identified because the exchange offer is ongoing and information about its progress is private.

… and they’re losing their CEO:

Jeffrey M. Peek has informed the Board of Directors that he plans to resign as Chairman and Chief Executive Officer from CIT effective December 31, 2009. The Board is forming a Search Committee to oversee the recruitment process and ensure a smooth leadership transition at the Company.

“CIT’s recently launched restructuring plan is designed to enhance its capital levels, bolster liquidity and return the Company to profitability,” said Mr. Peek. “By strengthening CIT’s financial position, the Company will advance its bank-centric model and invigorate its market-leading franchises which support the small business and middle market sectors of the economy. Now is the appropriate time to focus on a transition of leadership, and I look forward to working closely with our Board during that process.”

Another down-day for PerpetualDiscounts, which lost 11bp on the day, in distinction to FixedResets, which gained 5bp. The day was enlivened by a new issue from EPP, which was downgraded by DBRS, thus simultaneously confirming three trends and predictions:

• New FixedResets from relatively low-quality companies
• New FixedResets following the jump in Canadian 5-year yields last Friday
• Downgrade of EPP

RBC did some nice crosses on the day, dominating the board.

The transfer of wealth from the banking to the shadow-banking sector got a boost today when Citigroup sold Philbro to Occidental:

Oil producer Occidental Petrol Corp., based in Los Angeles, will pay “net asset value” for the unit, the companies said today. Occidental’s net investment in Phibro will be about $250 million. The sale won’t be material to Citigroup earnings, the New York-based bank said.

Phibro had become a flashpoint for critics of excessive compensation at banks receiving federal aid because its chief, 58-year-old Andrew J. Hall, was paid more than $100 million in 2008 and is set to earn about the same this year. Citigroup, the third-biggest U.S. bank by assets, received a $45 billion taxpayer-funded bailout last year.
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Vikram Pandit, 52, Citigroup’s chief executive officer, is parting with one of his most consistently profitable businesses.

Phibro, based in Westport, Connecticut, has been profitable each fiscal year since 1997, with pretax earnings averaging $371 million during the past five years, Occidental said in its statement. Citigroup had a record $27.7 billion net loss last year as the financial crisis brought mortgage-trading losses and higher loan charge-offs.

Hall, who has a degree in chemistry from the University of Oxford, is paid under a contract that gave him a portion of the unit’s trading results, and he may be owed $100 million this year under the terms of his contract with Citigroup, according to people familiar with the matter.

In Canada, of course, we solve such problems by putting an army of accountants and lawyers on the case, finding a few minor transgressions and firing the bum who made the mistake of being too good at his job. I am glad to see that Citigroup executives have more personal integrity.

Government bonds got hammered today. Across the Curve articulates my thoughts on the matter:

I was in the insomniac zone last night and was up late writing. I wrote about the Bernanke speech. I thought that he broke no new ground. Absolutely none. But some of the headline writers have focused on the fact that he mentioned that the Federal Reserve will raise rates when the economy recovers. Well, I wonder who would have been so obtuse as to think otherwise?

Aided by the Canadian jobs number, the Canadian five-year got smacked for 23bp today, closing at 2.75%. It is interesting to speculate whether the implied narrowing in required reset spreads will bring a flood of FixedReset issuance next week … I trust all the newly indentured investment bankers will be working their telephones from their call-centres.

There could be an interesting ‘cram-down’ battle going on with Energy Future:

— Energy Future Holdings Corp.bondholders are forming a group to block the electricity provider’s offer to swap $6 billion of debt for $4 billion of new secured notes with less protection for investors, according to two people familiar with the matter.

Lenders owning as much as 50 percent of Energy Future’s bonds maturing in 2017 oppose the terms of the exchange, said an attorney familiar with the matter who declined to be identified because the discussions are private.

Dallas-based Energy Future, formerly TXU Corp., needs to reduce debt after KKR & Co. and TPG Inc. paid $43 billion for the company using a combination of high-yield, high-risk loans and bonds in October 2007. That was before gas prices fell, credit markets seized up and equity markets tumbled.
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Energy Future has $44.5 billion of loans and bonds, including $22.5 billion coming due in 2014, according to data compiled by Bloomberg.

The company “is suffering under the weight of an untenable debt load created by an ill-timed leveraged buyout at the top of the market,” Carl Blake, a Washington-based analyst at Gimme Credit LLC, wrote in an Oct. 6 report.

We will see more of this as the smoke clears – we saw some yesterday with the BAM acquisition of BBI.

I mentioned the controversy regarding the Federal Housing Authority yesterday. Here’s a defense of their business practices from the chair of the House Subcommittee on Housing and Community Opportunity, Maxine Waters:

It is a myth that FHA is the new subprime and has adopted lower underwriting standards and the other worst abuses of the subprime market. In fact, just the opposite is true. A recent Federal Reserve report indicates that over 60 percent of the increase in FHA purchase activity between 2007 and 2008 was to borrowers with prime-quality FICO scores. Additionally, the percentage of loans in FHA’s portfolio with loan-to-value ratios above 95 percent has fallen from 72 percent in 2007 to 67 percent in 2008. And unlike the subprime market, all of FHA’s mortgages require full documentation and verification of the borrower’s income and assets.

The preferred share market was down again today, with PerpetualDiscounts down 24bp and FixedResets giving up 7bp; as always, figures are given in terms of total return. The S&P/TSX Preferred Share Index was down 41bp, as opposed to no change yesterday; I have been asked about such differences and suspect that S&P uses the Close to price the index, rather than the Closing Bid used by HIMIPref™, although their published methodology does not make this absolutely explicit. Volume was good.

This is way, way, way WAY off topic, but I grew up with Vivien Leigh telling the Beatrix Potter stories (on 45s – if anybody remembers what those were) and have been looking for re-releases for years. Found ’em! The best is Peter Rabbit.

Yet another major US housing subsidizer is in trouble:

The Federal Housing Administration, which insures mortgages with low down payments, may require a U.S. bailout because of $54 billion more in losses than it can withstand, a former Fannie Mae executive said.

“It appears destined for a taxpayer bailout in the next 24 to 36 months,” consultant Edward Pinto said in testimony prepared for a House committee hearing in Washington today.
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The FHA program’s volumes have quadrupled since 2006 as private lenders and insurers pulled back amid the U.S. housing slump, Pinto said. The jump has left the agency backing risky loans and exposed to fraud in a “market where prices have yet to stabilize,” he said.

Representative Scott Garrett, a New Jersey Republican, introduced legislation this month to boost the FHA’s minimum down payment to 5 percent from 3.5 percent to help shore up the agency’s insurance fund, a move that could add to the housing market’s burdens as it struggles to recover.
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Falling prices will push the FHA’s single-family fund’s reserves below a 2 percent cushion required by Congress, Commissioner David H. Stevens, who will also speak today, said last month. “Under no circumstances will a taxpayer bailout be needed” because the shortfall will be cured over time, he said.

The idea the FHA needs a rescue is “just plain wrong,” Stevens said in an Oct. 6 letter to the Wall Street Journal. That’s in part because the FHA’s accounting method mean its reserves are enough to cover more than 30 years of projected losses, assuming no revenue from new business, he said.

FHA’s total reserves exceed $30 billion, or more than 4.4 percent of its insurance, according to Stevens. The loan- insurance ratio, which compares the reserves with the loans insured, was 6.4 percent a year ago, government data shows.
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Official figures on FHA’s reserves as of Sept. 30 won’t show a shortfall when released because “the assumptions used will be overly optimistic relative to loss mitigation resulting from both loan modifications and recent and expected underwriting changes,” Pinto said.

In the early days of MLEC (remember MLEC? It was going to save the world from a possible credit crunch) I argued that the only way it could work would be if it had the plan of buying wonderful assets from distressed SIVs. Now that PPIP is the acronym of the day, it looks like I was right:

Starwood Capital Group LLC and TPG’s agreement to buy $4.5 billion of Corus Bankshares Inc.’s real estate assets shows investors are ready to bet on distressed property — as long as the U.S. helps finance the deals.

The private-equity firms led a group that won the auction for loans and properties of the failed Chicago lender, offering $554 million, the Federal Deposit Insurance Corp. said Oct. 6. They will take a 40 percent stake and manage the portfolio, while the FDIC keeps 60 percent and lends the buyers as much as $2.39 billion to complete the sale.

The investors, who are paying about 60 cents on the dollar, beat out seven other bidders.

Some may quibble over my equating these distressed mortgages with “wonderful assets” … but with vendor financing of over 80% of the price on a non-recourse basis … well, it works just like that extra glass of beer in a pick-up bar near closing time, you know?

THUMP! The preferred share market got whacked again today, with PerpetualDiscounts down 43bp and FixedResets losing 16bp on good volume. I am pleased to see a lot of volatility evidenced in the composition of the performance table: there were fifteen index included issues losing more than a point (total return), but five gained more than this. Increasing volatility means more trading chances!

The new PWF 5.80% Straight starts trading tomorrow … that should be fun.

The OSFI Annual Report 2008-09 has been published. Standard corporate puffery, but this part was amusing:

Because the Canadian financial system withstood the first wave — global financial market turmoil — better than many systems, OSFI has received a lot more attention than we normally do, and fielded many questions as to why Canada has faired relatively well. Our answer has been that the strength of the Canadian system is due to Canada’s overall policy framework, the quality of OSFI’s supervision and regulation, cooperation and communication among Financial Institutions Supervisory Committee (FISC) partners (OSFI, the Bank of Canada, the Canada Deposit Insurance Corporation, the Financial Consumer Agency of Canada and the Department of Finance) and the risk management skills of Canada’s financial institutions. The contributions of all the players in the system have led to Canada’s success to date.

There is no acknowledgement of other answers to the question either here or by comparison with Australia. However, given the quality of Canada’s governance, it doesn’t need to be particularly rigorous, does it?

The SEC’s Department In Charge of Making Prospectuses Longer has proposed new rules regarding credit rating related disclosure:

We believe that today’s proposals could help reduce undue reliance on credit ratings by providing investors with information about what a credit rating is, and what it is not, and other information bearing on the reliability of ratings to place the credit rating in its proper context. In light of the importance of credit ratings to investors and their use by registrants in marketing securities, we believe it is appropriate to require that this information be included in a registrant’s prospectus so that all investors receive this information.

Finally! In the past, advisor/investor conversations about credit quality have been along the lines of “General Motors Microsoft’s always going to be around, Jack. I wouldn’t worry about it!”. But now that this information will at last be available to investors who have searched hopelessly for this kind of vital information, they may now read all about it and engage in learned discussions with their advisors. Then Prime Minister Layton will present Conrad Black with the Order of Canada, while City of Toronto Councillors make intelligent remarks in the background.

More alarmingly, the SEC is also proposing to treat CRAs as “experts”; this will require them to give consent to having their ratings included in a prospectus, and allow third parties to use the ‘experts defense’, that they are not liable for things not working out properly if they relied on an expert when making the decision. The more I think about this, the more insanely complicated the potential knock-on effects appear. The SEC notes:

Of course, we are mindful of the possibility that a risk of greater NRSRO liability as a result of subjecting NRSROs to Section 11 may undermine competition if credit rating agencies decide that they are unable to bear the risk of liability and thus exit the ratings business. Similarly, firms considering entering the ratings business may reconsider in the face of an increased risk of legal liability. The threat of liability may particularly affect smaller, less-established rating agencies that may find it more difficult to negotiate for indemnification or bear the risk of additional liability. It also is possible that, in response to the rescission of Rule 436(g), registrants would begin to take greater advantage of private placements instead of public offerings.

I hope they’re really careful with this one! The ‘experts defense’ was enthusiastically promoted by a Council of Institutional Investors [who?] white paper:

The accountability of NRSROs has deteriorated so much that institutional investors now are vulnerable if they rely on credit ratings in making investment decisions. To the extent rating agencies are not subject to liability, an institutional investor’s defense of reliance on ratings is weakened, because constituents can argue that ratings are less reliable when rating agencies are not accountable for fraudulent or reckless ratings.

I confess that I have not read the white paper thoroughly; it has a good discussion of the concept of “regulatory license” (in which a credit rating is considered a license to buy by a bozo) but by and large it draws its conclusions from flimsy premises (e.g., no subprime should ever have been AAA; Lehman should not have been A, et c.).

The situation with CIT Group is getting muddier:

Pacific Investment Management Co. and Baupost Group LLC resigned from CIT Group Inc.’s bondholder steering committee, reducing the group to four members, according to a person familiar with the situation.

Pimco, which manages the world’s largest bond fund, and Baupost weren’t part of the group as of about a month ago, said the person, who declined to be identified because the firms haven’t disclosed their decision. The remaining creditors on the committee are Centerbridge Partners LP, Oaktree Capital Management LLC, Capital Research & Management Co. and Silver Point Capital LP.
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CIT’s $500 million of 4.125 percent notes due Nov. 3 fell 4 cents to 67 cents on the dollar as of 2:52 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Credit-default swaps on five-year CIT debt rose 2 percentage points to a mid-price of 40 percent upfront, according to CMA DataVision. That means it would cost $4 million initially and $500,000 annually to protect $10 million of CIT debt from default for five years.

KERRR-UNCH! It’s just like old time, with PerpetualDiscounts getting whacked for a loss of 70bp on the day, while FixedResets were able to pick up 12bp worth of total return. There is a long list of losers in the performance tables; volume was quite good.

PerpetualDiscounts now yield 5.92%, equivalent to 8.29% interest at the standard equivalency factor of 1.4x. Long Corporates now yield … oh, call it 5.95% so the pre-tax interest-equivalent spread has now widened to about 235bp, a large increase over the 215bp reported on September 30. So who’s smarter? Bond Guys or Pref Guys? Place yer bets, gents, place yer bets!