Category: Market Action

Deutsche Bank is cackling with glee over the recent improvements to its competitive position:

Deutsche Bank AG Chief Executive Officer Josef Ackermann said Germany has a “comparative advantage” over other financial hubs because it doesn’t plan to tax bonuses like Britain and France.

“To strengthen the financial hub of Germany I think is a very wise move,” Ackermann said in an interview in Berlin late yesterday.

RBC is redeeming some sub-debt.

Econbrowser‘s James Hamilton makes a good point in his post Should the Fed be the nation’s bubble fighter?:

Before we can discuss this issue, we’d need to agree on what we mean by a “bubble”. Here’s one definition that a lot of people may have in mind: a bubble describes a condition where the price of a particular asset is higher than it should be based on fundamentals and will eventually come crashing back down.

If that’s what you believe, then there’s a potential profit opportunity from selling the asset short whenever you’re sure there’s a bubble. And if that’s the case, my question for you would be, why don’t you do put your money where your mouth is instead of telling the Fed to do it for you?

Dr. Hamilton references an excellent Cleveland Fed commentary, Why Didn’t Canada’s Housing Market Go Bust?, most of which I agree with but I would add one very important difference to the list: Canadian mortgages are issued with recourse to the borrower, while many of the defaulted mortgages in the US were without recourse. The ability of American speculators to put little or no money down gave them a one-way bet on the market.

The Bank of Engand has released its 4Q09 Quarterly Bulletin with an excellent as usual review of the Bank’s operations and the UK economy.

Citigroup is about to exit TARP:

The bank, the only major U.S. lender still dependent on what the government calls “exceptional financial assistance,” said it will sell at least $20.5 billion of equity and debt to exit the Troubled Asset Relief Program. The U.S. Treasury Department also plans to sell as much as $5 billion of common stock it holds in the company, and will unload the rest of its stake during the next six to 12 months
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The U.S. earned a net profit of at least $13 billion from its investment in Citigroup, a Treasury official said today. The estimate includes about $3 billion in dividends and gains on the common-equity stake, roughly $5.8 billion based on the Dec. 11 share price.

… and so is Wells Fargo:

Wells Fargo & Co., seeking to shake the stigma of government bailout funds and keep up with its rivals, plans to raise $10.4 billion in a share sale so it can get out of the Troubled Asset Relief Program.

The bank plans to return all of the $25 billion that taxpayers invested last year, according to a company statement issued today. The exit from TARP would put Wells Fargo on the same footing as Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc., its three largest competitors, which have already paid back the U.S. or announced plans to do so.

Great-West Lifeco has released a position paper on pension reform titled The strength of CAPs in Canada’s retirement market

It was a strong day on good volume for preferreds, with PerpetualDiscounts gaining 23bp and FixedResets up 6bp. The median-weighted-average YTW for FixedResets is now 3.70% and the chant of “How low can they go?” is getting deafening … at least it is around here!

The IMF has published the Dec. 09 issue of Finance and Development.

CIT Group post-bankruptcy common commenced trading on the NYSE yesterday and closed today at $29.64. Consideration for the Maple bonds, 4.72% of 2011-2-10 has been paid; the notice states 125581AU2 2/10/2011 $67.7674921 $101.6512381 $101.6512381 $169.4187301 $237.1862222 5.8332692 of bonds maturing 2013, 2014, 2015, 2016 and 2017 and stock, respectively, which comes to about USD 675 par value in bonds and USD 175 in equity. All the bonds pay 7%. The CDS Settlement price was $68.125

A strong day for preferreds, with PerpetualDiscounts up 29bp and FixedResets up 12bp, taking yields for the latter to yet another all-time low of 3.73%. There were no losers on the performance table and volume was strong.

Royal Bank of Scotland’s equity will be massively diluted by preferred share conversion:

Investors in RBS’s $1 billion of 9.118 percent undated preference shares issued in 2000 have until the end of December to exercise an option to be repaid in common stock, according to the issue documents. The option was triggered after the Edinburgh-based bank failed to inform investors at the start of this month that it would redeem the notes at the next call date.
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If all the preference shares are converted, the new shares will represent about 11 percent of the company’s common stock not held by the U.K., according to Bloomberg calculations based on current share prices. RBS was prevented from calling the notes under European Commission rules on the bank’s 45.5 billion-pound rescue, which left the U.K. holding 70 percent of RBS stock.

One of the committments in the restructuring plan is:

Requirement that RBS shall not pay investors any dividends or coupons on existing hybrid capital instruments (including preference shares and B Shares) or exercise any call rights in respect of such existing securities for a two year period unless there is a legal obligation to do so. The extent and timing of this obligation and the securities which it will impact is subject to further discussion between RBS, HM Treasury and the EC.

Dealbreaker has some man-on-the-desk reaction to the UK bonus super-tax discussed yesterday:

This is major news here; everybody (even my group head) is talking about either moving to hedge funds, boutiques or buy-side (which aren’t subject to the supertax), or relocating to Zurich, NY or HK. Even if it’s only a one-year tax as currently drafted, people have lost faith in the UK political leadership. The long-term future of the UK is at risk and nobody seems to give a shit as they’re too busy trying to punish bankers for our supposed misdeeds.

How much of this is talk and how much is action remains to be seen … it is also unclear how much these guys’ skills would be worth outside a brand-name firm. None-the-less, if I was a mid-size bank thinking about expanding with a new European trading operation … I’d be thinking harder!

A mixed, quiet day for Canadian preferreds, as volume returned to more normal levels, PerpetualDiscounts lost 5bp and FixedResets were able to gain 1bp, to set a new record low for yield.

Sorry this is so late – PrefLetter, the holiday season and family commitments are ensuring I stay off the streets and out of trouble nowadays.

The Investment Industry Regulatory Organization of Canada is going after Deutsche Bank for not functioning as Coventree’s Investor Relations department in the ABCP affair. Assiduous readers will recall that domestic banks are expected to enter a golden age:

But Mr. Downe said the exit of a number of non-bank competitors in the lending market means that the banks should be able to earn more on their loans.

“I think that the prospects for good asset growth at better margins over the next couple of years are quite realistic,” he told analysts on a conference call, adding that the banking system is absorbing more than $1-trillion worth of short-term financing previously done by other lenders.

PrefBlog anticipates that this golden age will bring with it the necessity of hiring many experienced compliance personnel at fat salaries. The whole thing is laughable: it is impossible to determine whether domestic banks’ BAs are junior, senior or pari passu with BDNs, but this lack of disclosure doesn’t worry their future staff members in the least.

It should be clear, however, that Alistair Darling will not be looking for work in finance:

Chancellor of the Exchequer Alistair Darling imposed a 50 percent levy on banker bonuses and said he will increase income taxes after elections next year as the worst recession on record drives up U.K. government borrowing.

But then, perhaps he likes living in London.

DBRS has placed Dexia preferreds and sub-debt on review negative following their October 30 announcement that, in order to get state aid, they had to agree that they would (among other things):

not to make any payment of any discretionary coupons, or to exercise any call options on any hybrid Tier 1 instruments or on any Upper Tier 2 perpetual instruments issued by any entity of the Group. Within this context, Dexia undertakes in particular (a) not to pay the coupons relating to the Tier 1 issues of Dexia Funding Luxembourg S.A. (November 2, 2009) and Dexia Crédit Local (November 18, 2009), and (b) to waive exercise of the call option on the Upper Tier 2 issue of Dexia Bank Belgium (Isin BE0116241358) dated November 18, 2009. The Dexia Group will issue a further communication in relation to the payment of the coupons for the Upper Tier 2 issue of Dexia Bank Belgium (Isin BE0116241358);

Volume jumped considerably today although price action was muted, with PerpetualDiscounts gaining 6bp and FixedResets up 1bp.

PerpetualDiscounts now yield 5.88%, equivalent to 8.23% interest at the standard equivalency factor of 1.4x. Long Corporates now yield just a hair under 6.0%, so the pre-tax interest-equivalent spread (also referred to as the Seniority spread) is now about 225bp, a slight tightening from the 230-235bp level reported on December 2.

CIT Group will shortly be exiting bankruptcy:

CIT Group Inc., the 101-year-old commercial lender, won court approval of a plan to cancel old shares, shed debt and exit bankruptcy court protection with new stock worth as much $11 billion.

U.S. Bankruptcy Judge Allan Gropper in New York today confirmed CIT’s so-called prepackaged Chapter 11 reorganization plan, which already had creditor support when CIT filed for bankruptcy last month. The U.S. won’t recover much, if any of the $2.3 billion in taxpayer money used in a bailout of CIT, and shareholders will be wiped out.

“I recognize, literally, billions of debt have agreed to this plan,” Gropper said, adding that the plan could take effect on Dec. 10. “It’s an enormous achievement to have gotten the vote that you’ve gotten.”

I missed this when it came out, but here’s the latest in the David Berry saga:

On March 7, 2008, Berry commenced this application (the “Application”) pursuant to section 21.7 of the Securities Act, R.S.O. 1990, c. S.5, as amended (the “Act”) for a hearing and review of the RS Stay Decision by the Ontario Securities Commission (the “Commission”). He submits that the RS Panel erred in refusing to stay the RS Proceeding and asks the Commission to set aside the RS Stay Decision and permanently stay the RS Proceeding.

[5] For the reasons set out below, we dismiss this Application. We conclude that UMIR are rules of RS and are applicable to and enforceable against Participants and other persons within the jurisdiction of the TSX.

A downdraft hit the preferred market today, with PerpetualDiscounts giving up 10bp (a portion of which is due to the lousy opening of IGM.PR.B) and FixedResets a hair on the wrong side of flat, losing under 1bp. Volume was normal.

Bob Eisenbeis, Chief Monetary Economist at Cumberland Advisors, has posted a good commentary on Contingent Capital.

It was a mixed day for preferred shares, with PerpetualDiscounts down 10bp and FixedResets up 11bp – which took the weighted median yield-to-worst of the latter class down to 3.75%. How low can it go? The five lowest yields recorded on the FixedReset index have been observed on the last five trading days. Volume returned to normal levels.

The overhang of Treasury’s Citigroup stake is causing problems:

The U.S. Treasury Department’s refusal to sell its 34 percent stake in Citigroup Inc. is hampering the bank’s plans to repay $20 billion of remaining bailout funds, people familiar with the bank said.

Executives at the New York-based bank are growing frustrated because they can’t sell stock to raise money for repayment until the Treasury signals when and how it will unload its 7.7 billion shares, said the people, declining to be identified because the matter is under discussion. Investors may be reluctant to buy shares because a Treasury sale could drive down the price.

On May 20 I mentioned the idea that what trading floors need is a little less testosterone and a little more femininity. In what is possibly the most amazing story ever published, Dealbreaker documents how this idea was taken seriously at SAC Capital … maybe a little too seriously. You’ll laugh! You’ll cry! You’ll send SAC a redemption order! At least it’s more interesting than “boo-hoo-hoo, my boss told a blonde joke“.

Geithner is in a slanging match with Goldman:

In the interview, the Treasury chief also disputed claims made by Goldman Chief Executive Officer Lloyd Blankfein that his firm would have survived last year’s financial crisis without assistance from the federal government.

“The entire U.S. financial system and all the major firms in the country, and even small banks across the country, were at that moment at the middle of a classic run, a classic bank run,” Geithner said.

Of the biggest banks, “none of them would have survived a situation in which we had let that fire try to burn itself out,” he added.

Assiduous Readers will note that the disputants are not talking about the same thing: Blankfein’s talking about the TARP capital injection to his particular firm; Geithner is talking about capital injections and liquidity provision in general.

A thoroughly boring day on the preferred share market, with low volume and no entries whatsoever on the performance highlights table. However, PerpetualDiscounts eked out a gain of 3bp while FixedResets were up 4bp.

Credit Default Swaps are having definitional problems in Japan:

The International Swaps and Derivatives Association is assessing whether Japan’s alternative dispute resolution process for companies restructuring their debt triggers a so-called credit event that would lead to payouts on swaps, according to Executive Vice-Chairman Robert Pickel.
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After Aiful entered ADR talks in September, a committee of 15 dealers and investors that determines when the swaps are triggered rejected three attempts to get payouts from contracts on the Kyoto-based lender even as one bank said Aiful ceased making loan payments. Failure to reach prompt agreement may damage confidence in Japan’s market for the securities, J. Paul Forrester, a partner and co-head of the derivatives and structured products practice at Chicago-based law firm Mayer Brown LLP, said in an interview last month.

There’s some more grandstanding on the Tobin Tax:

Iowa Senator Tom Harkin and Oregon Representative Peter DeFazio, along with five other Democratic members of the House, proposed the measure, which they said would raise $150 billion a year, to fund a new jobs bill and help pay down budget deficits.

“Let me be blunt: We need new revenue,” Harkin said at a news conference today in Washington. He called it the “most painless way” to raise revenue.

The New York Fed has published an interesting review of the international market in FX Swaps by Niall Coffey, Warren B. Hrung, Hoai-Luu Nguyen and Asani Sarkar titled The Global Financial Crisis and Offshore Dollar Markets:

Facing a shortage of U.S. dollars and a growing need to support their dollar-denominated assets during the financial crisis, international firms increasingly turned to the foreign exchange swap market and other secured funding sources. An analysis of the ensuing strains in the swap market shows that the dollar “basis” — the premium international institutions pay for dollar funding — became persistently large and positive, chiefl y as a result of the higher funding costs paid by smaller firms and non-U.S. banks. The widening of the basis underscores the severity and breadth of the crisis as markets designed to facilitate the flow of dollars faltered and institutions worldwide struggled to obtain funds.

BofA raised a chunk-and-a-half of equity:

Bank of America Corp., which plans to repay $45 billion of U.S. government bailout money, raised $19.3 billion in a sale of securities at $15 apiece, a 4.8 percent discount to its common stock.

The Charlotte, North Carolina-based lender sold 1.286 billion so-called common equivalent securities, according to Bloomberg data. The security, which is made up of one depositary share and one warrant, is convertible into one common share, subject to stockholder approval, a regulatory filing before the sale showed. Bank of America’s common stock rose 0.7 percent today to $15.76 in New York Stock Exchange composite trading.

A good day for preferred shares, as PerpetualDiscounts gained 12bp and FixedResets were up 6bp, as both volume and volatility returned to more normal levels.

Looks like the UK government is doing all it can to make the Royal Bank of Scotland a casualty in the holy war against bonuses:

Royal Bank of Scotland Group Plc, recipient of the world’s biggest bank bailout, said the British government’s “very restrictive” control over 2009 bonuses risks driving employees away.
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The RBS board has had legal advice that they would have to resign if the government blocked bonuses they regarded as essential for the bank’s competitiveness, according to Robert Peston, the British Broadcasting Corp.’s business editor.
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“It’s a headhunters dream at the moment,” said Shaun Springer, chief executive officer of Square Mile Services Ltd., which advises London financial firms on pay. “They are going to lose people and then have to pay to replace them which is so very short sighted. RBS is getting hammered every which way.”

On a different regulatory topic, there are estimates that CDS regulation could cost JPM $3-billion in revenue:

Revenue at JPMorgan Chase & Co., the second-largest U.S. bank, may drop by as much as $3 billion should most derivatives trades be moved to exchanges, a Sanford C. Bernstein & Co. analyst said.
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JPMorgan “sees the largest risk from legislation mandating that all derivatives be traded on an exchange as opposed to through the OTC market, limiting the company’s ability to create customized products,” [Bernstein analyst John] McDonald wrote, referring to the over- the-counter market. He declined to comment beyond the note.

Parallels to TRACE and Corporate Bond Transparency are clear … it seems to me that the following scenario is most likely:

• Increased transparency brings lower spreads
• lower spreads bring lower profits
• lower profits bring lower capital allocation
• lower capital allocation brings lower liquidity

But who needs capital market liquidity in the middle of a holy war? The important things in life are:

• make it look like the politicians know what they’re doing
• ensure that moronic portfolio managers don’t suffer the consequences of their actions

Next crisis, coming right up! To make a decent return on capital, the dealers will have to find a new way to exploit the stupid (and whoever can figure out how to replace $3-billion in revenue will probably get a bonus – oh, the horror!).

OSFI has announced Stress Testing Guidelines.

A quiet day on the Canadian preferred share market, with PerpetualDiscounts squeaking out a gain of less than 1bp and FixedResets gaining 7bp. Volume was pretty quiet and there are only two entries in the performance highlights table!

PerpetualDiscounts now yield 5.87%, equivalent to 8.22% interest at the standard equivalency factor of 1.4x. Long Corporates continue to yield about 5.9%, so the pre-tax interest-equivalent spread is now n the 230-235bp range, a slight widening from the 225bp reported on November 30.

The market-timing fiasco (in which trades were executed at stale prices) is heating up again. As far as I am aware, there has been no admission of guilt by anybody; and nobody lost their license due to facilitation of the scheme; or was personally named.

A strong day, with PerpetualDiscounts up 13bp and FixedResets gaining 7bp, on relatively heavy volume.