Category: Market Action

YPG.PR.C, the 6.75%+417 FixedReset announced September 8 and promptly upsized to 7.5-million shares + greenshoe 1.125-million shares (I don’t know whether or not the greenshoe was exercised) has settled with results that many will find disappointing.

The issue traded 245,490 shares in a range of 24.50-75, before closing at 24.47-55, 6×83.

Vital statistics are:

The issue is tracked by HIMIPref™, but is relegated to the Scraps index on credit concerns.

To nobody’s surprise, the banks are starting to harness the hysteria over bonuses to alter the balance of power with their traders:

Canada’s biggest bank, Royal Bank of Canada, is changing the way its investment bankers and traders are paid, according to a memo it sent to employees Tuesday.
…
The bank’s aim is not to decrease the amount its employees are paid, but rather to ensure that their pay packages are structured in a way that does not encourage them to take excessive risks.

That last paragraph should have been published as “The Morning Smile”.

For instance, a greater proportion of Royal Bank employees’ compensation will now be deferred, and managing directors will be required to own a certain amount of shares in the bank.

So RBC gets to slap the golden handcuffs on their traders for free, and managing directors will have their pay dependent on whether or not some bozo in the president’s office has lent $20-billion to Argentina. Cross your fingers, boys!

When it comes to calculating bonuses, the bank intends to pay more attention to how employees reached their results, not just what their results were. The bank is paying more attention to non-financial measures in part so it can take into account the amount of risk employees take on to achieve their financial goals.

Non-financial measures like ‘Did you suck enough management arse?’

ln addition, RBC told employees it is in the process of finalizing a claw back policy, for cases where misconduct or a failure to abide by proper procedures results in a loss or the need to restate financial results.

Opening up the gates for more abuse of the regulatory process. David Berry can tell you all about that one.

The paper also mentions changes at Scotia, but I haven’t heard much about that. The last major round of compensation rejigging I know of was at CIBC, where changes resulted in a flood of resumes hitting the streets and the institutional sales desks hastily restaffed by high school students.

All this, by the way, is just after the relevation (to me) that RBC routinely spies on its employees:

She accused another of using the made-up word “sensy” rather than “sexy” so that RBC’s monitoring system would not pick up his language.

What a charming example of the Thought Police kicking out any manager with a rational world view.

But where are the RBC guys going to go? Thanks to the Canadian oligarchy, there are very few opportunities to work as a prop trader – with good capital availability and good order flow – at a non-bank trading firm. I continue to believe that the Achilles heel of the Canadian banking sector is the potential for contagion between vanilla banking, wealth management and trading … and we’ll just have to hope it never takes effect, because OSFI won’t do anythng useful about it.

The CME is introducing a new US long bond futures contract, which will have a lower negative convexity that the current contract:

The “ultra” Treasury bond future will begin trading in the first quarter of next year, Chicago-based CME said today in a statement. The contract, designating Treasuries with maturities of 25 years or more for delivery, won’t replace the current 30-year bond future, which allows government bonds that mature in 15 years or more.
…
“With the increased issuance because of the deficit over the last year and a half we now have an ample deliverable basket” of long-term bonds to underpin the futures contract, [CME managing director of interest-rate products Robin] Ross said. Two to three years ago there wasn’t enough supply of U.S. bonds maturing in 25 years or more to make the futures contract deliverable, she said.

The big excitement today was the new TRP 4.60+192 FixedReset; PerpetualDiscounts gained 3bp total return on the day while FixedResets were down about 22bp. Floaters continued yesterday‘s pop. There were no huge volume outliers, but volume was quite good across the board.

Jim Hamilton of Econbrowser points out that increased regulation of bankers’ pay mean increased risk of regulatory capture. While supporting the principle, he recommends:

Openness and transparency. Details of all regulations should always be extremely transparent and public, with high-profile communication of any proposed changes. I was unable to locate a public release of the specifics of the Fed’s proposal, but gather that the WSJ story was based on off-the-record statements from “people familiar with the matter”. I think one of the best disinfectants for preventing regulatory capture is to keep as bright a light as possible shining on all details of the regulatory process.

Simplicity and uniformity. The goal here is to be very clear about the basic principles we’re trying to implement and make sure they’re applied broadly, fairly, and consistently. Although the Fed is used to thinking in terms of preserving its discretion, it’s important that these regulations be implemented in a transparently uniform way.

The first, at least, of these principles is anathema to Canada’s OSFI.

Scott Sumner of Bentley University writes a provocative column on VoxEU, Misdiagnosing the crisis: The real problem was not real, it was nominal arguing that monetary policy was too tight in late 2008, and that this is what caused the awful events of 4Q08:

Woodford (2003) emphasised how expectations of future monetary policy and aggregate demand impact current demand. An explicit price level or nominal GDP trajectory going several years forward would have helped stabilise expectations in late 2008. Because the Fed failed to set an explicit target path (level targeting), expectations became very bearish in late 2008. Contrary to what many economists assumed, tight money was already sharply depressing the economy by August 2008. After the failure of Lehman most economists simply assumed that causation ran from financial crisis to falling demand. This reversed the primary direction of causation – as in the Great Depression, economic weakness worsened bank balance sheets and intensified the financial crisis in late 2008.

A recent Vox column by Carmassi, Gros, and Micossi expressed the widely held view that the roots of this crisis lay in overly accommodative Fed policy during the housing bubble. Policy was a bit too easy during that period, as nominal GDP growth was slightly excessive, but if we are going to take market efficiency seriously then the primary cause of the severe worldwide recession should have occurred when the markets actually crashed. Yes, the tech and housing bubbles showed that markets are not always efficient. But that is no reason to ignore market signals.

The preferred share market advanced today, with PerpetualDiscounts gaining 15bp while FixedResets were up 6bp. Floaters gained strongly, claiming the top three spots on the performance table to take that very volatile, small, BAM dominated index up 159bp, perhaps helped by Jonathan Chevreau’s endorsement of the asset class (hat tip: Assiduous Reader MP):

Floating Rate Preferred Shares pay a dividend based on the prime rate and provide tax-efficient income for non-registered portfolios. Compared to pure interest income, such preferred shares are taxed far less harshly because of the dividend tax credit. If the Bank of Canada boosts the prime rate and banks increase their prime rate in response, the dividend income on these shares will rise, as will its capital value. Palombi’s current favorite is the BCE Preferred Series, which pay 100% of the prime rate.

Volume was good.

European leaders continued to prefer talking about greedy bankers’ bonuses rather than their own regulatory, monetary and fiscal culpability for the Credit Crunch:

European Union leaders said the Group of 20 nations should agree on binding rules backed by national sanctions to curb bank bonuses, a week before a summit of the top industrial and emerging nations in Pittsburgh.

The EU agreement on the need for action failed to include details of how such curbs would be achieved, leaving any details to be negotiated at the G-20 summit. Leaders of the 27 EU states said voters would react with anger if bankers were allowed to award themselves large bonuses while relying on public money for their survival.

We’ve seen a fair number of CEOs trashing their employees in recent times. Today, Vikram Pandit joined their ranks:

Citigroup Inc. Chief Executive Officer Vikram Pandit said the bank will restructure its Phibro LLC energy-trading business as the bank faces what may be a $100 million payday for the unit’s chief, Andrew Hall.

“That business will be restructured and rationalized,” Pandit said yesterday at the 92nd Street Y in New York. When asked if $100 million was too much to pay, he replied, “Yes.”

Way to stand up for your employees, Mr. Pandit! Boy, don’t you sound like a wonderful person to work for.

The bankers’ bonus rules discussion is getting steadily more boring:

Global leaders meeting at the Group of 20 summit in Pittsburgh next week are moving toward a compromise on compensation rules that fall short of the political rhetoric branding banker pay a worldwide disgrace.

Pay caps, once pushed by French President Nicolas Sarkozy, were excluded from recommendations made by finance officials this month. European leaders may be willing to endorse linking bonuses to a bank’s capital level, moving closer to a U.S. position that avoids specific limits.

More interestingly, there’s some movement in the Money Market Fund world:

Fidelity Investments and Vanguard Group Inc. are among U.S. asset managers working on a proposal that would provide money-market mutual funds with an emergency pool of cash in the event of a run on deposits, according to two people who have been briefed on the plan.

Funds participating in the program would pay a fee to a bank, called the Liquidity Exchange Bank, to build a cash reserve that would help them handle investor withdrawals during a liquidity crisis like the one last September, the people said. The bank could also apply for emergency support from the Federal Reserve discount window.
…
The program won’t seek to insure money funds against losses from defaulted securities, as does the Treasury Department’s emergency program that expires today, one year after its inception. The Treasury’s Temporary Guarantee Program for Money Market Funds explicitly insured deposits in participating funds as of Sept. 19, 2008, and succeeded in halting last year’s investor flight.

The industry plan would have more in common with the Fed’s Money Market Fund Liquidity Facility, which lends money to banks that buy asset-backed commercial paper from money funds. That program, also begun last September, provided cash to help funds meet withdrawal demands. It will expire Feb. 1.

Encouraging, but not consequential. If they want to get bank lines, they can get them now; this is merely a method whereby they get to keep the fees for the line in-house. The implicit guarantee of the stable value is much more important.

The preferred share market regained some ground today, with PerpetualDiscounts up 19bp and FixedResets plugging away with a gain of 4bp. Volume was very healthy, with five of the six names in the volume highlights table being insurers.

Paul Volcker is advocating hard caps and prescriptive regulation for banks:

In his speech, Volcker urged limits on the activities of banks that are considered “too big to fail,” going beyond what other officials in the Obama administration have advocated.

“I do not think it reasonable that public money –taxpayer money — be indirectly available to support risk-prone capital market activities simply because they are housed within a commercial banking organization,” Volcker said.

Since January, Volcker has advocated that regulators should prohibit financial companies whose collapse would pose a risk to the economy — those considered “too big to fail” — from engaging in certain types of trading and investing activities. The administration wants stricter oversight for such companies and tighter capital and liquidity requirements.

“Extensive participation in the impersonal, transaction- oriented capital market does not seem to me an intrinsic part of commercial banking,” Volcker said. “Substantial involvement in heavily leveraged finance and heavy proprietary trading almost inevitably entails risks.”

“I want to question any presumption that the federal safety net, and financial support, will be extended beyond the traditional commercial banking community,” he said.

Manulife is rejigging its seg fund guarantees:

• InvestmentPlus: With a choice of over 75 funds, this Series provides investors with the greatest range of investment choice available with management expense ratios competitively priced with most mutual funds. It offers investors basic protection and investment flexibility without the need of enhanced guarantees.
• IncomePlus (version 2): A new version of Manulife’s very popular IncomePlus has been designed to continue to meet the needs of investors in their pre- or early retirement years by offering guaranteed income for life, growth potential of the market and income protection from market downturns.

  IncomePlus (version 2) will continue to offer resets, annual income bonuses and a 100 per cent death benefit guarantee. In addition to these features, a new Joint Life Payout Option will also be available. In the event one spouse dies, this option can allow the surviving spouse to continue to receive income at the same level, uninterrupted for the balance of his/her life.

• EstatePlus: Is a new estate-planning-focused series offering a 100 per cent Death Benefit Guarantee with resets. This Series will help investors who do not require income protection to protect their legacy for their beneficiaries.

Meanwhile, Sun Life pledged not to cut their common dividend.

The Financial Stability Board is attempting to implement a reform agenda:

Improving compensation practices. The FSB will set out for the Pittsburgh Summit specific implementation guidelines on the governance, structure and disclosure of compensation, which will limit the level of compensation in the light of the need to conserve capital and ensure that the structure and incentives are aligned with good risk management, in line with the FSB Principles for Sound Compensation Practices in financial institutions issued in April.

Meanwhile, the Institute for International Finance published a letter to the G-20, stressing that this is not a time for business as usual. Rick Waugh, CEO of the Bank of Nova Scotia, is quoted by the Globe and Mail as explaining that “business as usual” means “competition”:

“Right now, there seems to be some rogue behaviour among certain institutions that have been offering, say, three-year guarantees to induce people to leave their firm to go to another one,” said Rick Waugh, chief executive officer of Bank of Nova Scotia and co-head of the IIF committee that came up with a list of recommendations for the sector. As a result, the IIF has written to its member banks to remind them of its principles on compensation, and it has spoken to politicians, he said.

Rick Waugh’s firm is known for its innovative approach towards revising compensation contracts.

Looks like the SEC will attempt to ban flash orders:

SEC commissioners unanimously voted today to seek public comment on a rule barring exchanges and trading platforms from giving clients access to information about stock orders a fraction of a second before the market.

“Investors that have access only to information displayed as public quotes may be harmed if market participants are able to flash orders and avoid the need to make the orders publicly available,” Chairman Mary Schapiro said.

Democratic Senators Charles Schumer and Ted Kaufman urged the commission to halt the practice, arguing frequent traders use technology to profit from access to information not available to retail investors. Direct Edge Holdings LLC has relied on flash orders to take market share from NYSE Euronext.

Unusual political news:

Industry executives have complained that the government’s plans to harmonize the provincial sales tax with the federal goods and services tax will siphon money out of the retirement nest eggs of Canadians. But after an article published in The Globe and Mail this week, officials in Finance Minister Dwight Duncan’s office said they are prepared to release a document on the negative impact of management fees for investors if executives continue to complain in public, industry sources said.

There better be a really good explanation of this – it sounds like political dissent will now be met by attacks on industry … to cheers from the avid crowd. Funny, I had a conversation just this week about the gradual, yet noticable, erosion of civil liberties.

Not a lot happened in the preferred market today, with the two main sectors up by marginal amounts, but volume was quite strong. There’s no colour on the volume table again, because the Financial Post is still reporting yesterday’s news as of 6:45pm.

Not much price action today, as PerpetualDiscounts resumed their downward drift, losing 8bp, while FixedResets gained about 2bp. Volume was strong.

PerpetualDiscounts now yield 5.78%, equivalent to 8.09% interest at the standard equivalency factor of 1.4x. Long Corporates yield a hair under 6.0%, so the pre-tax interest equivalent spread is about 210bp, a slight (and possibly simply tecnical) widening from the 205bp reported September 9 and at the upper end of the range it has reported through September – and in the pre-Lehman Credit Crunch.

Remember the world’s worst bond fund? I discussed it on February 15, 2008. Now the sponsor has received a comeuppance:

Former Chicago Bull Horace Grant won a $1.46 million arbitration award against Morgan Keegan & Co. for losses in some bond mutual funds, the largest victory against the brokerage firm to date for his Chicago-based lawyer.

The award, announced Friday, represents nearly all of the unrealized losses Grant allegedly suffered as of January 2008, said his attorney, Andrew Stoltmann.
…
The brokerage firm, a unit of Regions Financial Corp., a bank based in Birmingham, Ala., faces a flood of arbitration claims from investors related to its high-yield bond funds. Investors in the funds reportedly lost more than $2 billion in 2007.

PerpetualDiscounts halted their recent slide today, gaining 3bp, but were outperformed by FixedResets which were up 15bp. Volume was quite good but there wasn’t much price volatility.

The Financial Post has updated its calendar and is again providing a timely block trade report.

The preferred share market continued to ease off in an orderly fashion today, with PerpetualDiscounts down 17bp and FixedResets losing 9bp. All the volume action was in FixedResets but unfortunately I cannot provide any details of the blocks since the Financial Post is reporting last Thursday’s news (as of 8:24pm, anyway).

The DC FixedReset 6.75%+410 new issue closes tomorrow – it will be most interesting to see what happens to the price.

Esquire has an entertaining and illuminating feature article titled The Deal of the Century, regarding last fall’s Barclays/Lehman deal.

PerpetualDiscounts underperformed today, losing 22bp against the gain of 7bp by FixedResets. This means that the former class is down 69bp on the month-to-date, while the latter is up 30bp, a reversal of fortunes from recent months! Volume picked up today and is relatively heavy

Volume picked up today, but results were mixed, with PerpetualDiscounts losing 5bp and FixedResets gaining 16bp.