Category: Market Action

Deutsche Bank is marching to a different drummer – worrying about competition, of all things!:

Deutsche Bank AG, Germany’s biggest bank, plans to spread the costs of the U.K. bonus tax to all employees worldwide, risking a backlash from bankers outside of London.

Chief Executive Officer Josef Ackermann, in an interview with the Financial Times, said the bank wouldn’t restrict the cost of the tax to the U.K. bonus pool.

“We will clearly globalize it,” Ackermann said. “If parts are paid out of the bonus pool, we would seek to globalize it. It would be unfair to treat the U.K. bankers differently.”
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Ackermann told the Financial Times today that governments shouldn’t interfere in setting pay, saying bonuses should be the result of “supply and demand for skilled people.”

The Federal Reserve Bank of Cleveland has published the December edition of Economic Trends. The article on “Supply and Demand Shocks in Residential Mortgages” was interesting, although not noteworthy enough to merit a dedicated post.

A solid, though hardly spectacular, day for preferreds today, with PerpetualDiscounts up 9bp and FixedResets gaining 3bp. This is the eighth consecutive day of gains for FixedResets and they’re up about 78bp on the month-to-date. Volume was good; it should slow down next week, but the pending settlement of the YPG new FixedReset should give the traders something to do.

PerpetualDiscounts took a hit today, losing 15bp, but FixedResets just kept on keeping on, up 8bp to close with a weighted-median-average YTW of 3.68%. How Low Can They Go? Volume was moderately good.

Holy smokes, it’s been ten years!

The November 27, 2007 commentary on the Abu Dhabi – Citigroup deal is now looking a little dated:

Citigroup Inc. said the Abu Dhabi Investment Authority is seeking to end an agreement to buy the bank’s stock, or to receive more than $4 billion in damages.

Abu Dhabi Investment, one of the world’s top two sovereign wealth funds, filed a claim alleging “fraudulent misrepresentations” tied to its agreement to buy $7.5 billion of common stock, Citigroup said today in a statement.

In front-page news, the UK said something sensible about regulation:

The U.K. pushed back on European Union and U.S. proposals to trade standardized derivatives on exchanges and clearing houses, saying that other steps can reduce risks to the financial system instead.

While the U.K. broadly supports EU and U.S. objectives, the Treasury and Financial Services Authority said in a report today that they have concerns that the proposals could concentrate risk. The U.K. has 43 percent of the over-the-counter derivatives market, the paper said.
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The U.K. paper mandated seven steps, including greater standardization of OTC derivatives contracts, consensus on global standards for CCPs, international agreement on what contracts can be backed by a clearinghouse and the registration of “relevant” trades in a data warehouse. The paper said that if these steps were followed, putting standardized derivatives on exchanges would be unnecessary.

Regulators are, in general, anxious to establish clearinghouses for two reasons: it will deflect attention from their negligence in not requiring collateral or capital for unsecured positions in the banks they regulate; and clearinghouses will be large financial establishments )charging fees to brokerages in a non-public manner) that will require a lot of ex-regulators on staff, just to ensure that it’s all done right.

In general, the idea makes the system as a whole vulnerable to a single point failure, something the rest of the world is moving away from.

The log-jam has burst and Wells Fargo has issued a CDO:

Banks may arrange as many as 100 collateralized debt obligations backed by high-yield, high-risk loans in 2010 following Wells Fargo & Co.’s “landmark” offering yesterday, according to Guggenheim Partners LLC.

Guggenheim was the main investor in the securities of Newstar Commercial Loan Trust 2009-1, a $250 million CLO arranged by Wells Fargo, said Scott Minerd, who helps supervise more than $100 billion as Guggenheim’s chief investment officer.

A good strong day for preferreds, with PerpetualDiscounts gaining 22bp and FixedResets squeaking out another gain of 1bp to take their median-weighted-average yield down to 3.68%. How low can they go? (I’m thinking of inventing a little dance to go with the chant.) Good volume, especially for Nesbitt.

PerpetualDiscounts now yield 5.83%, equivalent to 8.16% interest at the standard conversion factor of 1.4x. Long Corporates continue to yield about 6.0%, so the pre-tax interest-equivalent spread (a.k.a. the Seniority Spread) is now 215-220bp, a slight tightening from the 225bp reported December 9.

Another day of good returns and good volume for preferreds, with PerpetualDiscounts gaining 5bp and FixedResets up 12bp, taking the median-weighted-average yield for the latter index down to yet another new low of 3.69%. How low can they go?

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.