Category: Market Action

OSFI has released a statement on federally regulated pension plan solvency:

The latest results show that the average estimated solvency ratio of federally regulated defined benefit private pension plans at June 30, 2009 was 0.88, meaning the total value of assets of all federal plans was 12 per cent lower than liabilities, calculated on a solvency basis. This compares to an estimated solvency ratio of 0.85 in December 2008.
…
The private pension plans subject to OSFI regulation currently represent seven per cent of all private pension plans in Canada, accounting for approximately 12 per cent of private pension assets.

Prior Fed policies are under continued attack:

A month after warning that property prices are rising “probably excessively,” Norges Bank Governor Svein Gjedrem is set to increase interest rates on Oct. 28. Reserve Bank of Australia Governor Glenn Stevens cited costlier real estate as a reason for raising rates three weeks ago.

At the Federal Reserve, officials under Chairman Ben S. Bernanke are reviewing whether recent gains in asset prices and narrowing credit spreads are justified as they try to ensure near-zero borrowing costs don’t generate future market turmoil.

The approach may herald what New York-based Morgan Stanley calls a “new era” in which central banks pay more attention to asset prices when setting monetary policy and devising regulation, broadening their focus from inflation.
…
Former Fed Chairman Alan Greenspan advocated a hands-off approach to asset prices during the U.S. expansion that lasted six years until December 2007. He said it was easier to clean up the mess of a bust than to spot bubbles and that monetary policy was too blunt to deflate them.

“There is no evidence that it works other than in computer models,” he said in a January 2008 interview about the idea that central banks should raise rates to pop asset bubbles. He noted that the stock market merely leveled off when the Fed doubled rates to 6 percent in 1994-95 and then resumed its climb.

All I can suggest is: as long as there are policies and policy makers, there will be policy errors. The new paradigm will not eliminate errors; it will merely change their nature.

Springfield Massachussets saved a few bucks on outrageous portfolio management fees:

Salvatore Calvanese, the treasurer of Springfield, Massachusetts, for four years, had a ready defense for why he risked $14 million of taxpayer money on collateralized-debt obligations laden with subprime mortgages in 2007.

He didn’t know what he was buying, he says, and trusted the financial professionals who sold them and told him they were safe.

With a jealous eye on the $369-million held under CBO, BMO has introduced a short term bond ETF:

The BMO Short Corporate Bond Index ETF seeks to replicate, to the extent possible, the performance of a short term corporate bond index, net of expenses. Currently, the BMO Short Corporate Bond Index ETF seeks to replicate the performance of the DEX Short Term Corporate Bond Index. The Manager may, in its discretion and without unitholder approval, change the DEX Short Term Corporate Bond Index to another widely recognized short term corporate bond index in order to provide investors with exposure to a short term corporate bond index. If the Manager changes the DEX Short Term Corporate Bond Index, or any index replacing such Index, the Manager will issue a press release identifying the new index. The BMO Short Corporate Bond Index ETF invests in a variety of debt securities primarily with a term to maturity between one and five years. Securities held in the Index are generally corporate bonds issued domestically in Canada in Canadian dollars, with an investment grade rating. As an alternative to or in conjunction with investing in and holding the Constituent Securities, BMO Short Corporate Bond Index ETF may invest in or use exchange traded funds, mutual funds or institutional pooled funds and derivative instruments to obtain exposure to the performance of the DEX Short Term Corporate Bond Index.

The MER is 30bp – and they’re looking to track the index net of fees. There are a number of ways in which this could be attempted:

• Taking views on the markets
• Trading the hell out of it
• heavily overweighting teeny-tiny issues and/or bad credits and/or non-bonds

I suspect they’ll try to juice the yields by holding non-bonds, such as sub-debt (well … OK. These are in fact bonds, they’re just not short-term bonds) and Tier 1 issues (not bonds by any stretch of the imagination) – but we will see.

Nine times out of ten – no, that’s too gloomy, call it ninety-nine times out of one-hundred – the increased risk won’t make any difference. That last time however? Just wait for the whining. ‘How was I supposed to know the terms? I’m only the portfolio manager! And … gloryosky! They’re in the index!’

The Canadian preferred share market managed to eke out small gains today, with PerpetualDiscounts up 3bp and FixedResets gaining 10bp. Volume was solid, dominated as usual by FixedResets.

CIT has released a review of its restructuring plan threatening carnage if it does not pass. The PDF of the SEC filing is copy-protected, of course, because it’s SECRET, but they estimate recovery on unsecured claims – such as senior bonds – of between 5.9% and 37.2%. Ouch!

Carl Icahn estimates minimum 80% recovery if the firm is put into run-off; perhaps 100%.

In news guaranteed to amaze and astound, American financial institutions with severely restricted retention plans are having retention problems:

At Bank of America, for instance, only 14 of the 25 highly paid executives remained by the time Feinberg announced his decision. Under his plan, compensation for the most highly paid employees at the bank would be a maximum of $9.9 million. The bank had sought permission to pay as much as $21 million, according to Treasury Department documents.

At American International Group, only 13 people of the top 25 were still on hand for Feinberg’s decision.

Isn’t that incredible? Who would ever have thought that employees had choices, or that there was any point to retention bonuses beyond the fun of doing evil?

The preferred share market had a respite from the steady drip of declines today, with PerpetualDiscounts gaining 6bp and FixedResets up 11bp. Volume was steady.

A place to stand and a place to owe! Ontari-ari-ari-o was downgraded by DBRS to AA(low) from AA:

Based on the Q2 2009 update, the Province is now looking at a deficit of nearly $32 billion or 5.6% of GDP for this year on a DBRS-adjusted basis (including capital expenditures on a pay-as-you-go basis rather than as amortized), up 50% from the forecast available at the time of the budget. This also marks a notable deterioration from the Q1 2009 update released last June, which captured the effect of the auto sector bailout and rapidly declining tax revenues and led DBRS to change its trend on the long-term rating to Negative from Stable. The latest revisions are primarily the result of dampening tax collection due in part to the ongoing recession, and increased pressure on social program spending. Faced with a weaker-than-expected tax base, the Province has also trimmed its medium-term outlook, with DBRS-adjusted shortfalls of $27 billion to $30 billion now expected for the next two years, up from previous estimates of $17 billion to $21 billion.

Total debt as measured by DBRS is now projected to increase by 22% in 2009-2010 alone, and by 11% to 14% over the following two fiscal years. This will in turn boost Ontario’s debt-to-GDP-ratio from 29% at March 31, 2009, to approximately 37% by fiscal year-end, the third-highest level of all provinces, and to a peak as high as 43% by 2011-2012, well in excess of the level recorded at the onset of the early 1990s recession.

Thank you, Mike, Ernie & Dalton! Amidst all the partisan tumult in Queen’s Park, it is a pleasure to see all the cooperation you guys have exhibited in trashing the provincial finances. Fortunately, however, the Great Leap Forward will not be affected.

Another down-day for preferreds, with PerpetualDiscounts down 4bp and FixedResets down 17bp. Volume continue to be strong, with a preponderance of FixedResets in the volume highlights table.

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.
…
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.
…
“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.
…
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.
…
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.
…
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.
…
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.
…
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.
…
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.