PrefBlog

Some little kids want Mommy to make everything nice:

For nearly a year, a group of major bond investors has been looking for answers to a seemingly simple question — who among Canada’s many regulators is in charge of Cdor [Canadian Dealer Offered Rate], a benchmark rate affecting some $6-trillion bonds, corporate loans, derivatives and other securities held by investors across the country. They have yet to get an answer.

“It’s kind of exasperating,” said Joe Morin, chair of the Canadian Bond Investors Association, which represents some 30 fixed income funds with more than $300-billion of assets. “Nobody has stepped up to take responsibility.”
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On Aug 20, nearly five months [after whimpering to Mommy], they received a reply from the OSC, referring the group to a “review” of Cdor published by another regulator, the Investment Industry Regulatory Organization of Canada, made public in Jan 2013. The review found that the Cdor rate setting process had the “potential” for manipulation. It also found that none of this country’s regulators had proper jurisdiction over the rate.

In January of this year the Office of the Superintendent of Financial Institutions appeared to clear away the regulatory cobwebs, announcing it would “assume a role” in the oversight of Cdor, which was interpreted by many as a declaration that it was taking responsibility for the rate.

But it turned out that was not the case.

“We would like to clarify that OSFI is not the regulator of Cdor,” a spokesman for the regulator said in an email to the Financial Post on Feb 20.

Assiduous Readers will recognize that these are the same box-tickers who want bond covenants standardized in order to reduce the chance they might have to read a term sheet and, even worse, have to take a view on the value difference between slightly different covenants, as discussed on March 10.

Capital Power Corporation, proud issuer of CPX.PR.A, CPX.PR.C and CPX.PR.E, has been confirmed at Pfd-3(low) [Stable] by DBRS:

CPC’s preferred shares rating is based on the credit quality of its subsidiary, Capital Power L.P. (CPLP; rated BBB). The one-notch differential in the ratings of CPC and CPLP reflects structural subordination at CPC.
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CPC has no bonds/debentures issued at the parent level and is not expected to issue any debt in the foreseeable future. CPC currently has $464 million of preferred shares outstanding, of which $73 million is treated as debt by DBRS in CPC’s adjusted debt-to-capital calculation (adjusted debt-to-capital ratio was approximately 3% in 2013). In the adjusted debt-to-capital calculation, the amount of preferred shares over the 20% preferred shares-to-equity threshold (defined as the percentage of preferred shares outstanding divided by total equity, excluding preferreds and minority interest) is treated as debt. CPC’s adjusted debt-to-capital ratio remains in line with its rating category. In addition, the pro forma unconsolidated fixed charge coverage ratio is expected to remain high, at around four times.

It was a mildly negative day for the Canadian preferred share market, with PerpetualDiscounts down 3bp, FixedResets off 1bp and DeemedRetractibles flat. Volatility was not just minimal, it just reversed yesterday’s. Volume was below average.

Nothing happened today.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 34bp, FixedResets off 3bp and DeemedRetractibles gaining 3bp. Volatility was low. Volume was average, with the highlights comprised entirely of FixedResets.

The robots are taking over:

When Minneapolis attorney William Greene faced the task of combing through 1.3 million electronic documents in a recent case, he turned to a so-called smart computer program. Three associates selected relevant documents from a smaller sample, “teaching” their reasoning to the computer. The software’s algorithms then sorted the remaining material by importance.

“We were able to get the information we needed after reviewing only 2.3 percent of the documents,” said Greene, a Minneapolis-based partner at law firm Stinson Leonard Street LLP.
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The advances, coupled with mobile robots wired with this intelligence, make it likely that occupations employing almost half of today’s U.S. workers, ranging from loan officers to cab drivers and real estate agents, become possible to automate in the next decade or two, according to a study done at the University of Oxford in the U.K.

“These transitions have happened before,” said Carl Benedikt Frey, co-author of the study and a research fellow at the Oxford Martin Programme on the Impacts of Future Technology. “What’s different this time is that technological change is happening even faster, and it may affect a greater variety of jobs.”

This is exacerbated by the good old WASP work ethic:

About a dozen years ago, one of his biggest competitors started using undocumented Mexican laborers. At the time, the landscaper’s firm suffered high turnover and low productivity, and finding employees to do the actual landscaping — his company’s bread and butter — was difficult.

“We’ve never had anyone come in here looking for work,” he told me, on condition that I withhold his name. He found many of the Americans he has hired over the years to be unreliable and unwilling to work hard. Sometimes they quit; other times he has fired them.

Gradually, he started hiring Mexican laborers. All of them were able to provide Social Security numbers, though he understood they were bogus. “We have to have paperwork on these guys,” he said. “We just don’t have to have it be legitimate.”

In not entirely unrelated news, Fischer is indicating continued expansionary monetary policy:

Stanley Fischer, the nominee to be Federal Reserve vice chairman, said the world’s largest economy still needs the central bank’s unprecedented accommodation as joblessness remains elevated.

“At 6.7 percent, the unemployment rate remains too high,” Fischer, a former Bank of Israel governor and Citigroup Inc. vice chairman, said in remarks prepared for his confirmation hearing tomorrow before the Senate Banking Committee.

“Achievement of both maximum employment and price stability requires the continuation of an expansionary monetary policy — even though the degree of expansion is being gradually and cautiously cut back as the Fed reduces its monthly purchases” of securities, said Fischer, 70.

I’m told I’m not employing enough regulators, but that will change soon enough:

Under NI 31-103, OBSI’s membership will more than double to almost 1600 firms in the financial industry, including:

• •Investment Industry Regulatory Organization of Canada (IIROC) member firms
• •Mutual Fund Dealers Association of Canada (MFDA) member firms
• •Mutual fund companies
• •Exempt market dealers
• •Portfolio managers
• •Scholarship plan dealers
• •Forex trading services
• •Domestic and foreign-owned banks
• •Credit unions
• •Federal trust and loan companies and other deposit-taking organizations

Fabulous Fab has been fined for selling investments to dumb people:

Ex-Goldman Sachs Group Inc. (GS) vice president Fabrice Tourre, found liable for his part in a failed $1 billion investment, was ordered to pay more than $825,000 in the U.S. Securities and Exchange Commission case.

U.S. District Judge Katherine Forrest in Manhattan ruled today that Tourre must pay $650,000 in civil penalties and give up $175,463 of his 2007 bonus, plus interest. He can’t seek reimbursement of the penalties from Goldman Sachs, the judge ruled.

Tourre, 35, was found liable Aug. 1 after a jury trial at which the SEC claimed he intentionally misled investors in a subprime-mortgage vehicle called Abacus 2007-AC1. Tourre lied about the role played by billionaire John Paulson’s Paulson & Co. hedge fund, which helped choose the securities underlying Abacus then made a billion-dollar bet it would fail, the agency said.

… and the SEC weenies are high-fiving each other for their role in making the world a safer place for grossly incompetent professionals:

“We’re pleased that the judge’s decision imposes the disgorgement amount we recommended as well as other significant penalties for providing false marketing materials to investors. The ruling reflects the SEC’s intent of pursuing meaningful sanctions to punish individuals responsible for misconduct and deter others from violating the federal securities laws.”

Assiduous Readers will remember that the Feds are cancelling five hundred years of bankruptcy law by forcing banks to issue bail-in bonds, as discussed on November 14, 2013; following Lap-Dog Carney’s parroting of the official line without any research whatsoever. So what will be the effect of this? Logically, bail-in bonds will be riskier than banks’ current senior debt; therefore they should be more expensive to issue; therefore the banks will issue less of them and rely more on large-scale deposit notes, which have a shorter term. What will be the effect of all this? Teodora Paligorova and João Santos have written a paper titled Rollover Risk and the Maturity Transformation Function of Banks:

This paper shows that banks that rely heavily on short-term funding engage less in maturity transformation in an attempt to decrease their exposure to rollover risk. These banks shorten both the maturity of their portfolio of loans as well as the maturity of newly issued loans. We find that the loan yield curve becomes steeper with banks’ increasing use of short-term funding. The loan maturity shortening is driven by banks and affects borrowers’ financing choices – they turn to the bond market for long-term funding. To the extent that borrowers do not manage to compensate for the undesirable shortening of loan maturities by going to the bond market, they may become more exposed to rollover risk due to banks. This potential synchronization of banks’ and borrowers’ rollover risk can be a source of financial instability once short-term funding suddenly disappears.
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Our results also help to explain the downward trend in the average maturity of outstanding bank loans over the past two decades, documented by Mian and Santos
(2011). [Footnote reads: While average maturity is close to four years in 1988, it declines to just over two-and-a-half-years in 2010.

The paper focusses on money-market instruments as ‘short-term funding’, but the implications are there. It would be really nice to see some research focussed on bail-in bonds as a major change in the structure of bank financing and the implications of this for lending and financial stability, but I don’t think the BoC will be doing much – not with the Parakeet in charge.

Speaking of Lapdog Carney, he his political puppetmasters have given him authority to identify risk as quickly as six years afterwards!

Senior bankers may be forced to pay back bonuses as long as six years after they cash the checks under proposed Bank of England rules to curb short-term financial risk-taking.

The central bank is readying rules that would take effect in 2015, Katherine Braddick, director for policy at the central bank’s Prudential Regulation Authority, said in a speech in London today. Braddick didn’t specify the circumstances under which the clawbacks would be enforced.

“The ability to apply clawback should further encourage the avoidance of excessive risk taking and the alignment of incentives with firms’ longer-term interests,” Braddick said.

The war on traders will have far-reaching consequences, none of which have ever been thought about.

If there’s one thing welfare bums love to do, it’s complain about poor service:

“They have made these changes to reduce their operating costs,” [Western Grain Elevator Association head] Mr. Sobkowich said. “This manifests itself as inadequate service – especially in circumstances when service requirements are higher because of a larger than normal crop and when operating conditions are difficult because of cold weather.“

Excess capacity and system robustness costs money. I wonder who’s going to pay for it. I know! Ottawa! Then Ottawa can write cheques to the railway companies for not shipping the grain that the farmers have been paid not to grow! Everybody wins!

Assiduous Reader DR brings a piece on no-contest settlements to my attention:

No-fault deals would give miscreants credit for co-operating with the OSC and allow the regulator to end enforcement action by simply levying a financial penalty. “These initiatives will allow us to resolve enforcement matters more quickly and issue more protective orders earlier, which would benefit both investors and the capital markets,” is how Tom Atkinson, the OSC’s director of enforcement justified the idea. In other words, these types of settlements will streamline the watchdog’s case log, conserve resources, claim more scalps and burnish its enforcement image. Market players and defence lawyers love it chiefly because it’s preferable to pay a fine than make high-risk admissions that can be used against them in other jurisdictions, such as the civil courts.

For that reason, investor protection advocates and class-action lawyers oppose the idea. OSC enforcement proceedings don’t result in direct compensation, thus fleeced investors and victims of fraud rely on admissions extracted by the regulator to get restitution through litigation, namely class-action lawsuits. “By dispensing with admission, enforcement staff would be leaving investors completely in the cold,” warned a submission filed by class-action law firm Siskinds LLP.

DR asks:

I confess I am confused, I don’t know if this is going to be for better or worse

I am unequivocally against no-contest settlements. If a company has done something wrong, they should be nailed to the wall – that’s the OSC’s putative job. If they haven’t done anything wrong, then the OSC should shut up.

No-contest settlements make it easier for the OSC to indulge in regulatory extortion … ‘OK, Mr. X, we can go after you for ten million dollars and we’ll tell our lawyers – who we have to pay anyway, so there’s no marginal cost on our side – to make it as expensive for you to fight it as they possibly can. Or we can agree on no-contest for $100,000.’ So the company agrees, because just fighting the charges will cost more than $100,000, and the regulator pads his resume with yet another impressive victory.

Enbridge was confirmed at Pfd-2(low) by DBRS:

EGD’s financial profile reflects an “A” rating, with all credit metrics remaining solidly within the current rating range. However, two concerns over the near to medium term are as follows: (1) Significant liquidity is required to finance EGD’s volatile working capital (mostly gas inventory for winter distributions). EGD’s liquidity is currently viewed as adequate to meet its operational needs given low natural gas prices. Should natural gas prices increase significantly, DBRS expects EGD to properly manage its liquidity to cope with that situation. (2) Large free cash flow deficits are expected over the next two years because of the $686.5 million GTA Expansion project. EGD’s parent (Enbridge Inc.) is expected to continue providing financial support for EGD. DBRS expects EGD to finance its cash flow shortfalls while maintaining the debt leverage within the regulatory capital structure and all other credit metrics within the DBRS “A” rating range. This project has been approved by the OEB and should provide good earnings growth once it is in service, which is expected to occur by the end of 2015.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 13bp, FixedResets gaining 5bp and DeemedRetractibles up 6bp. Volatility was basically zero – the only performance highlights are Floating Rate issues, which have been jumping around a lot lately according to the scheduling of global hyperinflation. Volume was slightly below average.

PerpetualDiscounts now yield 5.55%, equivalent to 7.22% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.55%, so the pre-tax interest-equivalent spread is now about 265bp, a slight (and perhaps spurious) tightening from the 270bp reported March 5.

Banner headline on Bloomberg – An FX trade didn’t work out:

A senior currency dealer at Lloyds Banking Group Plc shared details of a pending order by his firm with a trader at another company to the potential detriment of the bank, according to four people with knowledge of the matter.

The Lloyds’s dealer, Martin Chantree, alerted the other trader on Jan. 31, 2013, that his desk had received instructions from the bank’s treasury department to swap more than 300 million pounds ($499 million) for dollars and that they would continue selling regardless of price movements, said two of the people, who asked not to be identified amid a probe into alleged rigging of the currency market. The recipient of the tip worked for oil company BP Plc, the other two people said.

In the seven minutes between the communication at 10:53 a.m. and the time Lloyds began executing the order, the pound fell 16 basis points against the dollar, or 0.16 percentage point, according to data compiled by Bloomberg. As the U.K. currency tumbled, costing Lloyds an estimated $750,000, Chantree told colleagues that maybe he shouldn’t have shared the information, two of the people said.
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Lloyds suspended Chantree on Feb. 3 after inquiries by Bloomberg News about his alleged communications in advance of the trade. The London-based bank, which is 33 percent owned by the U.K. government, approached the FCA after discovering messages, including the 10:53 a.m. voice communication in which Chantree detailed the size and timing of the order, two of the people said.
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Between 10:53 a.m. and 11 a.m. on the day of the trade, about when Lloyds began selling, the pound-dollar exchange rate fell to 1.5790 from 1.5815, data compiled by Bloomberg show.
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Lloyds did internal deals of that size only six or seven times a year, two of the people said. When an order came in, some traders on the second floor of the bank’s Gresham Street headquarters in London’s financial district would place their own bets before executing the trade in a way that moved the market as much as possible, one of the people said. They were able to do this because notice was typically sent to more than one trader on the desk and Lloyds’s treasury unit didn’t scrutinize whether it got the best price, the person said. There’s no indication Chantree placed such bets that morning.

Well, sure. If you’re going to do size, you’ve got to show size. And sometimes showing size means everybody on the opposite side pulls their orders … which is consistent with what happened. Why else do you think dark pools are so popular? Trading size is more of an art than a science, and sometimes it’s art with a capital F. I will be kind and assume that Lloyds has suspended its trader only because they’re terrified of the regulators nowadays.

It seems very likely that the villain of the piece is Lloyds treasury. A market order for half a billion bucks? I will need to see a long detailed explanation before I’m convinced they’re not idiots.

Lest anybody think that I always take the traders’ side, I will say: front-running orders of this type was clearly wrong. In case of this particular type, the traders do in fact owe a fiduciary client to their institutional client … but only because the client is also their employer.

We may finally be approaching the approaching the elimination of the GSEs:

The bipartisan measure, drafted with input from President Barack Obama’s administration, would replace the U.S.-owned mortgage financiers with government bond insurance that would kick in only after private capital suffered losses of at least 10 percent, Senate Banking Committee Chairman Tim Johnson and Senator Mike Crapo said in a statement today. The bill would require most borrowers to make down payments of at least 5 percent.
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The government would play a smaller role in the market by taking a backstop position on mortgage securities, stepping in only if private interests were wiped out by catastrophic losses. A new agency called the Federal Mortgage Insurance Corp. would charge fees to issue a government guarantee on bonds that would kick in only after private investors suffered losses of at least 10 percent.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 17bp, FixedResets off 10bp and DeemedRetractibles gaining 4bp. Volatility was above average due to stellar performance from Floating Rate issues, indicating that the recently postponed global hyperinflation has now been rescheduled. Volume was high.

Canada’s central planners are flexing their muscles:

Ottawa is forcing Canada’s two main railway companies to double the amount of grain they ship in a week to try to unclog a transport bottleneck that has left piles of grain sitting in bins across the Prairies.

Transport Minister Lisa Raitt said cabinet has passed an order-in-council that gives Canadian National and Canadian Pacific a month to start moving a minimum of one million tonnes of grain in 11,000 cars each week.

I wonder what goods won’t get moved because of pandering to farmers. I wonder what the price of transport would be in a free market.

Let’s hope this becomes a trend:

JPMorgan Chase & Co. (JPM), Deutsche Bank AG, UBS AG (UBSN) and Depfa Bank Plc won a bid to overturn a conviction for overseeing fraud by their bankers in the sale of derivatives to the city of Milan.

An appeals court in Milan cleared the banks and individuals at the firms because “the alleged crimes didn’t take place,” Judge Luigi Martino said as he read out the verdict today.

There’s no shortage of government debt to buy:

The amount of debt globally has soared more than 40 percent to $100 trillion since the first signs of the financial crisis as governments borrowed to pull their economies out of recession and companies took advantage of record low interest rates, according to the Bank for International Settlements.

The $30 trillion increase from $70 trillion between mid-2007 and mid-2013 compares with a $3.86 trillion decline in the value of equities to $53.8 trillion in the same period, according to data compiled by Bloomberg. The jump in debt as measured by the Basel, Switzerland-based BIS in its quarterly review is almost twice the U.S.’s gross domestic product.

Borrowing has soared as central banks suppress benchmark interest rates to spur growth after the U.S. subprime mortgage market collapsed and Lehman Brothers Holdings Inc.’s bankruptcy sent the world into its worst financial crisis since the Great Depression. Yields on all types of bonds, from governments to corporates and mortgages, average about 2 percent, down from more than 4.8 percent in 2007, according to the Bank of America Merrill Lynch Global Broad Market Index.

On March 7 I mentioned some competition in American health-care. Here’s some abuse of the system:

Allegations that pre-scheduled cath-lab patients showed up at the ER may signal efforts to get unwarranted payments from health insurers or federal coverage programs for patients who wouldn’t be covered otherwise, said James Sheehan, chief of the charities unit for the New York state attorney general’s office. Sheehan, a former inspector general of the state’s Medicaid system, was speaking generally, not specifically about Mount Sinai.

In emergency situations, patients cannot be turned away just because they can’t pay for care, according to federal and New York state laws. New York’s Medicaid system spends about $500 million a year on emergency procedures for uninsured patients.

After Andy Jagoda, Mount Sinai’s emergency-department chief, heard in 2012 that cardiologists were sending patients through the emergency ward with previously scheduled cath-lab appointments, he indicated that he had brought the matter up with the hospital’s administration and would do so again. Mount Sinai declined to make Jagoda available for an interview.

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On average, doctors who have financial ties to the hospital — such as arrangements to provide Mount Sinai cardiologists with office space for a fee — tend to make more referrals, based on data from 2010. In that year, seven doctors or practices that had such business dealings with Mount Sinai referred 301 patients to the cath lab on average — 15 times the average referrals made by all 546 doctors who sent patients to the lab that year, according to hospital documents.
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New York’s rates are driven by a “surplus” of cath labs seeking patients, a competition that spurs usage of hospitals’ facilities and doctors’ expertise that’s unrelated to patients’ needs and distorts the market for heart procedures, Marmur said. “The pendulum is way out of whack,” he said. “It drives up the cost of health care for everyone.”

I claim this sort of highly suspicious nonsense is inevitable whenever the consumer of a service doesn’t have to pay for it.

Some charming little box-tickers are whimpering about bond covenants:

…major players such as Canso Investment Counsel and Manulife Financial Corp. came together roughly two years ago to create the Canadian Bond Investors’ Association.
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After working with lawyers to draft a working paper, the industry group is now advocating for four fundamental changes to debt covenants. The improvements include new standardized language around a “change of control,” or a switch in company ownership. At the moment, companies can have multiple bonds that each come with different rules on how they will be treated in this situation.

For instance, Safeway Inc., the giant U.S. grocery chain that is now the target of a $9-billion (U.S.) leveraged buyout, has a number of bonds outstanding, and each has different change-of-control provisions. Some bondholders are allowed to sell their bonds back to the acquirer, Cerberus, for full value, while others cannot.

I can tell you as a fact that when such a thing occurs, it is a total surprise to most owners, as they read the term-sheets and prospectuses for the very first time. By and large, the Canadian bond market is oblivious to anything that’s not included in the Bloomberg summary.

To address this inequity, bond investors want issuers to be required to enhance their coupon payments by a preset amount – it could be 100 or 200 basis points – in similar situations in the future, but only if a company loses its investment grade rating.

Yes, it will be a better world, as soon as there are more rules, more red tape, more regulators and more lawyers. It never occurs to any of these clowns that they have a choice regarding what to buy; if big enough, they can even approach issuers themselves with a proposal for a private placement.

TransAlta Corp., proud issuer of , was confirmed at Pfd-3(stable) by DBRS:

TAC’s key credit metrics are currently in the BB (high) range, which provides the Company with very limited financial flexibility. However, key credit metrics are expected to improve following the 38% decrease in dividend payouts and the reduction of debt with the proceeds from the sale of non-core assets (see the DBRS press release dated February 20, 2014). In addition, the Company is expected to generate a free cash flow surplus in 2014, which is expected to further improve its leverage modestly. The Stable trend reflects DBRS’s expectation that TAC will improve its key credit metrics to the BBB (low) range, including leverage to near or below 50% by the end of 2014. DBRS also expects TAC to continue to fund any significant unforeseen costs, cash shortfalls and/or acquisitions in a prudent manner to prevent any further deterioration of key credit metrics. Any delay in reducing leverage, or further weakness of other key credit metrics, could result in a negative rating action.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 12bp, FixedResets gaining 3bp and DeemedRetractibles up 8bp. Volatility was minimal. Volume was below average.