PrefBlog

Well, the huge sums of government money spent persecuting Fabulous Fab have finally had an effect:

Fabrice Tourre, the former Goldman Sachs Group Inc. (GS) vice president found liable for his part in selling a pre-crisis mortgage security that lost value, said he won’t file an appeal in the civil case.

“While my lawyers have advised me there are strong grounds to appeal, I prefer to move forward with my education and close this difficult chapter of my life,” Tourre said in a statement today. “I look forward to finishing my Ph.D. in economics and to making meaningful contributions to my field.”

Tourre, 35, was found liable Aug. 1 after a jury trial at which the U.S. Securities and Exchange Commission claimed he intentionally misled investors in a subprime-mortgage vehicle called Abacus 2007-AC1. In March, he was ordered to pay more than $825,000 in penalties.

The lawsuit was one of the government’s most prominent efforts to fix responsibility for the housing market crash, which helped precipitate the worst economic downturn since the 1930s.

It looks like all the easy shale oil money has been made:

The U.S. shale patch is facing a shakeout as drillers struggle to keep pace with the relentless spending needed to get oil and gas out of the ground.

Shale debt has almost doubled over the last four years while revenue has gained just 5.6 percent, according to a Bloomberg News analysis of 61 shale drillers. A dozen of those wildcatters are spending at least 10 percent of their sales on interest compared with Exxon Mobil Corp.’s 0.1 percent.
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Drillers are caught in a bind. They must keep borrowing to pay for exploration needed to offset the steep production declines typical of shale wells. At the same time, investors have been pushing companies to cut back. Spending tumbled at 26 of the 61 firms examined. For companies that can’t afford to keep drilling, less oil coming out means less money coming in, accelerating the financial tailspin.

Good news, everybody! Not only is Toronto the largest Fair Trade city in North America, but Ethiopian coffee is Canada’s favourite FairTrade product! There’s only one teensy, tiny little problem:

The third main set of FTEPR findings concerns Fairtrade specifically. This research was unable to find any evidence that Fairtrade has made a positive difference to the wages and working conditions of those employed in the production of the commodities produced for Fairtrade certified export in the areas where the research has been conducted. This is the case for ‘smallholder’ crops like coffee – where Fairtrade standards have been based on the erroneous assumption that the vast majority of production is based on family labour – and for ‘hired labour organization’ commodities like the cut flowers produced in factory-style greenhouse conditions in Ethiopia.8 In some cases, indeed, the data suggest that those employed in areas where there are Fairtrade producer organisations are significantly worse paid, and treated, than those employed for wages in the production of the same commodities in areas without any Fairtrade certified institutions (including in areas characterised by smallholder production). At the very least, this research suggests that Fairtrade organizations need to pay far more attention to the conditions of those extremely poor rural people – especially women and girls – employed in the production of commodities labelled and sold to ‘ethical consumers’ who expect their purchases to improve the lives of the poor.

Section 3 discusses other evidence too, drawing on both quantitative and qualitative findings. The FTEPR research design did not set out to capture comprehensive data on child labour. However, in the quantitative survey results and especially in the qualitative life’s work interviews, the fact of widespread wage labour by children and teenagers (specifically, children working for wages and during school time) was inescapable.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 5bp, FixedResets down 33bp and DeemedRetractibles off 8bp. The lengthy Performance Highlights table is dominated by FixedReset losers (although Floaters got hit hard too), particularly BAM issues – presumably due to the new issue announcement. Volume was average.

There’s always a lot of political complaining about corporate short-term thinking, with the equity markets forcing managers to focus on the next quarter’s profit rather than investing for the long term. I’m never too sure about how seriously to take this. First, there seems to be quite a lot of technological advance anyway and second, long-range planning by it’s nature can often go astray and blow up the companies just as well as anything else. One way or another, there’s an interesting insight into the role of indexers:

Most of the more than $4-trillion (U.S.) that BlackRock oversees on behalf of clients is in index funds that passively track market benchmarks. Because it can’t sell individual stocks in index funds, BlackRock is, by necessity, in it for the long haul.

So instead of threatening, [Blackrock Chairman and CEO] Mr. [Larry] Fink cajoles. He writes letters. Very, very well-read letters. His latest went to the heads of all the biggest companies in the United States and Europe, hundreds of them, urging CEOs to think long term.

“As the largest index player in the world, we have to own companies, even if we hate ‘em,” Mr. Fink said in an interview on a recent visit to Toronto. “The most powerful component of our ownership is our vote, and we have to vote for what we think is in the best interests for the long term. Whether we like you or not, we are going to be an investor for the long term. We want leadership to focus on long-term strategies.”

In many ways, BlackRock’s fortunes are tied to long-run economic growth. That’s what drives stock indexes higher. It’s a rising-tide-lifts-all-boats game.

The Lapdog’s learning that sucking political arse is a risky career choice … the demands keep increasing and the promises keep accumulating:

Less than a year into his new job, Mr. Carney is getting decidedly mixed reviews from a much tougher crowd of critics. He’s already had one big flub, after he was forced to revise his stated plan to hold interest rates down until the unemployment rate fell below 7 per cent.

The jobless target was achieved two years ahead of Mr. Carney’s forecast, with unemployment hitting a five-year low of 6.8 per cent in March, and the latest jobs reports have been among the strongest in years. Still, Mr. Carney insists he won’t raise interest rates any time soon, although financial types in the City no longer find his “forward guidance” of much use. They have taken to calling it “fuzzy guidance.”

Some even label Mr. Carney a monetary “dove” who’s tempting fate. For the first time on his watch, members of the central bank’s monetary policy committee disagree over the course of action to take. The governor’s insistence that there is still too much slack in the economy to raise rates is challenged from within. His soon-to-leave deputy recently took a jab: “There is a real danger of spurious precision and the pretense of knowledge in this area.”

What’s the peak of the next interest rate cycle? Place yer bets, gents, place yer bets:

From bond yields to futures and swaps, traders see little chance the economy will strengthen enough over the course of its expansion to compel the Fed to lift its overnight rate beyond about 3.3 percent. That’s less than the historical average of 4.25 percent that New York Fed President William Dudley said would be consistent with the central bank’s current target for inflation and compares with its long-term estimate of 4 percent.

The divergence reflects deepening concern among bond investors that tepid wage growth and a lack of inflation will persist for years to come, and hold back growth as the Fed moves to end its unprecedented monetary stimulus. Lower peak rates will also reduce the likelihood of any selloff in longer-term Treasuries, which have rewarded holders this year with the biggest returns in two decades.

It was a day of modest movement for the Canadian preferred share market, with PerpetualDiscounts and DeemedRetractibles both gaining 2bp, while FixedResets were off 5bp. Volatility was low. Volume was below average.

In a story picked up by the Globe, Renee Altom wrote a piece for the Richmond Fed titled Why was Canada exempt from the financial crisis?; she concludes that a

So to truly understand a country’s financial landscape, you have to go back — all the way back — to its beginning. Financial regulation in a new world typically starts with one question: Who has the authority to charter banks?

This seemingly small choice sets off a chain reaction, according to Michael Bordo and Angela Redish, Canadian economists at Rutgers University and the University of British Columbia, respectively, and Hugh Rockoff, a monetary expert also at Rutgers. They’ve studied the differences between Canada and the United States in several papers dating back to the 1990s.

They argue that the states here prohibited banks from branching, while Canada did not.
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Many economists have argued that this “unit banking” in the United States made banks more fragile. For one thing, banks were rather undiversified.
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According to the recent study by Calomiris and Haber, set out in their 2014 book Fragile By Design, united factions with an interest in keeping banks small succeeded in shooting down attempts at branching liberalization until the 1980s.
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The U.S. Constitution gave all functions not explicitly handed to the federal government, such as regulatory policy, to the states. Interests needed only to win legislative fights at the local level, which was a far easier task than in today’s relatively more federalized system, Calomiris and Haber contended. Thus, they argued that the origins of a country’s financial stability — or lack thereof — are mainly political. Small farmers opposed branching because it would allow banks to take credit elsewhere after a bad harvest. Small banks wanted protection from competition. And many others opposed any signs of growing power concentrated in any one institution — or bank.
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There have been many proposed explanations for why our financial system proved much less resilient than Canada’s in 2007 and 2008, from insufficient regulation, to lax mortgage lending, to our history of government rescues.

The longer lens of history shows, however, that any one explanation for financial instability — and therefore any one regulatory attempt to fix it — may be too simple. Even if unit banking is a relic of the past, it is still with us through its effects on the evolution of the U.S. financial system — just as reforms today will determine the shape and stability of the financial system of the future.

The slowdown in trading hasn’t hurt TD & RBC much:

Heading into the current bank earnings season, the worry was that Canadian investment banks would suffer from the same trading slowdown that hit so many global rivals. RBC was particularly in the spotlight, because it has the biggest trading operation of all the Canadian lenders.

Yet their results came in Thursday, and they were surprisingly good considering what the worst case scenarios looked like.
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For RBC, the strength stems from its capital markets operations beyond Canada’s borders. “The growth is really focused in the U.S., and our [fixed income] Europe business has performed well in the last quarter as well. And I think really it’s just more origination in Europe and also the markets are much improved in Europe,” Mr. McGregor added.

TD benefited from origination as well, albeit mostly in the domestic market. Asked about the bank’s strong trading numbers in the first half of fiscal 2014, capital markets head Bob Dorrance said they’re “driven significantly by the origination markets.”

Coincidentally, S&P came out with a report titled Delving Deeper Into Global Trading Banks’ Risks And Rewards: A Study Of Public Disclosures. RBC is one of the top 15 global banks for trading, with a 1.8% market share.

Tougher regulatory requirements, particularly as they pertain to capital, have caused some of the biggest global banks to scale back their trading businesses to ensure that profitability clears their cost of capital. Although this has enabled a few select banks with scalable trading operations to increase their market share, the overall trend has been a decline in sales and trading as a percentage of banks’ total revenues–a development that has reduced some of the market risks related to banks’ trading operations from their 2007-2008 peaks, in our view. That said, we believe trading risks remain significant, and could destabilize banks that don’t manage them properly.
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• We have carried out a study of public disclosures by the 15 rated banks with the largest global trading operations to assess changes in the risk of their trading activities.
• Trading as a percentage of overall revenue has declined for most of these banks over the past five years, and trading risks have subsided from their excessive precrisis levels, largely because of stricter regulation and lower market volumes. However, the risks are still significant, in our view, and could destabilize banks that don’t manage them well.
• We don’t expect to take any imminent rating actions on these banks based on developments in their trading activities, but changes in their risk profiles, over time, could lead to positive or negative rating actions.

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Assessing trading risk at banks can be a difficult endeavor because trading positions, especially derivatives and less-liquid securities, are very complex and opaque. Moreover, the value at risk (VaR) models and other internal models that aim to measure market risks can be inaccurate and inconsistent, particularly in relation to peers. And a significant market disruption may render fair values, which are the basis for many derivatives and securities, unreliable and difficult to measure.

Notably, two recent Bank for International Settlements (BIS) trading surveys that analyzed risk-weighted assets for market risk showed substantial discrepancies across banks in measuring VaR and also showed that regulatory capital requirements for market risk vary among global banks. An October 2013 BIS paper (“Fundamental Review of The Trading Book—Second Consultative Document”) outlines, among other things, certain proposals to improve the accuracy and consistency of bank trading risk-weighted assets, in order to make them more commensurate with risk. We believe this is a step toward further consistency across banks, but more clarity is necessary (see “Basel’s Proposed Overhaul Of Capital Requirement Calculations For Banks’ Trading Risk Is Only A Step Toward Greater Consistency,” published Jan. 31, 2014). Although VaR has certain limitations–and thus, in isolation, may provide an incomplete picture of a bank’s trading risk–we still believe it has value when considered with other factors in determining market risk. That said, we do not base our analysis on ratios alone, not least because some can be the result of a multitude of different influences, some positive and some negative, which we detail in Appendix 3.

The BIS document is titled Consultative Document: Fundamental review of the trading book: A revised market risk framework. To my astonishment, it does not mention ageing as a test for whether or not something is legitimately in the trading book, but:

Having reflected on feedback from the first consultative paper, the Committee has developed a revised boundary that retains the link between the regulatory trading book and the set of instruments that banks deem to hold for trading purposes, but seeks to address weaknesses in the boundary by reducing the possibility of arbitrage and by providing more supervisory tools. As such, this boundary is more likely to be aligned with banks’ own risk management practices relative to the valuation-based approach.
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The Committee remains concerned about the risk of arbitrage. To reduce the incentives for arbitrage, the Committee is seeking a less permeable boundary with stricter limits on switching between books and measures to prevent “capital benefit” in instances where switching is permitted. The Committee is also aiming to reduce the materiality of differences in capital requirements against similar types of risk on either side of the boundary. For example, the Committee has decided that the calibration of capital charges against default risk in the trading book will be closely aligned to the banking book treatment, especially for securitisations. The Committee is also investigating the development of Pillar 1 charges for interest rate and credit spread risk in the banking book.
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Main differences between the current and proposed definition of the boundary

Intent-based boundary (current)	Revised boundary
Requirement for reports to supervisors to make the boundary easier to supervise: N/A	Requirement for reports to supervisors to make the boundary easier to supervise: Banks must prepare, evaluate and have available specified reports used by banks in their boundary determination decision, including reports on inventory ageing, daily limits, intraday limits (banks with active intraday trading), market liquidity and any deviations from the presumption lists.

So there will be reports! Lots and lots of lovely reports, requiring the employment of an army of regulators to read and another army of ex-regulators to prepare. Super!

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 18bp, FixedResets down 5bp and DeemedRetractibles off 1bp. Volatility was average. Volume was below average.