PrefBlog

The bank rate is unchanged:

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

Global growth prospects have weakened since the Bank’s April Monetary Policy Report (MPR). While the economic expansion in the United States continues at a gradual but somewhat slower pace, developments in Europe point to a renewed contraction. In China and other emerging economies, the deceleration in growth has been greater than anticipated, reflecting past policy tightening and weaker external demand. This slowdown in global activity has led to a sizeable reduction in commodity prices, although they remain elevated. The combination of increasing global excess capacity over the projection horizon and reduced commodity prices is expected to moderate global inflationary pressures. Global financial conditions have also deteriorated since April, with periods of considerable volatility. The Bank’s base case projection assumes that the European crisis will continue to be contained, although this assumption is subject to downside risks.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums down 10bp, FixedResets gaining 13bp and DeemedRetractibles up 11bp. Volatility was almost non-existent. While there were a few issues with very good volumes (with a very high correlation to the recent TXPR rebalancing), overall volume was light.

As long as the dividend tax rate remains a political football, the US will never have a decent preferred share market:

Senate Democrats are seeking to set the top tax rate on dividends at 23.8 percent, almost 20 percentage points lower than the proposal offered by President Barack Obama in his budget.

That detail, along with a top estate tax rate of 45 percent and a one-year patch to prevent the alternative minimum tax from affecting millions more families, are part of the written version of Senate Democrats’ attempt to extend expiring income tax cuts for one year. The core of the proposal would extend the George W. Bush-era cuts through 2013 for 98 percent of households while letting them expire on income above $200,000 for individuals and above $250,000 for married couples.

There’s more finger-pointing with Barclay’s / LIBOR:

A former executive of Barclays who has been blamed for ordering subordinates to submit false interest rates in 2008 says he believed his action had been sanctioned by the Bank of England.

Jerry del Missier, a Canadian, told a Parliamentary committee on Monday that he drew that conclusion from a conversation with the bank’s chief executive, Bob Diamond. He insisted that he believed he had done nothing wrong.

It’s entirely believable. It’s the oldest trick in the book … the boss expresses a vague notion that it would be nice if something happened … and eager subordinates fall over each other to put a smile on the boss’ face. “Who will rid me of this turbulent priest?”

I wonder if it will occur to any of the investigators to wonder just why nobody thought it was odd that Bank of England would counsel somebody to lie.

The Globe has a long story today on Canada’s Vanishing Tech Sector:

High-tech names have been vanishing from the radar in Canada at an alarming rate. Last year, 45 Canadian tech firms were snapped up by foreign buyers, up from 32 the year before and less than 15 per year in the mid-2000s, according to Branham Group, an Ottawa market research firm.

Worse, most of those companies are selling out too early, before they have a chance to grow into larger, global businesses that could fuel further innovation and success in the tech sector, say industry insiders and observers. The blame is squarely pointed at what they call a “broken” financing system, starting with wary, previously burned angel investors, a timid, underfunded and inexperienced venture capital industry, and moving up to institutional investors who are still smarting from their experience with Nortel stock. Many Bay Street investment dealers have lost all interest in the sector, content with the flow of deals in mining and oil and gas. Equity offerings from technology companies represented less than 4 per cent of deals on the TSX in each of the past four years, down from more than 20 per cent a decade ago.

After carefully reviewing the data and determining that Canada does not have a competitive advantage in high-tech venture capital, Spend-Every-Penny has reached a conclusion:

The federal government has taken notice. In its recent budget, the government announced it will pour $400-million into Canadian venture capital, and Finance Minister Jim Flaherty has tapped Sam Duboc, one of Canada’s most successful venture capital investors, to provide advice on how best to deploy the money.

Canada has a competitive advantage in filling out forms and whining for government assistance. We must thank our wise masters for recognizing and exploiting this fact.

It was a mildly positive day for the Canadian preferred share market, with PerpetualPremiums up 5bp, FixedResets gaining 2bp and DeemedRetractibles winning 8bp. Volatility was subdued. Volume was average – a pleasant change from the troughs of last week!

The New York Fed knew all about Barclay’s / LIBOR as it happened:

The Federal Reserve Bank of New York said it became aware that Barclays Plc was underreporting borrowing costs for the London interbank offered rate as early as 2007.

A Barclays employee explained to a New York Fed staff member in April 2008 that “Barclays was underreporting its rate to avoid the stigma associated with being an outlier with respect to its LIBOR submissions, relative to other participating banks,” the New York Fed said in a statement posted today on its website.

“The Barclays employee also stated that in his opinion other participating banks were also under-reporting their LIBOR submissions.”

According to the official press release:

As part of this broad effort, on April 11, an analyst from the Markets Group queried a Barclays employee in detail as to the extent of problems with LIBOR reporting.

The Barclays employee explained that Barclays was underreporting its rate to avoid the stigma associated with being an outlier with respect to its LIBOR submissions, relative to other participating banks. The Barclays employee also stated that in his opinion other participating banks were also under-reporting their LIBOR submissions. The Barclays employee did not state that his bank had been involved in manipulating the rate for its own trading advantage. Immediately following this call, the analyst notified senior management in the Markets Group that a contact at Barclays had stated that underreporting of LIBOR was prevalent in the market, and had occurred at Barclays.

That same day – April 11, 2008 – analysts in the Markets Group reported on the questions surrounding the accuracy of the BBA’s LIBOR fixing rate in their regular weekly briefing note. The briefing note cited reports from contacts at LIBOR submitting banks that banks were underreporting borrowing rates to avoid signaling weakness. In accordance with standard practice for briefing notes produced by the Markets Group, this report was circulated to senior officials at the New York Fed, the Federal Reserve Board of Governors, other Federal Reserve Banks, and U.S. Department of Treasury.

According to the briefing note:

Our contacts at LIBOR contributing banks have indicated a tendency to under-report actual borrowing costs when reporting to the BBA in order to limit the potential for speculation about the institutions’ liquidity problems.

Another analysis dated 2008-5-20 titled Recent Concerns Regarding LIBOR’s Credibility stated:

Around the time the WSJ article first reported on this matter in mid-April, we heard from several Eurodollars brokers and bank funding desks that many LIBOR banks were bidding for funds up to 25 basis points above their LIBOR quotes in the same maturity on the same day. The BBA also received a number of formal complaints along these lines. Several of these market participants suggested that discrepancies between funding rates and LIBOR quotes had existed since at least last August, but had gotten marginally worse since mid-March.

Additionally, around days on which the BBA’s efforts to address LIBOR have received media attention, there have been fairly dramatic increases in the LIBOR fixings. For example, in the two days surrounding the WSJ’s April 16 article, 3-month LIBOR increased 17 bps, which was the largest two-day increase in the rate since August 9. Earlier this week, as the integrity of LIBOR again received attention, 1-year LIBOR increased 21 bps, and OIS and fed funds-LIBOR basis swaps suggest that a large portion of this rise was not due to a re-pricing of policy expectations.

Geithner suggested to King in an eMail dated 2008-6-1:

1f the combination of best practices and audit recommendations in (1) above seems unlikely to be sufficiently effective in ensuring accLirate reporting, a complimentary [sic] approach might be to adopt the following process for collecting, calculating, and publishing LIBOR rates. The BBA could collect quotes from all members of the expanded panel, and then randomly select a subset of 16 banks from which the trimmed mean would be calculated. The tames and quotes for the 8 banks whose rates are averaged to calculate the LIBOR fixing would be published. The banks’ whose reports fall above or below the midrange would not be publicly identified, nor would the level of their outlying rates. This random sampling from an expanded panel would lessen the likelihood that the market would draw a negative inference regarding a particular bank’s continued absence from the list of published quotes

The Fed has also published a transcript of the April 11 call:

FR: Hmm.
: We were putting in where we really thought we would be able to borrow cash in the interbank market and it was
FR: Mm hmm.
: Above where everyone else was publishing rates.
FR: Mm hmm.
: And the next thing we knew, there was um, an article in the Financial Times, charting our LIBOR contributions and comparing it with other banks and inferring that this meant that we had a problem raising cash in the interbank market.
FR: Yeah.
: And um, our share price went down.
FR: Yes.
: So it’s never supposed to be the prerogative of a, a money market dealer to affect their company share value.
FR: Okay.
: And so we just fit in with the rest of the crowd, if you like.
FR: Okay.
: So, we know that we’re not posting um, an honest LIBOR.
FR: Okay.
: And yet and yet we are doing it, because, um, if we didn’t do it
FR: Mm hmm.
: It draws, um, unwanted attention on ourselves.

Note that all this happened well before the famous post-Lehman 2008-10-29 Diamond / Tucker telephone call:

If we take Bob Diamond and Paul Tucker at their word, part of the Libor scandal at Barclays Plc (BARC) can be chalked up to a series of comic misunderstandings, like a children’s game of telephone. It’s a bit much to swallow, but the spectacle sure has been fun to watch.

Both men agree that on Oct. 29, 2008, while the financial system was on the brink, Tucker, who is the Bank of England’s deputy governor, called Diamond on the phone. Diamond, who resigned last week as Barclays’s chief executive officer, was head of the company’s investment-banking business at the time.
…
The supposed misunderstandings don’t end there. In his October 2008 file note, Diamond wrote that he asked Tucker “if he could relay the reality, that not all banks were providing quotes at the levels that represented real transactions.”

Tucker told members of Parliament’s Treasury Committee that he didn’t take that statement to mean there was cheating going on. He said he thought it meant that “when they come to do real transactions, they will find they are paying a higher rate than they are judging they would need to pay.”

Tucker also was asked about a 2007 meeting with banking- industry members of a Bank of England liaison group. Minutes show “several group members thought that Libor fixings had been lower than actual traded interbank rates.” Tucker, who chaired the meeting, said “it did not set alarm bells ringing.”

“This doesn’t look good, Mr. Tucker,” the committee’s chairman, Andrew Tyrie, said. “It doesn’t look good that we have in the minutes on the 15th of November 2007, what appears to any reasonable person to be a clear indication of low- balling, about which nothing was done.” Tucker replied: “We thought it was a malfunctioning market, not a dishonest market.”

So, the usual thing has occurred: the regulators were negligent, the situation blew up, and in a desperate attempt to save face the regulators have fined the most honest bank nearly half a billion bucks and vilified the most honest man they could find. Regulation. Feh.

Naturally, Bloomberg feels Barclays should pay extra:

The fund set up by BP Plc to pay claims related to the 2010 Deepwater Horizon oil spill offers one possible template. Banks could pool their resources into a global Libor victims’ compensation fund, appoint an independent administrator and create a transparent formula to calculate damages. Doing so might persuade angry clients to settle rather than pursue litigation that would serve mainly to enrich armies of lawyers.

Such a move would require a lot of cooperation and candor among the banks. For one, they would have to come up with an authoritative estimate of how much Libor was skewed as a result of their misreporting. Beyond that, they would have to decide what share of the payments each bank should bear. One bank — Barclays is a prime candidate — might have to take the lead in setting up the fund, as BP did after the oil spill, and press the others to pay their share later.

Related to all this is a related quote on an unrelated matter:

“In U.S. criminal law, we very rarely do hold people criminally responsible for failure to supervise,” he [Duke University School of Law professor Sam Buell] said. “You need to show not only outright knowledge but also willful blindness — having a strong suspicion that there is wrongdoing and then taking steps to avoid it.”

The Globe points out that corporates are on a tear:

Earlier this week, the Barclays U.S. corporate investment grade index fell to just 3.096 per cent, its lowest yield since the bank made started the index in 1973.

Not only are corporate bond yields dropping, but their spreads over Treasuries are collapsing as well. The Bank of America Merrill Lynch corporate bond index currently has a spread of 294 basis points over Treasuries, about 50 basis points tighter than the 348 at the start of 2012.

They also mention a Bloomberg story about corporate bond duration:

Corporate bonds have never been more perilous for investors who are scooping up longer-maturity debt at the fastest pace since 2008 in a bet the Federal Reserve will keep interest rates at record lows through late 2014.

The duration of global company bonds, a measure of the securities’ price sensitivity to yield changes that rises with longer maturities, reached a record high yesterday, according to Bank of America Merrill Lynch index data.
…
Average yields on investment-grade corporate bonds reached a record-low 3.15 percent yesterday on the Bank of America Merrill Lynch Global Broad Market Corporate index. That’s helping push modified duration, which gauges the price change of a security for a given shift in yield, to an unprecedented 5.84 years as of yesterday, compared with 5.59 years at year-end and last year’s low of 5.28 on March 30.

I’d say we’re sowing the seeds of the next crisis ….

American houses are getting even larger:

The percentage of new single-family homes greater than 3,000 square feet has grown by one-third in the last decade, according to data released last month by the U.S. Census Bureau. The increase has occurred even while 4.3 million homes have been foreclosed upon since January 2007, a result of the housing- bubble collapse and economic meltdown. Slightly more than 1 in 4 new homes built last year were larger than 3,000 square feet, the highest percentage since 2007.
…
The Census Bureau reports that the average size of a U.S. house rose in 2011 to 2,480 square feet, up from 2,392 square feet in 2010. The 2011 figure is 62.6 percent larger than the 1,525-square-foot average size in 1973.

I don’t understand why people feel they want so much space. I grew up living in a shoebox in the middle of the road.

DBRS updated its report on CIU, proud issuer of CIU.PR.A, CIU.PR.B and CIU.PR.C:

DBRS has today updated its report on CU Inc. (CUI or the Company). The credit quality of CUI is based on the Company’s low business risk, which stems from the regulated nature of its operations supported by a reasonable regulatory environment, strong portfolio of diversified regulated businesses and strong financial profile.
…
CUI continues to generate significant free cash flow deficits as a result of the ongoing large capital expenditure program (estimated to be $5 billion to $6 billion in the 2012-2014 period). The Company has financed its capital expenditure with a combination of dividend management to its parent (Canadian Utilities Limited (CU), rated “A” by DBRS) and debt/preferred share issuances. As a result, CUI has been able to maintain its balance sheet leverage in line with its current rating category. DBRS expects the parent to continue to provide support to CUI through continued dividend management and equity injection in order to partially finance the Company’s future cash flow deficits.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums down 7bp, FixedResets gaining 1bp and DeemedRetractibles winning 12bp. Volatility was average. Volume continued to be pathetically low.

Looks like the bankers’ club will extend its hegemony over Canadian finance:

The so-called Maple Group, consisting of four big banks and eight other financial heavyweights such as pension plans, won the final regulatory approvals necessary to close the $3.6-billion purchase of the TMX Group Inc. Securities commissions in Alberta and British Columbia signed off Wednesday, dropping the last major hurdles.

Moody’s downgraded Italy:

Italy’s bond rating was cut and its negative outlook reiterated by Moody’s Investors Service as the euro area’s third-biggest economy faces higher funding costs and contagion risk from Greece and Spain.

The ratings company lowered Italy’s government bond rating by two steps to Baa2 from A3, citing a greater risk of a Greek exit from the euro and the Spanish banking system experiencing greater credit losses, according to a statement released in Frankfurt today. That makes Italy’s rating the same as those of Kazakhstan, Bulgaria and Brazil, according to data compiled by Bloomberg.

“Italy’s near-term economic outlook has deteriorated, as manifest in both weaker growth and higher unemployment, which creates risk of failure to meet fiscal consolidation targets,” Moody’s said. “Failure to meet fiscal targets in turn could weaken market confidence further, raising the risk of a sudden stop in market funding.”

It was another good, if rather uneven, day for the Canadian preferred share market, with PerpetualPremiums winning 12bp, FixedResets up 9bp and DeemedRetractibles gaining 1bp. It is most interesting to note that the Median YTW on PerpetualPremiums is negative, something that has happened on only 57 days since 1993-12-31, and happened for the first time on 2011-11-3. While there have been great changes to composition of this index due to the migration of DeemedRetractibles, it is also true that eight of the thirty-four DeemedRetractibles trading at a premium also have a negative YTW; additionally, at what we now know was the peak of the pre-crisis market 2007-3-30, the 53 issues in that day’s PerpetualPremium index had a median YTW of 4.24% … aided by the huge volume of issuance in the 4.5% range that still had nine-years to go before callable at par.

It seems to me, in fact, that the market is now dominated by those who select preferred shares according to Current Yield; and it may well be that they will get bloody noses from issuer redemptions.

Volatility was low. Volume was pathetic. You hear me? PATHETIC!