PrefBlog

The Central Banks are singing Pump up the volume!

Three of the world’s five major central banks moved to lower borrowing costs Thursday, underlining both the fragile state of the global economic recovery and policy makers’ resolve to block a slide back into recession.

In separate decisions that were announced within the span of less than an hour, the People’s Bank of China and the European Central bank cut their benchmark interest rates, and the Bank of England pumped up its bond buying program.

It didn’t do the European market much good:

The euro sank to a one-month low as Spanish and Italian bonds plunged after the European Central Bank disappointed investors anticipating a more aggressive effort to fight the debt crisis. U.S. equities fell as investors awaited tomorrow’s jobs report.

The euro tumbled 1.1 percent to $1.2388 at 3:01 p.m. in New York and the Dollar Index surged the most this year.

This might be relevant to good news from Ireland:

Ireland returned to short-term debt markets on Thursday for the first time since before its bailout in November, 2010, paying less for three-month paper than Spain, which has avoided going to international lenders for a full sovereign rescue .

In a tentative first step following a near two-year hiatus, Ireland sold €500-million ($628-million) of Treasury bills at an average yield of 1.8 per cent and said it hoped to return to long-term debt markets with a syndicated issue later this year or early next at a maturity of two years or more.
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Yields on benchmark Irish 2020 bonds have fallen by almost 100 basis points since the summit and were over 50 basis points lower than their Spanish counterparts at 6.25 per cent after the auction, little changed on the day. (A basis point is 1/100th of a percentage point.)

Spain, whose 10-year yields rose sharply on Thursday, sold three-month debt at an average yield of 2.36 per cent last week while Italy had to pay 2.96 per cent to auction six-month paper a day later.

Well, it’s 11:30pm and TMXDataLinx still hasn’t made Last Quotes for July 5 available, so I’m giving up. I’ll add the tables … sometime.

Update, 2012-7-6: Here are the tables, finally:

It’s a black day for Canadian capital markets – the regulators have approved the bank-controlled monopoly on infrastructure:

Canada’s Competition Bureau said it won’t challenge the proposed C$3.73 billion ($3.68 billion) bid for the owner of the Toronto Stock Exchange by a group of Canadian financial institutions.

The bureau “does not, at this time, intend” to challenge the acquisition of TMX Group Inc (X), the agency said in a statement posted on its website.

The statement says:

Today, the OSC issued final recognition orders regarding the proposed transactions, following its own review. While the Bureau has an independent mandate to review mergers, the Bureau provided input and advice to the OSC for its consideration relating to the potential impact on competition that could result from the proposed transactions.

While the Bureau conducted its own review of the proposed transactions, the measures contained in the OSC’s final recognition orders materially change the regulatory environment sufficient to substantially mitigate the Bureau’s competition concerns. Accordingly, the Bureau is today issuing a No Action Letter (NAL) to Maple Group in respect to the proposed transactions.”

The Regulatory approval is conditional on there being more jobs for regulators:

Regarding complexity, the Commission has imposed terms and conditions that it feels are necessary in order for it to determine that it is in the public interest to make the orders. We acknowledge that the Commission will require an increase in capacity and capability to effectively manage the increased demands of oversight and the Commission undertakes to do so. To the extent that this increase in capacity and capability results in increased costs of oversight, our expectation is that these costs will be borne by Maple and its regulated affiliates, through the imposition of participation fees and activity fees, rather than by market participants more generally. Our intended enhanced oversight program is described in more detail below.
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Due to Maple’s proposal to own the key market infrastructure entities in Canada, which could concentrate risk in Maple, and the significant amount of conflicts that could result, we will be instituting an enhanced oversight program for the Maple Group. This program will include:

• Regular communication and interaction with board and management
• Regular communication and interaction with relevant users committees
• Periodic reporting of activities and development in businesses
• Periodic oversight reviews
• Prior approval of certain aspects of operations
• Access to all information (both regulated and affiliated businesses )
• External verification of certain information/processes/performance standards
• Review of access to CDS by unaffiliated marketplaces and dealers
• Periodic internal review of certain aspects of businesses as specified by the Commission
• Recovery and resolution plans
• Change in control approvals

In addition, both the Exchange Recognition Order and CDS Recognition Order specify additional reporting that must
be provided to the Commission. In relation to the additional reporting that must be provided under the Exchange
Recognition Order, we also note that this is in addition to the information filing requirements currently imposed on
recognized exchanges under National Instrument 21-101 Marketplace Operation.

But wait! Could it be possible that lalaLand comes to the rescue? Not for any good reason of course – simply because they don’t want Ontario to get more of the lolly than they do:

The British Columbia Securities Commission, late in the game, unveiled a list of demands that the so-called Maple Group of banks and investors is not happy with, sources said. The parties have been talking for weeks, but have yet to reach a deal.

B.C.’s commission regulates the TSX Venture exchange, home to thousands of small capitalization companies. The B.C. regulator wants at least a quarter of the members of the Maple board to have experience running small companies, and is also demanding that Maple commit to keeping senior jobs in Vancouver.
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Also outstanding is approval from Alberta’s securities commission, which also regulates the Venture exchange.

Alberta’s decision is likely to hinge on the outcome of the B.C. talks.

Save us, westerners, save us!

UK politicians are making desperate efforts to whitewash their regulators:

Robert Diamond, who quit yesterday as chief executive officer of Barclays Plc (BARC), sought to blame other banks for misleading markets about their ability to borrow, and regulators for turning a blind eye.

Ordered to testify to British lawmakers after Barclays agreed to pay a record 290-million pound ($455 million) fine for rigging the London interbank offered rate, Diamond said he was “disappointed” regulators failed to act on repeated warnings from Barclays that competitors had lowballed their submissions. Legislators asked him why he took so long to uncover his own firm’s attempts to manipulate interest rates.

“This isn’t just Barclays,” Diamond, 60, told lawmakers at a three-hour hearing of Parliament’s Treasury Select Committee. “Throughout 2007 and 2008, no institution of the 16 banks reporting three-month dollar Libor was at the higher end more consistently than Barclays. Barclays was getting questions about why it was always high and we were saying, ‘We are high because we were reporting at where we were borrowing money.’”

Tucker has asked to defend himself against charges of sins of commission:

Bank of England Deputy Governor Paul Tucker signaled he wants to defend himself and give his version of what happened on a 2008 phone call with former Barclays Plc (BARC) chief Robert Diamond as the Libor scandal escalates.

Less than 90 minutes before Diamond’s appearance today at a hearing of U.K. Parliament’s Treasury Committee over attempted manipulation of the Libor rate, the central bank said Tucker wants to testify “as soon as possible.” He is “keen” to “clarify the position with regard to the events involving the Bank of England, including the telephone conversation with Bob Diamond on Oct. 29, 2008,” according to an e-mailed statement.

Tucker was drawn into the scandal after Barclays released a note of the 2008 call purporting to show that he hinted the bank could cut its Libor rates.

RIM is losing pricing power:

Research In Motion Ltd. (RIM), the BlackBerry maker whose stock has dropped 95 percent since 2008, is under pressure from mobile phone companies to reduce carrier fees that generate $4.09 billion in annual revenue.

RIM said it faces demands to cut the fees paid by customers such as AT&T Inc. after posting its first loss in a decade last week. The fees account for more than a third of revenue at RIM, which is racing to introduce BlackBerry 10 phones and engineer a turnaround.

How’s your pension?

An analysis by pension consulting firm Mercer shows the funded status, or solvency position, of pension plans declined sharply in the second quarter of 2012. Mercer’s revamped pension health index stood at 77 per cent on June 30, down five percentage points from 82 per cent on March 31.

The index, which tracks the performance of a hypothetical model pension plan with typical investments, was at 76 per cent on Dec. 31.
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Also Wednesday, an analysis by pension consulting firm Towers Watson showed its pension index fell to 56.3 per cent at June 30 from 57.1 per cent as of Dec. 31, a drop of 0.8 percentage points in the six-month period.

The index also tracks the performance of a hypothetical pension plan that invests using typical asset allocations with 60 per cent invested in stock and 40 per cent in bonds.

The US is getting a lesson on the relationship between paying the piper and calling the tune:

The Church of the Nativity in the Palestinian town of Bethlehem could use a few repairs, but is it in peril? The United Nations Educational, Scientific and Cultural Organization says so, having declared the church an endangered World Heritage site last week.

Palestinians made hay arguing that Israel’s occupation of the West Bank threatened the humble church, said to mark the birthplace of Christ. A UN expert committee disagreed, concluding it faced no danger. The U.S. objected to the “endangered” designation, claiming it was a means to attack Israel, but lost the 13-6 vote.

The episode offers a glimpse of the new Unesco, where the U.S. has diminished clout after having announced its intention to stop funding the organization following Palestine’s admission as a member last October. The U.S. purpose presumably was to punish Unesco. Instead, other countries — notably China and Qatar — have stepped in to fill the 22 percent hole in Unesco’s $325 million annual budget.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums and FixedResets both gaining 5bp, while DeemedRetractibles lost 11bp. Volatility was muted. Volume was very low.

Nada Mora What Determines Creditor Recovery Rates? should be an Interesting External Paper – but I have no time!

There are interesting mortgage bond shennanigans in Europe:

Spanish and Portuguese banks are leading European lenders in buying back their own mortgage- backed securities at distressed prices to bolster capital and stockpile eligible collateral for European Central Bank loans.

Banco Bilbao Vizcaya Argentaria SA (BBVA), Banco Comercial Portugues SA (BCP) and other lenders this year repurchased 6.6 billion euros ($8.4 billion) of asset-backed bonds they issued, more than double the level for all of 2011, according to data compiled by Deutsche Bank AG. Banks buy the debt, packages of loans in which they kept subordinated portions, for less than face value, and book a capital gain similar to the discount.
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The deals are poised to accelerate after the ECB last month reduced the minimum ratings it will accept for mortgage securities offered as collateral for cheap loans, adding incentive to lenders to buy back debt and pledge it with the Frankfurt-based institution.
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Investors demand 1025 basis points, or 10.25 percentage points, more than interbank rates to hold a senior five-year bond backed by Portuguese home loans, according to JPMorgan Chase & Co. data. That exceeds the 10 percent level considered distressed. The spread for Spanish residential mortgages is 615 basis points compared with 150 for Dutch mortgage backed securities and 132 for British transactions.

There’s an interesting paper on game theory released by the Boston Fed by Michalis Drouvelis and Julian C. Jamison titled Selecting Public Goods Institutions: Who Likes to Punish and Reward?:

The authors extend the standard public goods game in a variety of ways, in particular by allowing for endogenous preference over institutions and by studying the relationship between individual types, their preferences, and later behavior within the various institutional environments. They collect individual data on a variety of demographic factors, in addition to measuring levels of risk aversion and ambiguity aversion (over both gains and losses). The authors then elicit preferences in an incentive-compatible manner over voluntary contribution mechanisms with and without reward and punishment options. Finally, they randomly assign subjects to one of the four institutions and observe repeated play. They find that payoffs are significantly greater when punishment is allowed but that only a small minority of participants prefers such an environment. There is at most a weak link between individual characteristics and elicited preferences over environments. On the other hand, institutional preferences, as well as individual characteristics, are more strongly predictive of behavior in the public goods game. For instance, loss averse individuals preemptively reward more often when that option is available. This result suggests that when studying social interactions, especially if people can choose whether to participate in a sanctions-and-rewards mechanism, it is important to consider individual attitudes toward risk and uncertainty.
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Our main findings can be summarized as follows. First, our four preference measures are significantly correlated with each other. Second, subjects’ individual characteristics help explain their preferences over risk, loss, and ambiguity. Third, which institutions individuals prefer are, surprisingly, not influenced by preference measures, although other individual traits do have some explanatory power. Fourth, institutions with punishment options are best able to maintain cooperative norms. Fifth, relative to institutions without sanctioning mechanisms, institutions that permit sanctions incur enforcement costs that lower overall welfare in the short run but increase overall efficiency in the long run. Sixth, positive and negative reciprocity are significantly correlated with our preference measures. Seventh, subjects’ individual characteristics account for the way sanctions and rewards are used.
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Relative to those subjects who declare no political party affiliation, we observe that those who are affiliated with the Conservative party are more ambiguity averse, whereas those who are affiliated with a party other than the four major ones in the United Kingdom (that is, Conservative, Labour, Liberal Democrats, and Green) are found to be less ambiguity averse.

The banks’ “Living Will” joke has reached the punchline:

The Federal Deposit Insurance Corp. posted the public portions of so-called living wills on its website today as required by the 2010 Dodd-Frank Act. The documents outline more detailed proposals submitted privately to regulators describing how the companies can be dismantled if they fail.
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The aim of the living wills is to give regulators a plan for shutting down complex financial firms without taxpayer bailouts or the turmoil that followed the 2008 collapse of Lehman Brothers Holdings Inc.

Ha-ha! They’ll be lucky! If I remember correctly, the politicians always had the choice of whether or not to bail out the banks, and voted in favour because they thought that the alternative was worse. But this sounds tough, anyway. And look at the revolutionary statements in the Bank of America plan:

Bank of America’s Operating Principles

• Be customer-driven
• Manage risk well
• Continue to build a fortress balance sheet
• Deliver for our shareholders
• Manage efficiency well
• Be the best place to work

Pretty radical stuff!

The three top honchos at Barclays have all quit:

Robert Diamond stepped down today as chief executive officer of Britain’s second-biggest bank and Jerry Del Missier quit as chief operating officer, London-based Barclays said in a statement. Chairman Marcus Agius, 65, will quit once he has found a replacement for Diamond, who has worked at the bank for the past 16 years and oversaw its investment banking expansion.

The three are leaving after regulators fined the bank a record 290 million pounds ($455 million) for attempting to rig the London interbank offered rate for profit. With Diamond due to appear before lawmakers tomorrow to answer their questions, Barclays released a note of a 2008 call purporting to show that Paul Tucker, the central bank’s then markets director, hinted the firm could cut its Libor rates.

“Tucker stated that the levels of calls he was receiving from Whitehall were ‘senior’ and that while he was certain we did not need advice, that it did not always need to be the case that we appeared as high as we have recently,” Diamond said in an Oct. 30, 2008 e-mail to then CEO John Varley and Del Missier.

Diamond, 60, didn’t believe he had received any instruction or that he gave any order to Del Missier to lower the bank’s submissions, Barclays said in evidence to lawmakers today. Del Missier, 50, concluded that the Bank of England had instructed the firm not to keep Libor so high and mistakenly instructed employees to lower their submissions, Barclays said.

Whatever. Everybody’s ducking blame. As I stated on June 27, it seems quite clear to me that the regulators were either grossly negligent or willfuly blind. I am pleased to note that I am not the only one who thinks the regulators have some ‘splainin’ to do – in fact, my views are somewhat mild:

If [deputy head of the BoE] Mr. [Paul] Tucker said Barclays’ Libor submissions didn’t need to appear so high, what could he have meant other than that the bank should lower them? And why did Mr. Tucker mention Whitehall if not to legitimize such misstatements? Perhaps there are other explanations, but Mr. Tucker will now have to respond.

Moreover, the Diamond memo potentially contradicts the FSA account of the exchange. The regulator states that “no instruction for Barclays to lower its Libor submissions was given during this telephone conversation.” Well, there’s explicit instruction and implicit instruction. The BoE won’t like being dragged into this. But Mr. Tucker needs to provide some clarity – fast.

Manulife redeemed some Tier 1 Capital:

Manulife Financial Capital Trust (the “Trust”), a subsidiary of Manulife Financial Corporation, today announced that on June 30, 2012, it completed the redemption of all of its outstanding $60,000,000 principal amount of Manulife Financial Capital Securities – Series A and all of its outstanding $940,000,000 principal amount of Manulife Financial Capital Securities – Series B.

These notes had what are now rather generous termsand redemption is no surprise:

On June 30, 2012, the Company will have the right to call the total of $1,000 million of capital notes issued by Manulife Financial Capital Trust, qualifying as Innovative Tier 1 capital under OSFI rules. The amount represents two tranches: $940 million of 6.700% Manulife Financial Capital Trust Securities (“MaCS”) Series A Units and $60 million of 7.000% MaCS Series B Units. Depending on, among other things, capital adequacy assessments and regulatory approval of redemption, management will decide whether or not to exercise the right to call these instruments.
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On December 10, 2001, Manulife Financial Capital Trust (the “Trust”), a wholly owned open-end trust, issued 60,000 Manulife Financial Capital Securities (“MaCS”) – Series A and 940,000 MaCS – Series B.

Each MaCS – Series A entitles the holder to receive fixed cash distributions payable semi-annually in the amount of $35.00 representing an annual yield of 7%. Each MaCS – Series B entitles the holder to receive fixed cash distributions payable semi-annually in the amount of $33.50 representing an annual yield of 6.70%.

On any distribution date prior to June 30, 2012, the Trust may redeem, with regulatory approval, any outstanding MaCS series, in whole or in part, at the greater of par or the present value of the debt based on the yield on uncallable Government of Canada bonds plus 0.40% in the case of MaCS – Series A and 0.32% in the case of MaCS – Series B. On or after June 30, 2012, the Trust may redeem any outstanding MaCS series at par, together with any unpaid interest.

Each MaCS is exchangeable at the option of the holder into 40 newly issued MLI Class A Shares Series 2, in the case of MaCS – Series A, or 40 newly issued MLI Class A Shares Series 4, in the case of MaCS – Series B, under certain circumstances.

Under certain circumstances, each MaCS will be automatically exchanged, without the consent of the holders, for 40 MLI Class A Shares Series 3, in the case of MaCS – Series A, and 40 MLI Class A Shares Series 5, in the case of MaCS – Series B. The MaCS may be redeemed with regulatory approval in whole, upon the occurrence of certain tax or regulatory capital changes, at the option of the Trust.

On or after June 30, 2051, the MLI Class A Shares Series 2 and Series 3 will be convertible at the option of the holder into MFC common shares. On or after December 31, 2012, the MLI Class A Shares Series 4 and Series 5 will be convertible at the option of the holder into MFC common shares. In each case, the number of MFC common shares is determined by the face amount of the MLI Class A Shares divided by the greater of $1.00 and 95% of the then market price of MFC common shares.

The MaCS – Series A and MaCS – Series B constitute Tier 1 regulatory capital.

BRF.PR.A, proudly issued by Brookfield Renewable Power Preferred Equity Inc., is guaranteed by Brookfield Renewable Energy Partners L.P. Brookfield Renewable Energy Partners L.P.’s acquisition of dams in the US is expected by DBRS to be credit neutral:

DBRS expects that BREP will be able to provide its share of the permanent financing for the acquisition with non-recourse debt and equity capital and achieve a leverage ratio consistent with the Company’s existing capital structure and within the acceptable range of the current rating category. The deconsolidated metrics are expected to benefit from the incremental remitted or distributed cash flow from the assets, although the level of this cash flow would be subject to the regional hydrology and wholesale power market conditions.

It was a strong day for the Canadian preferred share market, with PerpetualPremiums gaining 10bp, FixedResets up 21bp and DeemedRetractibles winning 53bp. The lengthy Performance Highlights table was, unsurprisingly, dominated by Insurer-issues DeemedRetractibles. Volume was a little below average.

The European crisis has come to a satisfactory conclusion: central bureaucrats will gain power:

The European Union’s push to unify bank oversight moved to the euro area after two days of talks in Brussels, putting the European Central Bank at the center of Spain’s efforts to extract its government from its financial- industry rescue.

Euro-area leaders asked for proposals this year to unify banking supervision and soup up the ECB’s powers. They referred to a clause in the EU treaty that allows them to give the ECB prudential oversight of banks and other non-insurance financial companies.

The move paves the way for the European Commission, the EU’s regulatory arm, to augment its proposals on deposit insurance, capital requirements and how to handle failing banks.

Speaking of regulatory mission-creep:

Last week, the Canadian Securities Administrators published for public comment a consultation paper on the potential regulation of proxy advisory firms. The move follows a similar path taken by the U.S. Securities and Exchange Commission, which has spent two years considering ways to regulate proxy advisers.
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But as shareholder activism has grown, and as mutual funds have been required to step up disclosure of how they vote on corporate matters, the institutional community has increasingly leaned on proxy advisers to help them make their thousands of voting decisions.

That’s not quite right. It is the regulatory requirement to have a solid basis for the vote and to maintain records of that basis that has caused the growth of proxy advisory companies. Very nice and proper in theory, but a PM with – say – 50 stocks can’t do it and won’t do it. There’s only maybe one or two votes a year (tops) that have any meaning anyway. It’s a lot cheaper to hire a proxy advisory company and – presto! – box ticked.

It was a good day for the Canadian preferred share market, with PerpetualPremiums and DeemedRetractibles both up 16bp, while FixedResets gained 8bp. Lots of volatility heavily skewed towards SLF on the upside. Volume was below average.

Europe’s going to solve the crisis by subordinating privately held debt:

Italy today paid the most to sell 10-year debt since December, selling the notes to yield 6.19 percent. Spanish 10- year yields rose to 6.94 percent today. The focus should be on helping Spain’s banks and reducing Italian yields to around or slightly under 4 percent, Irish Finance Minister Michael Noonan said to reporters in Dublin today.
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“The EFSF or ESM could stand ready to intervene in the primary market to facilitate successful issuance of the covered bonds,” [Finnish Prime Minister Jyrki] Katainen said. “Italy and Spain have lots of state properties they could use in raising money. Selling covered bonds would send a strong message they stand behind their debt.”

Katainen said the proposal is based on Finland’s experience with the sale of covered bonds during its economic troubles in the early 1990s.

It’s odd … when the bank regulators want to boost bank capital requirements, they say it won’t matter since they’ll be able to borrow cheaper and sell equity at a higher multiple, since Modigliani-Miller says enterprise value is constant. This doesn’t seem to apply to sovereigns. Gee, I wonder why that is.

Greece may get bailed out of its bail-out:

An International Monetary Fund team will start negotiating possible changes to the conditions attached to a loan to Greece after a fact-finding mission travels to Athens early next week, a fund spokesman said.

The regulators have released an electronic trading press release

IIROC released a plethora of proposed new rules regarding electronic trading – a request for comments on rules:

The most significant impacts of the Proposed Amendments would be to:

• ensure that Participants and Access Persons adopt, document and maintain a system of risk management and supervisory controls, policies and procedures reasonably designed to manage the risks associated with electronic trading and access to marketplaces;
• ensure that Participants and Access Persons are effectively supervising trading activity and are accounting for the risks associated with electronic access to marketplaces in their supervisory and compliance monitoring procedures; and
• require an appropriate level of understanding, ongoing testing and appropriate monitoring of any automated order systems in use by a Participant, Access Person, or any client of the Participant.

Lots and lots of paperwork! Lots and lots of jobs for regulatory and compliance types! Lots and lots of opportunity to nail people with 20-20 hindsight when things go wrong! Yay!

… and a request for comments on guidance:

At a minimum, the post-order entry compliance procedures for clients who have been provided access to a marketplace should address the procedures for testing:
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orders that have been entered which may constitute “spoofing” contrary to Rule 2.2 of UMIR (the entry of an order or orders which are not intended to be executed for the purpose of determining the depth of the market, checking for the presence of an iceberg order, affecting an opening price or other similar purpose);

Strikes me that this will be very difficult to enforce.

It was another quiet mixed day for the Canadian preferred share market, with PerpetualPremiums off 5bp, FixedResets down 4bp and DeemedRetractibles gaining 3bp. Volatility was good. Volume was below average.