PrefBlog

Appalled by the huge outbreak of suicide bombers in Canadian office buildings, the wise folks in charge of Commerce Court in Toronto judiciously decided a few years ago to institute a visa policy – just like the big shots in New York! If you want to enter the building a tenant has to make an appointment for you with security so you can get a pass – see the February 24, 2010 post for more details. It’s working out as expected:

The four buildings and underground space that make up Commerce Court currently have a 27-per-cent vacancy rate, far above the overall rate in downtown Toronto, which hovers just above 5 per cent, according to commercial real estate company Avison Young.

There’s some cheery news from the breadbasket:

The drought in the U.S. Midwest that has pushed up corn prices 28 percent since June 15 may eventually rival a dry period in 1988 that cost agriculture $78 billion, a government meteorologist said.

This year’s weather pattern, which settled into the Great Plains and the Southwest last year and has spread into the Corn Belt, resembles those of a quarter century ago, Matthew Rosencrans, a drought specialist with the National Weather Service, said today at a forum in Washington. Sparse rainfall may drive crop costs up further, destroying livestock profits and raising food prices, said David Anderson, an agricultural economist at Texas A&M University.

Barclays was naughty during the crisis:

Barclays Plc (BARC) was fined 290 million pounds ($451.4 million), the largest penalties ever imposed by regulators in the U.S. and U.K., after admitting it submitted false London and euro interbank offered rates.
…
In February 2007, one of the Barclays traders wrote in an instant message to a trader at another bank:

“If you know how to keep a secret I’ll bring you in on it, we’re going to push the cash downwards on the imm day, if you breathe a word of this I’m not telling you anything else, I know my treasury’s firepower… which will push the cash downwards, please keep it to yourself otherwise it won’t work.”
…
“The senior U.S. dollar submitter emailed his supervisor, ‘following on from my conversation with you I will reluctantly, gradually and artificially get my libors in line with the rest of the contributors as requested,” the CFTC said. “I disagree with this approach as you are well aware. I will be contributing rates which are nowhere near the clearing rates for unsecured cash and therefore will not be posting honest prices.”

That’s a hell of a position for a guy to be in, particularly if he knows that at that moment there are NO JOBS anywhere else. But he must have been making enough at the time to make obtaining independent legal advice quite reasonable – maybe he did. Maybe that’s why there’s so much documentation available, with such explicit statements to his supervisor (among others). But look what happens when you’re honest:

He recognized, at times, that if he were to submit higher, accurate LIBORs, then the market or press would report that Barclays was experiencing difficulty in funding itself.

On September 3, 2007, Bloomberg featured Barclays in a news article entitled “Barclays Takes a Money-Market Beating.” The atiicle speculated that Barclays may have been having liquidity problems, because on two occasions Barclays had to borrow Sterling from the emergency lending facility of the Banle of England,2 and because of Barclays’ relatively high LIBOR submissions in Sterling, Euro and U.S. Dollar. The article posed the question, “So what the hell is happening at Barclays and its Barclays Capital securities unit that is prompting its peers to charge it premium interest in the money market?” Other newspapers, including the U.K. Financial Times and the Standard, ran similar articles about LIBOR and Barclays.

On the day of the Bloomberg article, Barclays’ U.S. Dollar LIB OR submissions in at least three tenors were the highest submissions of all panel banks, and were over six to nine basis points higher than the official BBA LIBOR fixing at those tenors. Barclays believed that its high LIBOR submissions caused its financial condition to be misperceived by the public and the media.

The negative media speculation caused significant concern within Barclays and was discussed among high levels of management within Barclays Bank. As a result, certain senior managers within Barclays Bank Treasury (“senior Barclays Treasury managers”) instructed the U.S. Dollar LIBOR submitters and their supervisor to lower Barclays’ LIBOR submissions, so that they were closer in range to the submitted rates by other banl(s but not so high as to attract
media attention.

It gets even more interesting:

One of the senior Barclays Treasury managers called a BBA representative and stated that he believed that LIBOR panel banks, including Barclays, were submitting rates that were too low because they were afraid to “stick their heads above the parapet,” and that “no one will get out of the pack, the pack sort of stays low.” He also relayed his belief that other panel banks relied too much on information from voice brokers to determine appropriate rates in the market, instead of making independent determinations for their own institutions. He encouraged the BBA to react and be heavy handed, suggesting the sanction that banles involved in such conduct be removed from the panel. In apparent response to Barclays’ call, the BBA sent an email to the Steering Committee of the BBA, which is comprised of certain panel bank members including Barclays, requesting views on whether rates were artificially low and how to address this.
…
The Barclays senior compliance officer subsequently had a conversation with the U.K. Financial Services Authority (“FSA”) in which LIBOR was discussed. The senior compliance officer stated in an internal email directed to several levels of Barclays’ senior management that he informed FSA of the following: that Barclays believed that LIBOR submissions by the panel banks were distorted due to market illiquidity; that Barclays had been consistently the highest or one of the two highest submitters but was concerned to go higher given the negative media reporting about Barclays; that Barclays had concerns about the trillions of dollars of derivatives fixed off LIBOR; and that there were “problematic actions” by some banks. However, the Barclays’ senior compliance officer did not inform the FSA that Barclays was making its LIBOR submissions based on considerations of negative market or press perceptions of Barclays or that its LIBOR submitters’ assessments of the appropriate rates for submission were being altered to adhere to the directive to be below “the parapet.” After this conversation, the same Barclays senior compliance officer did not follow up internally with the LIBOR submitters or their supervisor to confirm that Barclays was making its LIBOR submissions properly in accordance with the BBA’s definition and criteria for LIBOR.
…
Throughout the financial crisis period, Barclays’ employees, including the submitters, received routine surveillance telephone calls from staff members of the FSA, the Bank of England and the Federal Reserve Bank of New York. These conversations concerned the deepening global financial crisis and were to gauge the level of liquidity in the markets. These calls increased in frequency as the crisis worsened. In these calls, LIBOR was discussed as a measure of the severe illiquidity in the markets, and in that context, in some calls, Barclays’ employees expressed their opinion that Barclays and other panel banks were submitting rates that were too low given the market conditions. However, in those conversations, the Barclays’ employees did not explain that Barclays was not determining its LIBOR submissions in accordance with the BBA’s definition and criteria for LIBOR but instead was making its submissions in a manner to avoid negative market and media attention.

Helluva situation to be in – remember what happened to the boy who shouted that the Emporor had no clothes? He was instantly executed, his family was imprisoned for life and the village where he lived was burnt to the ground. Despite all the CFTC’s self-serving “Howevers”, it seems clear to me that the regulators were either grossly negligent or willfuly blind.

What should Barclays’ have done? Sitting here and looking at the situation in hindsight, with my own company and my own reputation not at risk in any way (in the same position as a regulator imposing a fine!), I’d guess the most honourable course would have been to have resigned from the BBA panel. And how would the markets have interpreted that? Are you sure? Would you be willing to bet the bank on it – literally?

It wasn’t much of a day for the Canadian preferred share market, with PerpetualPremiums gaining 3bp, FixedResets off 1bp and DeemedRetractibles up 1bp, but there was a surprisingly average amount of volatility considering the lack of excitement in the major indices. Volume was a little below average.

Where’s all those US dollars pulled out of Europe by MMFs gone? Canada and Japan:

The latest survey from Fitch Ratings found U.S. money market exposures to Canadian and Japanese banks in May increased to more than 22 per cent of the $638-billion (U.S.) of assets under management. A year ago, they represented just 13 per cent, and in 2008, less than 5 per cent. Canada’s Bank of Nova Scotia and National Australia Bank made Fitch’s top three list of banks that drink deepest from the money market pool. In 2010, France’s BNP Paribas and Credit Agricole topped the bill, while U.S. behemoths Citigroup and JPMorgan led the rankings in 2007.

It’s possible Europe will get a supranational bank regulator:

Bank supervision in the European Union would be shifted to a European supervisor and government would seek approval from other countries to run budget deficits, according to a broad outline of the plan prepared by European Council president Herman Van Rompuy.

His seven-page report, titled Towards a Genuine Economic and Monetary Union, presents a new design that could prevent another crisis for the euro zone, the embattled 17-member monetary union.

There’s more advocacy of inflation as panacea:

As Mr. Krugman says in his New York Times blog: “What to do? One answer is fiscal policy: let governments temporarily run big enough deficits to maintain more or less full employment, while the private sector repairs its balance sheets. The other answer is unconventional monetary policy to get around the problem of the zero lower bound: maybe unconventional asset purchases, but the obvious answer is to try to create expected inflation, so as to reduce real rates.”

Meanwhile, the Spanish barber is getting a very close shave:

Spain is poised for a downgrade to junk by Moody’s Investors Service, according to investors who sent the cost of default insurance for the nation’s biggest banks and companies close to record highs.

Credit-default swaps on Banco Santander SA (SAN), the country’s biggest bank, jumped 23 percent this quarter to 454 basis points, compared with an all-time high of 474 in November. Banco Bilbao Vizcaya Argentaria SA (BBVA) rose 26 percent to 477, approaching May’s record 516, while phone company Telefonica SA (TEF) surged 70 percent to a record 540 basis points.

Moody’s downgraded 28 Spanish banks yesterday including a two-step cut for Banco Santander and a three-level reduction for BBVA, a week after it lowered Spain’s rating to Baa3, on the cusp of junk. The country remains on review for another cut by New York-based Moody’s after it sought a 100 billion-euro ($125 billion) international bailout for its banks and on speculation losses from its real estate industry will worsen.

Prop traders continue to form hedge funds:

Former Royal Bank of Canada and Bank of America Corp. proprietary traders plan to start a mortgage hedge fund at New York-based Tandem Global Management LP next month, joining at least half-a-dozen money managers wagering that home-loan bonds will rise in value.

Stuart Lippman, 40, chief investment officer of the Tandem Mortgage Opportunity Fund, was formerly a managing director and senior portfolio manager in the non-agency mortgage credit business of Royal Bank of Canada’s proprietary trading group, according to a presentation dated May 25 that was obtained by Bloomberg News. David Liu, 43, chief strategist and portfolio manager at the new fund, managed portfolios in the global proprietary trading group at Bank of America.

Canadian banks didn’t get into much trouble during the Credit Crunch, but they’re working on it:

Bank of Montreal is laying the groundwork for more expansion in the United States, signalling to investors that it may buy more lenders south of the border and build additional branches to feed its massive North American growth spurt.
…
Much as TD has, BMO turned to the U.S. in search of growth as competition for profits in the Canadian market continues to grind away at margins for the country’s biggest lenders.

BMO now has roughly 650 branches in the U.S. to go with about 900 locations in Canada. It has more locations in Milwaukee than in Montreal, and more branches in Chicago than Toronto.

Soon Canada will have the same bank-assets-to-GDP ratio that Iceland had!

I understand a city is building a ferris wheel on its waterfront. What kind of dumb-ass mayor would build a ferris wheel on the waterfront?

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 4bp, FixedResets up 1bp and DeemedRetractibles off 10bp. Volatility was negligible. Volume was average.

Sorry this is so late, folks!

How about those inflation numbers, eh?:

Canada’s inflation rate tumbled to its lowest level in almost two years last month, falling to 1.2 per cent as Canadians paid less for gasoline, video equipment and some types of clothing, while price gains in many other consumer goods moderated.
…
May also saw prices fall outright on a month-to-month basis, meaning the basket of about 175 goods and services that Statistics Canada surveys cost 0.1 per cent less overall in May than it had in April.

Bank of Canada governor Mark Carney said this week he expected prices to dip below his two per cent target in the short term, given the recent drop in world oil prices, but that the underlying core rate – which excludes volatile items such as energy – would hover near the target. He was right on both counts, as core slipped to 1.8 per cent from 2.1 per cent in April.

Spain may join the rest of Europe in discarding 500 years of bankruptcy law:

Spanish policy makers are considering forcing investors who hold equity and junior debt in banks to absorb losses in a restructuring, according to a person with knowledge of the plan.

Such burden sharing is among conditions being negotiated with the European Union in a 100 billion-euro ($126 billion) rescue for Spain’s financial industry, said the person, who asked not to be named as the conversations are private. Depositors who bought subordinated instruments such as preferred stock may be partially shielded from losses through a compensation plan being considered, the person said.

I think Credit Rating Agency bashing may become an Olympic sport!:

Moody’s Investors Service suffered a downgrade of its own as markets responded to the company’s rating cuts of 15 of the world’s largest banks by bidding up the value of their stocks and bonds.
…
“The ratings agencies themselves are looking for a raison d’etre” as regulations in the U.S. and Europe try to reduce investors’ dependence on the credit assessments, David Zervos, chief market strategist at Jefferies & Co., said in an interview on Bloomberg Television’s “Market Makers.” “They like to be noisy, and this is a way to be noisy. I don’t think the effects are big in the end.”
…
“We view the Moody’s downgrade as another overhyped story of 2012,” David Trone, analyst at JMP Securities LLC, wrote to his clients. “The corporate market thinks for itself and credit rating agencies are often lagging indicators.”

I saw a hummingbird moth in my back yard this evening, nectaring on my milkweed. I hadn’t even known there was such a thing!

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It was a mildly positive day for the Canadian preferred share market, with PerpetualPremiums up 3bp and both FixedResets and DeemedRetractibles gaining 9bp. There was a surprising amount of volatility for such a quiet day, with no clear trend readily identifiable. Volume was extremely low.

OSFI has released new mortgage paperwork creation rules:

Consequently, FRFIs should maintain complete documentation of the information that led to a mortgage approval. This should generally include:
• A description of the purpose of the loan (e.g., purchase, refinancing, renovation, debt consolidation);
• Employment status and verification of income (see Principle 3);
• Debt service ratio calculations, including verification documentation for key inputs (e.g., heating, taxes, and other debt obligations);
• LTV ratio, property valuation and appraisal documentation (see Principle 4);
• Credit bureau reports and any other credit enquiries;
• Documentation verifying the source of the down payment;
Purchase and sale agreements and other collateral supporting documents;
• An explanation of any mitigating criteria or other elements (e.g., “soft” information) for higher credit risk factors;
• A clearly stated rationale for the decision (including exceptions); and
• A record from the mortgage insurer validating approval to insure the mortgage where there may be an exception to the mortgage insurer’s underwriting policies.
The above documentation should be obtained at the origination of the mortgage and for any subsequent refinancing of the mortgage. FRFIs should update the borrower analysis periodically (not necessarily at renewal) in order to effectively evaluate their credit risk. In particular, FRFIs should review some of the aforementioned factors if the borrower’s condition or property risk changes materially.

Lap-dog Carney breathlessly reports that his boss is doing a great job:

The Canadian government’s latest move to tame the mortgage market will support the “long-term stability” of the housing market and guard against the economic risks posed by excessive borrowing, Bank of Canada Governor Mark Carney said Thursday.

Speaking in Halifax just hours after Finance Minister Jim Flaherty announced a series of changes that come into effect next month, Mr. Carney reiterated his concerns about the effects that his ultra-low interest rates have had on the behaviour of both borrowers and lenders, warning the economy cannot “depend indefinitely” on debt-fuelled spending, especially as incomes stagnate.

In a free market economy, the mortgage market would be cooled off by cutting back on government guarantees of mortgage debt (CMHC guarantees have exploded over the past five years) and increasing the risk-weight assessed on the banks for mortgages (which is justifiable as the proportion of bank assets represented by mortgages is way out of whack with historical norms). But it’s more fun to micro-manage. Gets more tough-sounding headlines, too.

Fortunately, there’s some movement on the first point:

The growth of CMHC had understandably worried Canadians who were paying attention. Here was a beast that ranks among the biggest financial institutions in Canada, larger than some of our smaller banks, expanding at an astounding pace with seemingly minimal oversight from regulators and the politicians in charge.

Year by year, it would blow past its sales targets, with the amount of insurance it was writing ballooning. The insurance book at CMHC grew from $345-billion at the end of the 2007 fiscal year to $567-billion in 2011. That’s a compound annual growth rate of a little more than 13 per cent.
…
As the insurance book grew, the government steadily raised the cap on what was allowed, in what looked suspiciously like a rubber-stamp process.
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Earlier this year, Mr. Flaherty put OSFI in an official oversight role. He signaled in an interview with The Globe and Mail that the board was likely to be upgraded to something more appropriate for a financial institution of this scale. He refused to raise the cap on insurance in force beyond the current $600-billion.

Now, the move to end insurance for high-ratio mortgages on homes valued at more than $1-million and to further curtail other loans that require insurance by demanding faster paydowns will enable the CMHC to further curtail its growth.

CMHC is actually planning to allow its book to shrink in the current year, to about $557-billion, as mortgages are paid off faster (about $60-billion a year) than new insurance is originated.

But Spend-Every-Penny just can’t resist central planning:

Jim Flaherty is singling out Toronto’s overheated condo market as one of the main reasons Ottawa is tightening the rules for insured mortgages.

Hard on the heels of the BoC paper lauding repo central counterparties comes a BoC Working Paper by Hajime Tomura titled On the Existence and Fragility of Repo Markets:

This paper presents a model of an over-the-counter bond market in which bond dealers and cash investors arrange repurchase agreements (repos) endogenously. If cash investors buy bonds to store their cash, then they suffer an endogenous bond-liquidation cost because they must sell their bonds before the scheduled times of their cash payments. This cost provides incentive for both dealers and cash investors to arrange repos with endogenous margins. As part of multiple equilibria, the bond-liquidation cost also gives rise to another equilibrium in which cash investors stop transacting with dealers all at once. Credit market interventions block this equilibrium.
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In this paper, I take as given the OTC bond market structure. Thus, a question remains regarding the optimal market design, such as whether to introduce a centralized bond market or a set-up to ensure anonymity of cash investors. Also, the empirical implications of the model are yet to be tested. One of the testable implications is that a repo margin is increasing in the difference between the interdealer bond price and the repurchase bond price. Another implication is that spot transactions in a brokered bond market increase if a repo market collapses. Addressing these issues are left for future research.

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Buckyballs are undoubtedly the coolest organic molecule extant. They might even be useful!

Experimental solar cells made with two types of pure carbon absorb infrared sunlight that traditional silicon panels ignore and may eventually be used to improve efficiency, according to researchers at the Massachusetts Institute of Technology.

MIT scientists used nanotubes and spherical molecules known as buckyballs to make the first all-carbon photovoltaic cell, the Cambridge, Massachusetts-based university said today in an e-mailed statement.

Infrared light makes up about 40 percent of the solar radiation that hits the earth. Solar cells that absorb that energy may produce more electricity than conventional panels that don’t, according to Michael Strano, a professor of chemical engineering at MIT.

If we here in Ontario had any brains, we would have been pouring money into solar energy research rather than trying to create an indigenous industry with not-ready-for-prime-time technology so that we could compete with the Chinese on the basis of our lower labour costs. Unfortunately, we don’t have any brains.

Moody’s cut Royal Bank of Canada:

Moody’s Investors Service today repositioned the ratings of 15 banks and securities firms with global capital markets operations. The long-term senior debt ratings of 4 of these firms were downgraded by 1 notch, the ratings of 10 firms were downgraded by 2 notches and 1 firm was downgraded by 3 notches. In addition, for four firms, the short-term ratings of their operating companies were downgraded to Prime-2. All four of those firms also now have holding company short-term ratings at Prime-2. The holding company short-term ratings of another two firms were downgraded to Prime-2 as well.

“All of the banks affected by today’s actions have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities”, says Moody’s Global Banking Managing Director Greg Bauer. “However, they also engage in other, often market leading business activities that are central to Moody’s assessment of their credit profiles. These activities can provide important ‘shock absorbers’ that mitigate the potential volatility of capital markets operations, but they also present unique risks and challenges.” The specific credit drivers for each affected firm are summarized below.
…
Royal Bank of Canada

Long-term deposit rating to Aa3 from Aa1, outlook stable; Short-term P-1 affirmed

… but it was Credit Suisse that hogged the headlines:

Credit Suisse Group AG’s credit rating was cut three levels by Moody’s Investors Service, Morgan Stanley was reduced two levels and 13 other banks were downgraded in moves that may shake up competition among Wall Street’s biggest firms.

Credit Suisse, the second-largest Swiss bank, received the maximum reduction that Moody’s said in February it may make during a review of global banks with capital markets operations. Morgan Stanley and UBS AG (UBSN), the other firms singled out for such a steep cut, were lowered two steps instead.

Capital Power L.P. is the operating subsidiary of CPX, proud issuer of CPX.PR.A:

The Company’s power generation operations and assets are owned by Capital Power L.P. (CPLP), a subsidiary of the Company. As at December 31, 2011, the Company directly and indirectly held approximately 21.750 million general partnership units and 36.924 million common limited partnership units of CPLP which represented approximately 61% of CPLP’s total partnership units. EPCOR (in this MD&A, EPCOR refers to EPCOR Utilities Inc. collectively with its subsidiaries) held 38.216 million exchangeable common limited partnership units of CPLP representing approximately 39% of CPLP. CPLP’s exchangeable common limited partnership units are exchangeable for common shares of Capital Power Corporation on a one-for-one basis. The general partner of CPLP is wholly owned by Capital Power Corporation and EPCOR’s representation on the Board of Directors does not represent a controlling vote. Accordingly, Capital Power Corporation controls CPLP and the operations of CPLP have been
consolidated for financial statement purposes.

CPLP has been confirmed by DBRS at BBB:

DBRS has today confirmed the Senior Unsecured Debt rating of Capital Power L.P. (CPLP or the Partnership) at BBB with a Stable trend. The confirmation reflects (1) the Partnership’s balanced portfolio of contracted and merchant generation with reasonable fuel-hedging positions, (2) high plant availability and (3) increased geographical and fuel diversification.
…
…credit metrics are expected to remain reasonable for the current rating category, barring material debt-funded acquisitions in the foreseeable future. However, DBRS is increasingly concerned about the continued challenging merchant power market environment that could materially add to the Partnership’s existing challenges in the medium term.

Thomson Reuters Corporation, proud issuer of TRI.PR.B, has been confirmed at Pfd-2(low) by DBRS:

Thomson Reuters undertook 39 acquisitions for a total of $1.3 billion in 2011, with approximately two-thirds of investment occurring outside the U.S. Thomson Reuters also repurchased $326 million worth of shares during the period, its first share repurchase since 2008. As such, net debt increased moderately; however, net-debt to EBITDA decreased to 1.83x at the end of 2011, from 1.91x a year earlier.

Going forward, DBRS believes Thomson Reuters’ main challenge will be to achieve revenue and margin growth through the selection and integration of strategic acquisitions. The Company’s ability to grow profitably through this strategy remains to be proven.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums winning 11bp, FixedResets up 5bp and DeemedRetractibles off 4bp. Volatility was almost non-extistent. Volume was pathetic.