PrefBlog

Revolving-door regulation is at least getting a little scrutiny:

A Senate panel asked the Securities and Exchange Commission’s inspector general to review the agency’s “revolving door,” which shuttles many SEC staffers into jobs with the companies they once regulated.

In a letter sent Monday, Sen. Charles Grassley (R., Iowa), the ranking minority member on the Senate Finance Committee, asked David Kotz, the inspector general, to review the recent departure of a top official in the SEC’s Division of Trading and Markets who took a job with a prominent high-frequency trading firm.

Nice to see that the HFT guys have figured out how the game is played, anyway!

BP cancelled its dividend:

BP Plc canceled three quarterly payments of its $10 billion-a-year dividend after President Barack Obama demanded it put up cash for victims of the Gulf of Mexico spill. BP said it will reduce expenditures and sell more assets than planned to free up cash.
…
Svanberg and Chief Executive Officer Tony Hayward agreed to set aside $20 billion over several years to compensate victims of the spill after Obama in an Oval Office address yesterday called for the creation of a fund.

… and its perceived credit risk is rising …

Credit investors are pricing in a 36 percent chance BP Plc will default within five years as it tangles with the Obama administration over cleanup costs and claims for the biggest oil spill in U.S. history.

The default risk implied by credit-default swaps is up from 7 percent a month ago, according to CMA DataVision prices using a standard model used to value the derivatives. BP swaps climbed 70.5 basis points to 576.5. BP debt due next year traded today at distressed levels, with investors demanding as much as 1,251 basis points in yield more than Treasuries.

… but PIMCO thinks it’s an overreaction:

Bill Gross, co-chief investment officer at Pacific Investment Management Co., recently bought $100 million of shorter maturity BP Plc bonds and some Anadarko Petroleum Corp. debt, spokesman Mark Porterfield wrote today in an e-mail.

BP’s 5.25 percent notes due in 2013 rose 2.5 cents to 93.5 cents on the dollar as of 4:20 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. BP is based in London.

Congratulations to Sarah Hymas on the launch of her debut poetry book, Host.

PerpetualDiscounts managed to squeak out a gain of 2bp on the day to keep the streak alive, while FixedResets roared ahead, up 21bp. Volume as moderate.

PerpetualDiscounts now yield 6.03%, equivalent to 8.44% interest at the standard equivalency factor of 1.4x. Long corporates now yield about 5.75% (maybe a little under?) so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 270bp, a significant tightening from the 285bp reported on June 9.

Continuing trouble in Europe:

Bank bond sales slowed in May to the lowest since Lehman Brothers Holdings Inc.’s failure in 2008 as the extra yield buyers demand to hold the securities over government debt soared to the highest this year. Firms are wary of lending to each other, depositing record funds with the European Central Bank.
…
The central bank is preventing a crisis by providing banks with unprecedented funding. In substituting long-term money with shorter-maturity ECB cash, policymakers are making it harder to wean banks off life support as well as the short-term financing that regulators blame for the credit crisis.
…
Risk aversion is helping to spur sales of covered bonds, securities that are guaranteed by the issuer and backed by mortgages and other loans, reducing risk for investors and interest payments for the issuer. Financial firms have sold 11.5 billion euros ($13.9 billion) of the bonds this month, three times the total for May, according to van Steenis. Frankfurt- based Commerzbank raised 1 billion euros in a June 9 offering.

BP is looking greasy:

BP Plc’s credit rating was cut six levels to two above “junk” by Fitch Ratings on concern over the potential cost of cleaning up the Gulf of Mexico oil spill and meeting future liabilities.

BP’s long-term issuer default and senior unsecured ratings were lowered to BBB from AA, Fitch said in a statement today. That follows a reduction from AA+ on June 3.
…
The yield premium investors demand to hold BP’s 750 million euros of 4.25 percent bonds due next year rather than similar- maturity government debt increased 143 basis points to 505 basis points, according to HSBC Holdings Plc prices on Bloomberg.

BP credit-default swaps surged 39 basis points after today’s ratings downgrade to 476.5, according to CMA DataVision.

Speaking of BP:

Exxon Mobil Corp., ConocoPhillips, Chevron Corp. and Royal Dutch Shell Plc are as ill-prepared as BP Plc to halt and clean up an offshore oil spill because they all use “carbon copy” disaster plans, lawmakers said.
…
Lawmakers faulted the four executives for disaster-response plans that would halt oil leaks at the sea floor using the same techniques that failed for BP at its Macondo well.

Naturally, anybody who does something different that – for whatever reason – doesn’t work is simultaneously criticized for not using best practices.

It will be a long time before the truth is known, but my instinct is to look first at common or garden complexity. Everything’s complicated nowadays, everything is invented and serviced by small teams of specialists and everybody parrots what they say to the best of their ability. Used to be, it was common for teenagers to buy old cars and fix them up – a virtually impossible task nowadays. How many people in the world can talk about, for instance, Toyota’s fly-by-wire accelleration system and really know what they’re talking about? A dozen?

It’s nice to see that there are still some adults left in the business:

Despite all the bad headlines — the accusations of fraud, the talk of a big settlement, the risk, however remote, of criminal charges — there’s an inconvenient truth that’s been largely ignored: Most of Goldman’s big customers are not bolting.
…
“We trust them,” Jeffrey R. Immelt, the chief executive of General Electric, told an audience at the 92nd Street Y in New York last month. “People need to tone down the rhetoric around financial services and stop the populism and be adults.”

I’ve done business with Goldman before and I’ll do business with Goldman again. Why? Not because they’re nice people. Not because they’re kind to small furry animals. But because they can source trades. If I go to Goldman and say ‘I want to take such and such a position’, they’ll come back to me with price. You know, just like, say, a broker. Or a used car salesman, for that matter.

The Canadian preferred share market just kept on keeping on today, with PerpetualDiscounts up 24bp and FixedResets gaining 14bp, on moderate volume. Again, there were no losers in the Performance Highlights table … now, if I were a real financial journalist, I’d be able to say something like “This is the first time since august 17 that there have been two successive days of no losers during months without an “R” in them” …. but I ain’t. PerpetualDiscounts dominated the volume tables, another relatively rare occurance.

I have long taken the view that if sub-debt becomes contingent capital, then so will preferred shares; otherwise, issues’ seniority could leapfrog when an institution gets into trouble and that makes no sense. So I was gratified to hear this view echoed for the first time I’ve seen:

Canada is recommending that subordinated debt and preferred shares sold by banks be convertible to common shares to bolster capital in the event of a crisis. The conversion would be triggered if the banking regulator determines a troubled bank is about to fail, or if the government is forced to purchase shares in the bank.

It’s a shame that OSFI hasn’t actually published the proposal; or, indeed, done any work at all that I can see on the proposal.

An older paper on Contingent Capital is Rethinking Capital Regulation by Kashyap, Rajan & Stein, referenced but not previously linked in HM Treasury Discusses Contingent Capital.

Korea is imposing foreign exchange position limits:

Foreign banks will be required to cut currency derivatives holdings to 250 percent of equity capital and domestic banks to 50 percent, with three months to meet the new ceiling and two years to cover existing positions. The limit on derivatives to cover corporate settlements will be cut to 100 percent of the total, from 125 percent.

“We are not limiting portfolio investment,” said Kim Yi Tae, director at the finance ministry’s foreign exchange market division. “We’re not putting regulations on trade financing, only on bank lending in foreign currencies and on forwards.”
…
The new rules are to reduce systemic risks, which should serve as a safety net to avert a crisis, the government and central bank said in yesterday’s statement.

The ‘systemic risk’ rationale sounds a little thin to me. If that was the problem, they could simply impose higher risk-weights on FX positions. But prescriptive rules are always more attractive to politicians and bureaucrats than market-based solutions.

Call risk is hitting the Asian junk market:

The biggest junk bond market rally in more than a decade is increasing the risk investors in Asian high-yield debt will be roiled by early redemptions, according to Morgan Stanley and Credit Agricole CIB.

Cheaper funding alternatives such as loans make companies more likely to buy back callable notes, unsettling investors who may be forced to reinvest at lower rates or in more volatile assets. Thirty-five percent of liquid Asian junk bonds are callable — most this year — and about 20 percent are trading above or close to their call price, according to Morgan Stanley research.

Junk? Greece is junk says Moody’s:

Greece’s credit rating was cut four steps to non-investment grade, or junk, by Moody’s Investors Service, which cited the country’s economic “risks.”

The rating was lowered to Ba1 from A3, Moody’s said in a statement today from London. The outlook is stable, it said. Greece is already rated junk by Standard & Poor’s.
…
S&P cut Greece’s credit rating to non-investment grade on April 27, the first time a euro member lost its investment-grade since the euro’s 1999 debut. S&P warned that bondholders could recover as little as 30 percent of their initial investment if the country restructures its debt.

Fannie & Freddie continue to demonstrate that no matter what degree of incompetence at which we assess Wall Street, it will always be out-done by the politicians:

The cost of fixing Fannie Mae and Freddie Mac, the mortgage companies that last year bought or guaranteed three-quarters of all U.S. home loans, will be at least $160 billion and could grow to as much as $1 trillion after the biggest bailout in American history.

Quick! Trump up another charge against Goldman Sachs!

It was another very good day for Canadian preferred shares, with PerpetualDiscounts up 22bp and FixedResets gaining 29bp, on slightly elevated volume. There were no losers on the Performance Highlights table!