PrefBlog

Astonishing! There is a continued Greek crisis:

In Athens, unions struck for the second time this week and police used tear gas to counter protesters. George Karatzaferis, who heads one of the three parties supporting interim Prime Minister Lucas Papademos, said he wouldn’t support austerity measures worked out for a rescue. He spoke hours after German Finance Minister Wolfgang Schaeuble told lawmakers in Berlin that Greece was missing deficit targets.

“What has particularly bothered me is the humiliation of the country,” Karatzaferis, whose Laos party has 16 members in the 300-seat parliament, said in televised comments. “Clearly Greece can’t and shouldn’t do without the European Union but it could do without the German boot.”
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“The Greek offer is not sufficient and they have to go away to come up with a revised plan,” Bertrand Benoit, a spokesman for the German Finance Ministry, said by telephone.

Assiduous Readers will be accustomed to my occasional rants about bond market structure and auction design – these are usually triggered by ignorant whining about exchange trading of bonds, but now the Fed has become involved:

The Federal Reserve secretly selected a handful of banks to bid for debt securities acquired by taxpayers in the U.S. bailout of American International Group Inc., and the rest of Wall Street is wondering what happened to the transparency the central bank said it was committed to upholding.

“The exclusivity by which the process has shut out smaller dealers is a little un-American,” said David Castillo, head of sales and trading at broker Further Lane Securities LP in San Francisco, who said he would have liked to participate. “It seems odd that if you want to get the best possible price that it wouldn’t be open to anyone who wants to put in the most competitive bid.”

After inviting more than 40 broker-dealers to take part in a series of auctions last year, the Federal Reserve Bank of New York asked only Goldman Sachs Group Inc. (GS), Credit Suisse Group AG (CSGN) and Barclays Plc (BARC) to bid on the full $13.2 billion of bonds offered in two sales over the past month. The central bank switched to a less open process after traders blamed the regular, more public disposals for damaging prices in 2011. This week, Goldman Sachs bought $6.2 billion of bonds in an auction.
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“The purpose should be to get the best price for the taxpayer,” said Robert Eisenbeis, a former research director at the Federal Reserve Bank of Atlanta who’s now chief monetary economist for Sarasota, Florida-based Cumberland Advisors. “Anybody knows the more bidders the better, so it’s a little hard to understand why they would essentially pick potential winners and losers. That smacks of crony capitalism.”
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The New York Fed was criticized for damaging credit markets with the regular sales, and halted them in June after disposing of about $10 billion in face value of the assets.

It resumed the sales on Jan. 19, when it unloaded about $7 billion of assets in one block to Credit Suisse, after receiving an unsolicited bid for the securities from Goldman Sachs. Only Barclays and Bank of America were invited to also participate in that auction. Goldman Sachs won the auction for $6.2 billion of bonds this week after Credit Suisse placed an unsolicited bid for the assets. Barclays, Morgan Stanley (MS) and RBS Securities Inc. were also included in that sale. Barclays presented the second- highest offer in both auctions this year, according to a person familiar with the process.

The New York Fed didn’t announce either auction until after they closed, and said the broker-dealers it included were chosen based on the strength of previous bids. The Wall Street firms, and their clients who wished to bid on the assets, were required to sign non-disclosure agreements forbidding them from discussing the offerings. At least one investor opted not to participate for that reason.

Now, I’m not going to state that the Fed did things in the best possible way. I’m not even going to state that the auction method they chose is better than a fully public process! But I will state that calling the process “un-American” or stating that “Anybody knows the more bidders the better” is just plain pig-ignorant.

The Canadian preferred share market took a thumping today, as the very attractive GWO 5.40% Straight issue announced – and later upsized – today sucked all the money out of the market. PerpetualPremiums were down 34bp, FixedResets off 10bp and DeemedRetractibles lost 59bp. There is a very lengthy list of losers – and no winners – in the Performance Highlights table, overwhelmingly comprised of insurance DeemedRetractibles. Volume was a little on the light side.

Greece claims to have reached agreement:

“Discussions between the Greek government and the troika were successfully completed this morning,” Greek Prime Minister Lucas Papademos’s office said in an e-mailed statement today in Athens. “Political leaders have agreed with the result of those negotiations. Therefore there is a general agreement in the context of the new program ahead of tonight’s euro group meeting.” The statement didn’t include any details.

But PIMCO notes potential resistance of Greeks:

“It is very unlikely to lead to growth, jobs, financial stability and new investments,” El-Erian, chief executive and co-chief investment officer of the world’s biggest manager of bond funds, said in a radio interview today on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “This agreement will be very difficult to sell when the principals, those who have agreed, have to go to their constituents.”

The question on my mind is still: will Greek politicians sell the deal to Greek voters? I supported the idea of a referendum when the idea was floated – very briefly! – last fall. We continue to live in interesting times.

Meanwhile, the guys with the money say “Show me!”:

European finance chiefs are set to defer ratifying a 130 billion-euro ($173 billion) rescue for Greece, pressing the government in Athens to put a newly struck austerity plan into action.

“It’s up to the Greek government by concrete actions — through legislation, other actions — to convince its European partners that the second program can be made to work,” European Union Economic and Monetary Affairs Commissioner Olli Rehn said today as he arrived for an emergency meeting of euro-area finance ministers in Brussels.

And how many stories like this are we going to see?

Greek doctors are fighting a new invisible foe every day at their hospitals: a pneumonia-causing superbug that most existing antibiotics can’t kill.

The culprit is spreading through health centers already weighed down by a shortage of nurses. The hospital-acquired germ killed as many as half of people with blood cancers infected at Laiko General Hospital, a 500-bed facility in central Athens.

The drug-resistant K. pneumoniae bacteria have a genetic mutation that allows them to evade such powerful drugs as AstraZeneca Plc (AZN)’s Merrem and Johnson & Johnson’s Doribax. A 2010 survey found 49 percent of K. pneumoniae samples in Greece aren’t killed by the antibiotics of last resort, known as carbapenems, according to the European Antimicrobial Resistance Surveillance Network. Many doctors have even tried colistin, a 50-year-old drug so potent that it can damage kidneys.

“We’re not used to seeing people die of an untreatable infection,” said John Rex, vice president for clinical infection at London-based AstraZeneca, which is developing a new generation of antibiotics. “That’s like something in a novel of 200 years ago.”

The Bank of Canada has provided another nail in the coffin of Efficient Market Theory:

This paper develops and estimates a model to explain the behaviour of house prices in the United States. The main finding is that over 70% of the increase in house prices relative to trend during the increase of house prices in the United States from 1995 to 2006 can be explained by a pricing mechanism where market participants are ‘Fooled by Search.’ Trading frictions, also known as search frictions, have been argued to affect asset prices, so that asset markets are constrained efficient, with shocks to liquidity causing prices to temporarily deviate from long run fundamentals. In this paper a model is proposed and estimated that combines search frictions with a behavioural assumption where market participants incorrectly believe that the efficient market theory holds. In other words, households are ‘Fooled by Search.’ Such a model is potentially fruitful because it can replicate the observation that real price growth and turnover are highly correlated at an annual frequency in the United States housing market. A linearized version of the model is estimated using standard OLS and annual data. In addition to explaining over 70% of the housing bubble in the United States, the model also predicts and estimation confirms that in regions with a low elasticity of supply, price growth should be more sensitive to turnover. Using the lens of turnover, a supply shock is identified and estimated that has been responsible for over 80% of the fall in real house prices from the peak in 2006 to 2010.

Search costs are important!

This paper examines the impact of bank consolidation on mortgage rates in order to evaluate the extent to which mortgage markets are competitive. Mortgage markets are decentralized and so rates are determined through a search and negotiation process. The primary effect of a merger therefore is to reduce the number of partners available with whom to negotiate, although it can also change the characteristics of the product, and impact the search effort of consumers. Using a Canadian merger as a case study, we find that, overall, consolidation had little effect on rates suggesting that, on average, the mortgage market is fairly competitive. However, a decomposition of the aggregate treatment effect reveals important heterogeneity in the impact of the merger. We find that consumers gathering multiple quotes are affected by the merger, while those who do not search are not. These results suggest that market power originates in large part from the presence of asymmetric search costs.

Woo-Hoo, we’re saved! The CSA is bringing in new Money Market Fund regulations:

Canadian securities regulators have slapped new rules on money market funds in a move that could push already puny yields on these investments even lower.

Under the new regulations, these funds, which typically pay investors around 1 per cent a year, will need to hold at least five per cent of their assets in cash or in securities that can easily be converted into cash within a day. In addition, they must hold at least another 15 per cent of their assets in securities that can be converted within a week.

As I have pointed out until I’m sick to bloody death of saying it, the problem is not liquidity (although that can become a factor in an extreme case, just like any other extreme case) the problem is credit quality – and these rules do absolutely nothing to improve credit quality, which requires mandatory support from the sponsor. But why would a regulator worry about what might actually work?

It was a weak day for the Canadian preferred share market, with PerpetualPremiums down 8bp, FixedResets off 12bp and DeemedRetractibles losing 20bp. Volatility was average, skewed to the downside. Volume was average.

ITG claims that high frequency trading in Canada is becoming less frequent:

“This quarter’s analysis of message traffic data reveals changes in trading behaviour that may signal the begginings of a new regime,” ITG’s analysts wrote. “Improvements in our metric for the quality of order flow, combined with a decline in fleeting orders points to a structural change amongst HFT participants.”

Why are HFTs backing away? Money.

Study author Doug Clark, a managing director at ITG, said that other markets are showing similar trends. That suggests that the business of high-frequency trading is so competitive that some players weren’t making money.

Also, brokerage houses are doing a better job of offering clients algorithms and routers that handle trading in ways that combat high frequency traders and cut their profits.

Zerohedge continues to whine about HFT. Institutional Investor breathlessly tells us of how some “real money” investors’ agents have attempted to remain competitive by the unheard of strategy of getting better at their jobs:

The electronic-trading team at RBC decided to fight back against the problem of “phantom” or “disappearing liquidity,” which they blamed on a subset of high frequency traders using “predatory” tactics. That is how they came up with THOR, a system to help clients such as institutional money managers combat predatory HFT strategies and complete trades at the desired price.

The system has been in use for a year, and Steiner says it has greatly improved liquidity for RBC and its clients — allowing them to execute orders at the desired price.

The real reason behind the fashionability of deprecating HFT can be found in the recent IIAC publication Securities Industry Performance 11Q3:

Even though trading revenue only accounts for about 10% of overall revenue, the severe collapse in net trading revenue of nearly 50% in the year, reflecting substantial losses for equity market-makers, put a significant dent in overall earnings.

The industry’s prop-traders are having their lunch eaten by HFT practitioners who didn’t even go to the right schools! The horror!

Lucas van Praag, world’s greatest corporate spokesman, is leaving Goldman Sachs:

Lucas van Praag, who became one of the public faces of the U.S. financial industry as Goldman Sachs Group Inc.’s global head of corporate communications, is leaving the firm after 12 years.

Van Praag, a 62-year-old British citizen, will retire at the end of March and continue to provide strategic advice as a consultant to the company, according to an internal memo signed by Chief Executive Officer Lloyd C. Blankfein and President Gary D. Cohn. The memo’s contents were confirmed by Michael DuVally, a spokesman. Van Praag was promoted to partner, the highest rank in the New York-based company, in 2006.

The Canadian preferred share market resumed its winning ways today, with PerpetualPremiums winning 18bp, FixedResets gaining 9bp and DeemedRetractibles up 18bp. Volatility was good and highly skewed to the upside, with SLF notable among the winners. Volume was average.

PerpetualDiscounts (those few that are left; only four issues from two issuers) now yield 4.80%, equivalent to 6.24% interest at the standard 1.3x equivalency factor. Long corporates now yield a hair under 4.6%, so the pre-tax interest equivalent spread is now about 165bp, a sharp decline from the 190bp reported on February 1.

This looks better than a government programme as a way to address delinquent underwater mortgages:

Banks, accelerating efforts to move troubled mortgages off their books, are offering as much as $35,000 or more in cash to delinquent homeowners to sell their properties for less than they owe.

Lenders have routinely delayed or blocked such transactions, known as short sales, in which they accept less from a buyer than the seller’s outstanding loan. Now banks have decided the deals are faster and less costly than foreclosures, which have slowed in response to regulatory probes of abusive practices. Banks are nudging potential sellers by pre-approving deals, streamlining the closing process, forgoing their right to pursue unpaid debt and in some cases providing large cash incentives, said Bill Fricke, senior credit officer for Moody’s Investors Service in New York.

What’s more, it seems like there is a direct connection with auto loans:

Three years ago, credit was so tight that the owner of a legal firm with a $400,000 salary and a very good credit score of more than 700 couldn’t get financed to buy the car he wanted from Michael Mosser’s dealership.

“The world is upside-down compared to then,” said Mosser, general manager of Chevrolet and Cadillac stores in Ann Arbor, Michigan. “Today, somebody with a 500 credit score, I can get approved and in a Malibu,” which starts at $22,110.

Lenders resisted extending credit to car buyers when the mortgage market collapsed in 2008, helping push General Motors Corp. and Chrysler LLC into bankruptcy and sending U.S. sales to the lowest point in almost three decades. Amid a slow housing market, auto demand is rebounding, spurring lenders from Bank of America Corp. to Capital One Financial Corp. to approve buyers faster and at better rates to compete for a piece of an expanding market.

Amazingly, another Greek deadline has been missed:

Greek political parties delayed yet again on Tuesday making the tough choice of accepting painful reforms in return for a new international bailout to avoid a chaotic default, seemingly deaf to EU warnings that the eurozone can live without Athens.

With a series of deadlines come and gone, leaders of the three parties in the coalition of Prime Minister Lucas Papademos postponed what was supposed to be a crunch meeting until Wednesday.

S&P affirmed AltaGas, proud issuer of ALA.PR.A:

• AltaGas Ltd. has announced it is acquiring SEMCO Holding Corp., the sole shareholder of SEMCO Holding Corp. from Continental Energy Systems LLC for about C$1.1 billion.
• We are affirming our ratings, including our ‘BBB’ long-term corporate credit rating, on AltaGas.
• In our view, SEMCO has an excellent business risk profile and a highly leveraged financial risk profile.
• We have revised AltaGas’ business risk profile to strong from satisfactory and financial risk profile to significant from aggressive, assuming the transaction closes as expected. The stable outlook reflects our assessment of the company’s business mix, which is increasingly diverse with a greater contribution from fee-based and regulated utility cash flows.

It was another down day for the Canadian preferred share market, with PerpetualPremiums off 16bp, FixedResets down 14bp and DeemedRetractibles losing 18bp. Volatility was minor. Volume was a little below average.

Bloomberg has an interesting story about the legal snarl of an effective Greek default:

Hedge funds seeking to wring profits from a Greek debt restructuring are underestimating the will of policy makers to impose losses on them, according to investors who say trying to beat the politicians is too risky.
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European banks own most of the 200 billion euros ($263 billion) of Greek debt held by non-government investors. Hedge funds, pension funds, sovereign wealth funds and other “non- regulated investors,” own a further 60 billion euros, according to estimates by Pavan Wadhwa, JPMorgan Chase & Co.’s head of global interest-rate strategy.
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Because hedge funds and other holders could collectively keep the participation rate below that level, Greece has said it may approve legislation that imposes losses on investors who don’t support the voluntary swap by adding a retroactive collective action clause into its bond documentation. Such a provision would give a majority of bondholders the ability to force holdouts to accept the same terms as everyone else.
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It will be difficult for holdouts to assemble enough votes to block any collective action clause, because European banks have an incentive to support the provision, fund managers said.

A lawsuit against a collective-action clause legislated by the Greek government may also be difficult to win, because it would probably have to be filed in Greece, said a hedge-fund executive whose firm holds the country’s debt and has examined the legal options.

Never play poker with somebody who can change the rules! The question is: will anybody in their right minds ever buy Greek debt again? Or any European’s?

DBRS confirmed GMP.PR.B at Pfd-3(low):

DBRS has confirmed the Pfd-3 (low) rating on the Preferred Share obligations of GMP Capital Inc. (GMP or the Company) with a Stable trend. The rating reflects the strength of the Company’s business franchise as a premier provider of investment banking and capital markets products and services to its targeted market of mid-sized Canadian companies, most of whom operate in the resource and energy sectors. Following the issue of preferred shares in early 2011, the Company’s capitalization has become relatively more aggressive as a result of $66 million in share buybacks completed during the first nine months of 2011. At current levels of financial leverage, the Company’s financial flexibility is somewhat impaired. A continued slump in underwriting and trading activities, which DBRS does not expect to recover in the short to medium term given the weak global economic outlook and continued absence of investor confidence, will prevent a material improvement in this condition in the medium term. Nevertheless, DBRS remains comfortable with the Pfd-3 (low) rating, given the Company’s flexible cost base and its excess regulatory capital at its operating subsidiaries.

The recent run-up in the Canadian preferred share market took a pause today, with PerpetualPremiums down 7bp, FixedResets off 2bp and DeemedRetractibles losing 13bp. Volatility was significant and fairly evenly distributed between asset classes, winners and losers. Volume was average.