PrefBlog

Another small step in the decline of the West:

Hong Kong companies are issuing a record amount of bonds in Singapore dollars as Europe’s debt crisis boosts relative yields on securities denominated in the U.S. currency, enhancing the city-state’s appeal as a rival financial center.

Singapore-dollar bond sales by borrowers from Hong Kong have risen to $2 billion this year, from $671 million in all of 2010, according to data compiled by Bloomberg. Developers including Henderson Land Development Co. accounted for at least 96 percent of the total. At the same time, Hong Kong companies’ offerings of U.S. dollar notes have shrunk to $1.8 billion from $7 billion in 2010.

Hong Kong borrowers are turning to Singapore as Europe’s deepening debt crisis has driven relative yields on Asian U.S. dollar debt higher. Singapore’s currency market, Asia’s biggest by trading volume, is an additional attraction, enabling efficient conversion to other regional denominations.

To the astonishment of regulators everywhere some banks are bailing out of southern Europe:

BNP Paribas, France’s biggest bank, booked a loss of 812 million euros ($1 billion) in the past four months from reducing its holdings of European sovereign debt, while Commerzbank took losses as it cut its Greek, Irish, Italian, Portuguese and Spanish bonds by 22 percent to 13 billion euros this year.

Banks are selling debt of southern European nations as investors punish companies with large holdings and regulators demand higher reserves to shoulder possible losses. The European Banking Authority is requiring lenders to boost capital by 106 billion euros after marking their government debt to market values. The trend may undermine European leaders’ efforts to lower borrowing costs for countries such as Greece and Italy while generating larger writedowns and capital shortfalls.

Greece might have a new government soon:

Papandreou and Antonis Samaras, leader of New Democracy, “made progress in talks” yesterday “to name a head of a national unity government,” Elias Mosialos, a Greek government spokesman, said in an e-mailed statement. The two men spoke by phone a number of times yesterday, said a Greek government official who declined to be named. Talks will resume in Athens today, the official said.
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The unity government’s mission will be implementing the European summit decision from Oct. 26 on a second Greek financing package of 130 billion euros ($179 billion) before leading the country to elections, according to an e-mailed statement from the premier’s office. Papandreou, who has agreed to step aside for a new prime minister, spoke yesterday with German Chancellor Angela Merkel; Jean-Claude Juncker, who heads the group of euro area finance ministers; and European Commission President Jose Barroso.

Not much point talking to Juncker, because he’s a liar. Anyway, it’s lovely that the unity government will be implementing the borrowing part of the plan, but it’s unclear to me whether they will be able to deliver on the paying-back part of the plan. Capital flight is becoming a big problem:

Unsparing in its criticism of Greece, Bild launches another broadside against its favourite target: “Greeks stash 200 billion euros in Swiss bank accounts!” headlines the Berlin tabloid, whose influence on the Chancellorship is an open secret. “While Europe struggles to help Greece with multi-billion euro bailout plans, more and more Greeks are transferring their money out of the country” to avoid the consequences of a crash in the national economy, announces Bild. “Stop the capital flight!” insists the tabloid’s editorial, which lambasts the Greek elite for refusing to introduce a tax on money transfers or penalties for tax evasion.

The Globe & Mail reports:

That disenchantment has also been reflected in the flight of capital from the country in recent weeks. The New York Times, citing banking sources in Athens, estimated that €10-billion to €20-billion were whisked away to safer countries in September and October, escalating a trend that saw €46-billion in deposits leave Greek banks since January 2010.

The wealthy have reportedly been paying cash for homes in London, while those with more modest incomes are stuffing euro notes into safe-deposit boxes.

I’m sure that human flight is a problem, too, although I confess I have no evidence to support this. But come on! If you were Greek, aged under, say, 35, and were trained in an actual skill (doctors and nurses, for instance, have highly transportable skills) wouldn’t you be thinking that maybe France, Germany, or the UK would be better places to make a living?

And let’s not even mention Italy, it’s too depressing. Oh, all right, we’ll talk about Italy:

Italy’s cost of borrowing money soared to its highest point since the euro zone was formed, signalling a growing conviction the sovereign debt crisis is about to get worse as the currency union’s third-largest economy creeps closer to a financial cliff.

The yield on 10-year Italian bonds hit 6.68 per cent – a 14-year high – on Monday before narrowing to 6.45 per cent, amid reports that embattled Prime Minister Silvio Berlusconi was about to resign. Greece, Ireland and Portugal each were forced to seek bailouts soon after their bond yields climbed past 7 per cent.

As long as we’re talking about Europe, DBRS has some interesting things to say about Belgian mortgages:

Firstly, according to data from obtained by DBRS, Belgium has owner-occupation levels that are higher than neighbouring European countries at 71%, compared to 55% for France and 53% for the Netherlands. This is partly as a result of the house price growth over the last decade outstripping the commensurate growth in rental return. It is also infl uenced by the fact that Belgium has very high property purchase transaction costs (both buying and selling property) relative to other European jurisdictions. DBRS understands that purchase costs are routinely in the range of 10-20% of the property cost. Both these factors combined have meant that investment in property for speculative purposes is relatively unattractive as the rental yield is, comparative to other European jurisdictions, low, and day one cash outlay is high.
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In Belgium fi xed rate mortgages represent the majority of the market and the majority of the loans have a fixed rate of interest for 10 years or more or for the entire term of the loan. Variable rate loans also feature and differ from the completely variable rate loans found in other jurisdictions in that their variability is restricted by caps and fl oors in the interest rate. Rate caps offer borrowers some protection from spikes in interest rates by limiting the potential mortgage payments due by borrowers regardless of prevailing interest rates.

As part of the continuing campaign to make it impossible for Bad People to do business by making it impossible for anybody to do business, the federal government has issued a Consultation Paper on Proposed Amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations on Ascertaining Identity. Naturally, no attempt is made to justify the proposed revisions to protocol in terms of actual results; it is sufficient to pick objectives out of the air, say ‘This makes sense!’ and then enforce it.

BIS has issued a working paper by Michael Brei, Leonardo Gambacorta and Goetz von Peter titled Rescue packages and bank lending:

This paper examines whether the rescue measures adopted during the global financial crisis helped to sustain the supply of bank lending. The analysis proposes a setup that allows testing for structural shifts in the bank lending equation, and employs a novel dataset covering large international banks headquartered in 14 major advanced economies for the period 1995–2010. While stronger capitalisation sustains loan growth in normal times, banks during a crisis can turn additional capital into greater lending only once their capitalisation exceeds a critical threshold. This suggests that recapitalisations may not translate into greater credit supply until bank balance sheets are sufficiently strengthened.

A scandal regarding Olympus has been simmering for a while and has now come to a boil – Olympus was naughty:

Olympus Corp. (7733) said it hid losses by paying inflated fees to advisers on the 2008 acquisition of Gyrus Group Plc, the first admission of wrongdoing from the Japanese camera and medical-equipment maker since accusations from its former chief executive officer surfaced four weeks ago.

The stock plunged by the daily limit after the company said it also used three other acquisitions to help hide the losses on investments from the 1990s. Allegations by Michael C. Woodford after he was axed as CEO on Oct. 14 had wiped more than half the value from the company’s stock before today.

Prohibition is drying up in the States:

U.S. states that have kept a tight rein on alcohol sales since the Prohibition era may be loosening their grip.

Lawmakers in Utah, where even high-alcohol beer is sold through state liquor stores, were urged by an advisory panel this year to put the business in private hands. Pennsylvania, Virginia and North Carolina have considered privatizing state liquor outlets. Tomorrow in Washington, votes will be counted on a ballot measure backed by Costco Wholesale Corp. (COST) that would end state control of liquor retailing.

Budget deficits forecast to reach $103 billion this fiscal year are making states more willing to open the taps, to the dismay of some public-health advocates who warn it may exacerbate social ills. Companies including Costco, bourbon maker Beam Inc. and Warren Buffett’s Berkshire Hathaway Inc. (BRK/A), which owns food and alcohol distributor McLane Co., may gain a larger share of the $8.5 billion in gross sales last year in the 18 states where liquor is still controlled.

One wonders if Ontario will ever follow!

There was a defense of milkfare in Saturday’s Globe:

[Federal Agriculture Minister Gerry Ritz] noted the Americans approved $450-million (U.S.) last year to backstop their dairy industry.

How much did Ottawa spend on backstopping Canadian dairy farmers?

“Zip,” Mr. Ritz said.

Oh, and how much did consumers pay directly to subsidize the bucolic lifestyle of the favoured few?

Every year the distortions caused by the system grow larger. Canadians may not realize it when they go to the grocery store, but they’re paying twice the world average for dairy products – and up to three times what Americans pay. That’s a hidden $3-billion a year tax on all of us.

Roughly half the money flows back to dairy farmers, making them richer than other farmers, who work just as hard. Bloated government agencies and marketing boards soak up a significant chunk of the rest.

I’d rather make my donation directly, assuming that I have to make one at all. But maybe that’s just me.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 5bp, FixedResets down 9bp and DeemedRetractibles losing 21bp. Good volatility, all losers, with Sun Life notable again for its losses. Volume was light.

It would seem that nobody can make a decision about Greece:

World leaders failed to agree on increasing the resources of the International Monetary Fund, dashing the hopes of European governments keen to tap more foreign aid to buttress their crisis-fighting efforts.

Governments are awaiting further details of Europe’s week- old rescue package before they commit cash, German Chancellor Angela Merkel said today on the final day of a Group of 20 summit in Cannes, France.

The reluctance of the leaders of the world’s biggest economies to immediately channel funds to the euro area reflects frustration with Europe’s failure to end a crisis that sparked again this week, with Greece’s government lurching towards collapse and Italy facing intensifying pressure to restore fiscal order.

To be frank, I don’t know what is happening in Greece:

Prime Minister George Papandreou won a confidence vote after offering to form a government of national unity that may lead to him stepping down as he sought to reach an accord on European aid needed to avert default.

The premier said he’ll meet with President Karolos Papoulias to discuss his proposal to create a unity government. Main opposition leader Antonis Samaras rejected the offer and called for elections.

Lapdog Carney got his reward:

Mark Carney, governor of the Bank of Canada, has been confirmed as new chairman of the Financial Stability Board, the G20’s global banking watchdog.

Mr. Carney serves as an inspiration to yes-men and sycophants everywhere.

Interesting paper by Rui Zhu, Utpal M. Dholaki, Xinlei Chen and René Algesheimer: Does Online Community Participation Foster Risky Financial Behavior?:

Although consumers increasingly use online communities for various activities, little is known regarding how participation in them affects individuals’ decision making strategies. Through a series of field and laboratory studies, we demonstrate that participation in an online community increases risk seeking tendency of individuals in financial decisions and behaviors. Our results reveal that participation in an online community leads consumers to perceive support from other members, that is they believe they will be helped by other community members should difficulties arise. Such a perception leads online community members to make riskier financial decisions than non-participants. We also discover a boundary condition to the effect: online community members are more risk seeking only when they have relatively strong ties with other members; when ties are weak, they exhibit similar risk preferences as non-members.

As I have suspected all along, it appears that the ‘MF Global Missing Funds’ hysteria was ramped up by the regulators and trustee to serve their own purposes:

Customer funds missing from bankrupt brokerage MF Global Inc. have been located in a custodial account at JPMorgan Chase & Co. (JPM), according to two people with knowledge of the matter.

An MF Global custodial account at JPMorgan contained about $658.8 million of client funds as of Oct. 31, according to one of the people, who declined to be identified because they weren’t authorized to speak publicly.

MF Global’s customer funds had a shortfall of $633 million, or more than 11 percent, out of a segregated fund requirement of about $5.4 billion, regulators said yesterday.

Does anybody think this hasn’t been known all along? But this way, we can praise the extraordinary detective work of the trustee and regulatory authorities, whose hard work, dedication, and extraordinary forensic auditing ability led them to ask the question: “Where’s the $600-million?” and pierce through all the layers of evasions and ambiguity to uncover the truth behind the answer “At JPMorgan. Why?”.

On November 2 I mentioned some projections that some banks would meet their new capital requirements by backing away from non-core lending. Commerzbank steps up to illustrate:

Germany’s second-largest lender Commerzbank AG will refuse loans which don’t help Germany or Poland, as the euro zone crisis makes European banks more protectionist in choosing between writing new business and meeting stringent capital requirements.

“We are not doing business which is not to the benefit of Germany or Poland,” chief financial officer Eric Strutz told analysts on a conference call discussing third-quarter earnings on Friday. “We have to focus on supporting the German economy as other banks pull out.”
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Commerzbank, which is 25 per cent owned by the state, is accelerating the pullback from euro zone nations and cutting risky assets to avoid another state bailout after a €798-million ($1.10-billion U.S.) impairment on Greek assets pushed it to a third-quarter operating loss.

Having cut exposure to indebted euro zone countries by more than 20 per cent to €13-billion, including a 52 per cent haircut on Greek debt, the Frankfurt-based lender said it would continue reducing its public sector debt in Portugal, Italy, Spain, Ireland and Greece, mirroring a similar move made by French rival BNP Paribas SA.
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Commerzbank said it had a core Tier One ratio of 9.4 per cent at the end of September and needs to raise €2.9-billion to meet tougher capital requirements set out by the European bank regulators.

“We can meet the required capital ratio by, for example, reducing risk assets in non-core areas, selling non-strategic assets or by means of retained earnings and we do not intend to tap new state funds,” Commerzbank said.

Commerzbank will keep its Eastern European BRE Bank unit and its online arm comdirect but may sell other units as it seeks to cut risky assets by a further €30-billion. Its property financing unit Eurohypo will also stop taking new business, the bank said.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts winning 10bp, FixedResets down 5bp and DeemedRetractibles losing 8bp. Lots of volatility, with SLF issues notable amonst the losers. Volume was on the light side of average.

There was possible insider trading in MF Global bonds:

The U.S. Securities and Exchange Commission is reviewing trades in MF Global Holdings Ltd. (MF) convertible bonds to determine whether some investors sold the debt based on confidential information before the firm’s demise, according to two people with direct knowledge of the matter.

Investigators are in part focusing on trades that were made ahead of announcements that the firm’s credit rating had been downgraded, the people said, speaking on condition of anonymity because the matter isn’t public.

It’s not clear whether or not a Greek referendum is planned:

Just hours after saying Greeks need to decide on whether their future is in the euro, Papandreou said the country belongs in the currency bloc. He welcomed support shown by the main opposition New Democracy party for last week’s rescue pact agreed with European Union leaders in Brussels. Finance Minister Evangelos Venizelos said Greece won’t hold a referendum.

“We had a dilemma: either real consensus or referendum,” Papandreou told ministers, according to an e-mailed transcript of his statements. “As I said yesterday, coming out of the meeting, if there were consensus we wouldn’t need a referendum. I said if the opposition comes to the table to agree on the loan, there’s no need for a referendum.”

Some say no:

Greek Finance Minister Evangelos Venizelos, speaking to party lawmakers in Parliament in Athens today, said the nation won’t hold a referendum. Just hours after saying Greeks need to decide on whether their future is in the euro, Papandreou said the country belongs in the currency bloc.

“Papandreou absolutely blinked in this game of chicken,” Michael Holland, chairman and founder of New York-based Holland & Co., said in a telephone interview. His firm oversees more than $4 billion. “The interesting thing is that it took him so long to blink. The world’s markets told him he was wrong and he still persisted for an extended period of time. It was insane.”

It’s not clear to me whether the world’s markets get any say in the matter. The question is: can he simultaneously meet the EU requirements and reduce the incidence of riots and national strikes to a dull roar? I suggest he’s between a rock and a hard place; and if the Greek government pledges to meet the demands, the Greek population will make it impossible. Remember, we’re not talking about some professional snivellers snivelling about shooting the hippo – we’re talking about a dramatic and broadly based reduction in living standards.

Speaking of snivelling, we may be in for a new round of the HFT debate:

Estimates vary, but some traders say that as much as 35 per cent of volume on Canadian stock markets is now generated by high frequency trading firms that are jumping in and out of markets with buy and sell orders in hopes of profiting from tiny inefficiencies. In the U.S., some estimates place the amount of volume generated by HFTs at 60 per cent of all trading.
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Canadian regulators are grappling with what to do about dark pools. Who should be allowed to trade on them, and on what terms? While dark pools do allow money managers to avoid high frequency traders, they can also sap volume from stock markets, eroding their value as a place for others to trade. Too many dark pools is most definitely not a good thing. In the U.S., so much trading takes place away from stock markets that what’s left on the public markets like NYSE and Nasdaq is “the exhaust,” as [LiquidNet CEO] Mr. [Seth] Merrin puts it.
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The implication is that dark pools shouldn’t allow small orders, and shouldn’t be just ways for brokerages to avoid fees on their order flow. They should be reserved truly for orders that can’t be efficiently traded in light markets.

That’s right – make sure that retail doesn’t get any cut of the efficiencies! That’s what pays regulators’ salaries!

S&P confirmed MFC:

• Manulife Financial Corp. reported third-quarter net losses driven by equity-market and interest rate declines and net charges from its annual review of actuarial methods and assumptions.
• We are affirming our ‘A-‘ long-term counterparty credit rating on Manulife and our ratings on its subsidiaries.The company’s Canadian fair-value accounting framework is considerably more volatile, for comparable risks, than the relatively
  book-value-focused U.S. accounting framework.

• We expect Manulife to sustain its extensive global competitive advantages and its favorable capitalization.

TMX DataLinx seems to have resolved their networking problems – the quotes listed today are official.

It was a day of uneven strength for the Canadian preferred share market, with PerpetualDiscounts winning 40bp, FixedResets up 6bp and DeemedRetractibles gaining 18bp. There was a long list of Performance Highlights, heavily skewed towards winners. Volume was quite good.