PrefBlog

Roubini claims that a Greek default is better for all concerned:

“The recent debt exchange deal Europe offered Greece was a rip-off,” said Roubini in a commentary in Tuesday’s Financial Times. “If you take into account the large sweeteners the plan gave to creditors, the true debt relief is close to zero.”

The major problem, in Roubini’s view, is a lack of growth and competitiveness, which can only be overcome by currency depreciation.

“A return to a national currency and a sharp depreciation would quickly restore growth and competitiveness, as it did in Argentina and many other emerging markets that abandoned their currency pegs,” he said.

It’s official! National is buying HSBC’s brokerage:

National Bank of Canada (“National Bank” or the “Bank”), through an affiliate, has entered into an agreement with HSBC Bank Canada and certain of its subsidiaries (“HSBC Bank Canada”) pursuant to which National Bank will acquire the full service investment advisory business of HSBC Securities (Canada) Inc. (“HSBC Securities”) and certain assets related to the segregated fund and insurance business of HSBC Insurance Agency (Canada) Inc. (together, the “Full Service Investment Advisory Business”). HSBC Securities’ Full Service Investment Advisory Business has $14.2 billion of assets under administration, managed by over 120 investment advisors located in 27 offices across Canada. The Full Service Investment Advisory Business operates across Canada, with approximately 70% of its business being centered in Ontario and British Columbia.

National Bank has agreed to pay $206 million in cash to HSBC Bank Canada, subject to certain customary adjustments. An additional amount has been set aside to ensure maximum retention of investment advisors. The transaction is expected to increase National Bank’s 2012 and 2013 recurring EPS by $0.03 to $0.05. National Bank estimates the transaction will reduce its Common Equity Tier 1 ratio under Basel III rules by approximately 40 basis points. Closing is expected to occur in December 2011, subject to receipt of necessary regulatory approvals.

Here’s a straw in the wind:

Gold will exceed $2,000 this year, according to the average estimate of 16 respondents in a Bloomberg survey at the London Bullion Market Association’s conference in Montreal. The metal will peak at $2,268 next year, the survey showed.

Storage companies are responding. The 112-year-old Perth Mint, which refines more than 8 percent of all supply and is owned by the Western Australian state government, may add a new vault within the next year, according to Treasurer Nigel Moffatt. The mint sells everything from gold coins to 400-ounce (12.4- kilogram) bars.

Brink’s, the largest bullion carrier in the U.K., is considering adding more storage after opening a new London vault earlier this year. Barclays, based in London, is building a vault in the city that will open next year, the bank said in a statement last week.

Deutsche Bank, based in Frankfurt, is considering expanding existing facilities and developing new ones to meet demand, Matthew Keen, a director at the bank, said earlier this month. JPMorgan Chase & Co. (JPM) started a vault at the Singapore FreePort location last year and opened another in the financial district of New York.

Today’s winner of the coveted “Thug of the Day Prize” is Arthur Leader:

“We’ve had many angry patients say to us, ‘This is discriminatory’ and I say, ‘Yes, it is’ But I still won’t do it,” said Arthur Leader, co-founder of the Ottawa Fertility Centre. The facility where he works will not treat women with a Body Mass Index (a measurement of weight relative to height) of more than 35. A BMI of 30 meets the clinical definition of obese.

“A patient doesn’t have the right to make a choice that’s going to be harmful to them,” he said.

Yes they do, asshole. And we don’t need any pompous mechanics deciding which cars deserve to fixed, either.

For Dr. Leader, a major concern is that the “conscious sedation” used on patients while retrieving their eggs could disrupt breathing, but inserting a breathing tube into a patient who is morbidly obese is tricky and risky – “the patient could choke.”

“If that person then dies on my table – how good would I feel?” said Dr. Leader, who asks that women bring their BMI below 35 to receive treatment.

Who cares how you feel, twerp? If you feel you’re not competent to perform the procedure, then say so – spend a bit more time acting like a professional and a little less whimipering about your precious feelings.

Naturally, the possibility exists that Arthur Leader has simply applied the Canadian concept of competition to the problem of how to make a good living when there are other fertility clinics around: if you can’t beat ’em, get the regulators to outlaw the game.

Intact Financial, proud issuer of IFC.PR.A and IFC.PR.C, was confirmed at Pfd-2(low) by DBRS:

The Company’s operating subsidiaries continue to be among the stronger performers in the Canadian property and casualty (P&C) insurance industry in terms of underwriting profit and overall profitability. Overall industry profitability started to stabilize in 2010, in part as a result of the auto insurance reforms in Ontario and more benign weather patterns in 2010. For the first time in several years, Intact had an improved underwriting result, with a decline in its combined ratio.
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Intact’s previous investment strategies had left it exposed to the unprecedented decline in global capital markets in 2008 and in early 2009. This led to increased impairment charges and higher realized losses as a result of the Company’s decision to actively reduce its exposure to common equity investments in financial services companies while increasing its holdings in Canadian government bonds. In 2010, the Company shifted some of its corporate exposure to bonds from preferred shares, reflecting changes to regulatory capital requirements and more efficient tax treatment. A more conservative portfolio is expected to put downward pressure on investment earnings over time but had a neutral impact year over year in 2010.

The DBRS rating on the Company reflects its holding company status. While Intact has very strong operating entities, their regulated nature and the structural subordination of holding company obligations result in a rating assignment for the parent that is at least one notch below where the operating subsidiaries might be rated in their own right.

It was a good strong day for the Canadian preferred share market, with PerpetualDiscounts winning 18bp, FixedResets up 8bp and DeemedRetractibles gaining 11bp. It is of interest to note that the Bozo Spread (Current Yield PerpetualDiscounts less Current Yield FixedResets) is down to a mere 12bp. Volatility was muted, but on the positive side. Volume continued to be very low.

The SEC has proposed an asinine, politicized, rule:

The proposed rule would prohibit securitization participants of an ABS for a designated time period from engaging in certain transactions that would involve or result in any material conflict of interest. Two criteria to determine whether the transaction involves a material conflict of interest are set out in the rule proposal.
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EXAMPLE 1: Among other things, the proposed rule could — if certain conditions are otherwise met — prohibit a firm from packaging an ABS, selling the ABS to an investor, and subsequently shorting the ABS to potentially profit at the same time as the investor would incur losses.

EXAMPLE 2: The proposed rules also could — if certain conditions are otherwise met — prohibit a firm from allowing a third party to help assemble an ABS in a way that creates an opportunity for the third party to profit from the failure of the ABS.

So, when you’re putting together an ABS, you’re not allowed to ask the guy who’s shorting the stuff to you what he’s willing to sell. And don’t take a position opposite your clients, because the SEC knows for a fact that no investor who has ever lived is smart enough to be allowed to take a view contrary to a dealer.

S&P downgraded Italy:

Italy’s credit rating was cut one level to A by Standard & Poor’s, which said the outlook remains “negative.”

The rating for Italy, which has Europe’s second-largest debt load, was lowered from A+, S&P said today in a statement. The firm said Italy’s net general government debt is the highest among A rated sovereigns, and now expects it to peak later and at a higher level than it previously anticipated.

“In our view, Italy’s economic growth prospects are weakening and we expect that Italy’s fragile governing coalition and policy differences within parliament will continue to limit the government’s ability to respond decisively to domestic and external macroeconomic challenges,” S&P said in a statement.

Italy follows Spain, Ireland, Portugal, Cyprus and Greece as euro-region countries having their credit rating cut this year.

Dealbreaker has another excellent piece on the problems regarding defining “proprietary trading”.

The Canadian preferred share market took a loss today, with PerpetualDiscounts losing 29bp, FixedResets down 9bp and DeemedRetractibles off 4bp. There was an uptick in volatility, all to the downside. Volume was so low one might be forgiven for thinking it was Christmas!

Dealbreaker has an entertaining observation regarding the UBS unauthorized losses. After examining the bank’s published VaR calculations:

Oops! UBS’s maximum 95% value-at-risk in the second quarter was 98mm CHF, or around 85mm USD at current exchange rates. So if its returns are normally distributed and that’s a one-tail confidence interval it should have daily losses of over $52mm less than 16% of the time, $85mm less than 5% of the time, $104mm less than 2.3% of the time, $155mm or than 0.14% of the time …

You see where I’m going with this. A $2 billion loss is, um, 38.5 standard deviations. That exploded Excel’s brain but goofier methods suggest that a loss that big should occur about once in 10^324 days. Or the odds of it happening in the history of the universe are one in a googol. Cubed.

They have another thoughtful piece on how the lines between prop-trading and client trading can get blurred:

Perhaps I’m naïve in thinking that this is the circle of life. You’ll certainly see people who believe that the unpleasantness at UBS reveals that financial innovation and complexity should be banned, or that any units of banks with Greek letters in their names should be shut down. My own view is that you can’t really legislate a world where market makers don’t put their capital at risk – that’s what a market maker does. And if you’re willing to tolerate any form of financial complexity, you will have a world where the risks that market makers take are multiform, and where market makers have a lot of “proprietary” discretion to decide which risks to keep and which to hedge. And relying on forms of words like “proprietary trading” and “client facilitation” is not an intelligent way to think about systemic management of those risks.

In the meantime the accused trader has been charged:

Kweku Adoboli, the trader arrested Sept. 15 after UBS AG (UBSN) said it discovered unauthorized trades that caused a $2 billion loss, was charged with fraud and two counts of false accounting dating back to 2008.

The 31-year-old was taken into custody at a magistrates court in London yesterday until Sept. 22, when he can make an application for bail. Adoboli’s false accounting offenses started in October 2008, according to the court charge sheet. He is also charged with fraud dating back to January 2009.

Not an overnight thing!

Jefferson County may have avoided bankruptcy:

Jefferson County, Alabama, commissioners approved a settlement with holders of $3.14 billion of sewer debt to avert what would have been the largest municipal bankruptcy in U.S. history.

The County Commission voted 4-1 today to accept the terms of the agreement, which includes $1.1 billion in concessions from creditors. JPMorgan Chase & Co. (JPM), which arranged most of the debt, would take the biggest loss.
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The threat of bankruptcy has loomed over Jefferson County, home to Birmingham, Alabama’s biggest city, for more than three years as officials sought to keep sewer fees from ballooning to pay off the debt. The deal hinges on action by the state Legislature, and Commission President David Carrington said bankruptcy is still possible if final terms aren’t agreed on.

The deal calls for three annual sewer-rate increases of 8.2 percent, followed by future annual boosts of no more than 3.25 percent.

BIS has released a working paper by Stephen Cecchetti, Madhusudan Mohanty and Fabrizio Zampolli titled The real effects of debt:

At moderate levels, debt improves welfare and enhances growth. But high levels can be damaging. When does debt go from good to bad? We address this question using a new dataset that includes the level of government, non-financial corporate and household debt in 18 OECD countries from 1980 to 2010. Our results support the view that, beyond a certain level, debt is a drag on growth. For government debt, the threshold is around 85% of GDP. The immediate implication is that countries with high debt must act quickly and decisively to address their fiscal problems. The longer-term lesson is that, to build the fiscal buffer required to address extraordinary events, governments should keep debt well below the estimated thresholds. Our examination of other types of debt yields similar conclusions. When corporate debt goes beyond 90% of GDP, it becomes a drag on growth. And for household debt, we report a threshold around 85% of GDP, although the impact is very imprecisely estimated.

The OSC released its decision on the Sino-Forest puts:

IT IS ORDERED, pursuant to section 144 of the Act, that the Cease Trade Order is hereby varied solely to permit (a) the holders of outstanding Put Contracts issued and cleared by CDCC to exercise their Put Contracts, whether or not such holder is a person described in paragraph 6(i) or 6(ii); (b) the holders of the Put Contracts to sell common shares of the Issuer under the terms of the Put Contracts; (c) the sellers of such Put Contracts to perform their obligations to purchase common shares of the Issuer under the terms of the Put Contracts; and (d) CDCC and its members to carry out their respective obligations under the Rules of CDCC, including all requisite acts in furtherance of the trades described in (a), (b) and (c), provided that this order shall not apply to permit the sale of Issuer common shares by a person described in paragraph 6(i) who does not currently own common shares, or who is an insider or other person described in paragraph 6(ii), and provided further that the Cease Trade Order shall otherwise remain in effect, unamended except as expressly provided in this order.

It looks to my untrained eye as if it’s illegal to borrow shares to make good delivery. I say the integrity of Canadian capital markets has taken a hit.

It was a modestly good day for the Canadian preferred share market, with PerpetualDiscounts winning 10bp, FixedResets up 6bp and DeemedRetractibles gaining 2bp. Volatility was low. Volume was extremely low.

The Toronto Star has some details regarding the Equitable Trust fraud:

More than 1,000 condo owners across Toronto fear they are on the hook for millions of dollars as victims of an alleged property fraud.

Lawyers estimate the total misappropriation may exceed $20 million.

Manzoor Moorshed Khan, president of Channel Property Management, borrowed millions against at least five buildings without their knowledge, according to documents obtained by the Star.
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“It seems to be a case where a fairly sophisticated criminal fraud has been perpetrated,” Andrew Moor, president of The Equitable Trust Company, said in an interview. He said the suspected scheme “managed to penetrate a longstanding process that has kept us safe.”
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The Star has learned that at least four condominium corporations managed by Khan’s company were victims in the alleged fraud. Of these, one has filed a lawsuit for $3.1 million against Khan, his company and several financial firms, including Equitable Trust.

The suit, filed by owners at 25 Grenville St., a luxury condo with around 200 units in downtown Toronto, alleges Khan registered a fake bylaw without the board’s knowledge that authorized him to borrow more than $3 million against the property, according to court document.

The fraud against Equitable, proud issuer of ETC.PR.A, was reported on August 23; the depature of its CFO on September 12.

UBS announced unauthorized losses:

UBS AG (UBSN), Switzerland’s biggest bank, said it may be unprofitable in the third quarter after a $2 billion loss from unauthorized trading at its investment bank.

London police arrested Kweku Adoboli, a UBS employee, in connection with the loss, according to a person with knowledge of the situation who requested anonymity. City of London police and UBS declined to identify the man.

UBS management aims to “get to the bottom of the matter as quickly as possible, and will spare no effort to establish exactly what has happened,” the bank’s group executive board, led by Chief Executive Officer Oswald Gruebel, said in a memo to staff today.
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A 31-year-old man was arrested at business premises in central London at 3:30 a.m. on “suspicion of fraud by abuse of position,” City of London Police Commander Ian Dyson said in a statement today. The man remains in custody while the police investigate, the police said.

Adoboli’s LinkedIn page lists him as a director in ETF and Delta1 Trading at UBS investment bank in London. He previously held the position of trade support analyst at the investment bank, according to the LinkedIn profile. A University of Nottingham spokeswoman confirmed that Adoboli graduated from the school in July 2003, earning a degree in Computer Science.

Details are slowly trickling out:

As Switzerland’s central bank imposed a limit on the franc’s appreciation against the euro on Sept. 6, UBS AG (UBSN) trader Kweku Adoboli’s Facebook profile had a plea for his friends: “Need a miracle.”

Just over a week later, at 3:30 a.m. yesterday, police in London arrested the 31-year-old Adoboli on suspicion of fraud by abuse of position. UBS told investors less than five hours later that “unauthorized trading by a trader” it didn’t identify caused a $2 billion loss.
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Moody’s Investors Service put credit ratings for UBS under review for possible downgrade. The examination will focus on “weaknesses in the group’s risk management and controls that have become evident again,” Moody’s said in a statement. The loss itself “would be manageable for the group given its sound liquidity and capital position.”

UBS asked British police at 1 a.m. yesterday to arrest Adoboli, before alerting the U.K. financial regulator or prosecutors, according to two people familiar with the matter. The Financial Services Authority was notified shortly after the police, and prosecutors at the Serious Fraud Office weren’t contacted at all, according to the two people, who asked not to be identified because the investigations are private.

UBS declined yesterday to say how the trading allegedly lost the bank $2 billion. Gruebel called the loss “unauthorized” and “distressing” in an e-mail to employees, without giving details. No client positions were affected, the Zurich-based company said in the statement, issued on the third anniversary of Lehman Brothers Holdings Inc. (LEHMQ)’s collapse.

Securities regulators are publicizing a request for comments:

The CSA, and the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) (together referred to as the self-regulatory organizations or SROs), are working to develop requirements in a number of areas related to a client’s relationship with a registrant. This initiative is referred to as the CRM Project. As part of this work, the CSA has already developed requirements relating to:

• relationship disclosure information delivered to clients at account opening

• comprehensive conflicts of interest requirements

These requirements were included in the Rule when it came into force.

The amendments outlined in this Notice relate to the remaining elements of CRM, specifically:

• disclosure of charges related to a client’s account and securities transactions

• account performance reporting

The performance reporting is a welcome feature, but there are no provisions requiring advisors to publicize their composites. They’re allowing dollar-weighted calculations as well, which is craziness, and they are making a big fuss about original cost reporting, which is crazier.

It’s heavily influenced by a report Report: Performance Reporting
And Cost Disclosure:

Only two common investment terms are understood well by more than 2/3 of investors, namely, ‘rate of return’ and ‘Term deposit/GIC interest’. Understanding drops off quickly to the 4 out of 10 level when we talk about synthetic measures like market indices or ‘benchmark funds’. Terms like ‘Management Expense Ratio’ are understood by less than 1/3 of investors.
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When we look at how investors assess the performance of their portfolio, we find that most people simply assess the amount of money they gained or lost since their last account statement. The use of market indices and benchmark performance is most common among those with the most money invested.

YLO had a filing on SEDI today, but there was nothing of particular interest – just two more days of buying of YLO.PR.B, YLO.PR.C and YLO.PR.D in the familiar daily quantities, followed by a cancellation of all shares held by the firm on September 14.

It was a mixed day for the Canadian preferred share market with PerpetualDiscounts up 7bp, FixedResets down 9bp and DeemedRetractibles winning 12bp. Volatility was at its normal low levels. Volume was low.

Well, here’s a blunt proposal:

Hong Kong would “absolutely” welcome London-based banks HSBC Holdings Plc (HSBA) and Standard Chartered Plc (STAN) if they decided to move headquarters to the former British territory, according to Chief Executive Donald Tsang.

“If HSBC or Standard Chartered were to change headquarters it would not undermine their business at all,” Tsang said in an interview yesterday. Tsang added he didn’t “want to encourage a move that would impair relations” with trading partners including London and New York.
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HSBC and Standard Chartered, the two U.K. lenders dependent on Asia for a majority of their profit, faced calls from investors to consider moving after the U.K. government imposed a bank levy last year to raise 2.5 billion pounds from lenders. Shifting to Hong Kong would also allow the banks to sidestep any financial transaction tax imposed by the European Union.
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With a top tax rate of 50 percent, London-based bankers making more than 1 million pounds will pay about three times more in tax and social security than colleagues in Hong Kong, accounting firm KPMG estimated last year.

“If you ask businesses why they choose Hong Kong over other places, our surveys show that almost all of them place taxes at the top of the list – or perhaps I should say a lack of taxes,” Tsang said in a speech at the Think Asia Think Hong Kong conference in London.

More bad news for the Europeans:

The European Central Bank said it will lend dollars to two euro-area banks tomorrow, a sign they are finding it difficult to borrow the U.S. currency in markets.

The ECB allotted $575 million in a regular seven-day liquidity-providing operation at a fixed rate of 1.1 percent. It’s the first time since Aug. 17 that a lender requested dollars from the ECB. The spot rate was $1.3625. An ECB spokesman declined to comment on which banks borrowed the funds.

The premium European banks pay to borrow in dollars through the swaps market is close to the highest level in almost three years. The cost of converting euro-based payments into dollars, as measured by the one-year cross-currency basis swap, was 99.1 basis points below the euro interbank offered rate, or Euribor, at 12:24 p.m. in Frankfurt, indicating a premium to buy the greenback. It widened to as much as 112.6 basis points earlier this week, the most since Dec. 2, 2008, according to data compiled by Bloomberg.

U.S. money-market funds “have stopped rolling over dollar loans of European banks,” said Stephen Gallo, head of market analysis at Schneider Foreign Exchange in London. “I wouldn’t be surprised if demand increased in the next weeks.”

As anticipated, Moody’s downgraded Credit Agricole and SocGen:

Credit Agricole was lowered to Aa2, Moody’s third-highest rating, and remains under review. Paris-based Societe Generale (GLE) was reduced to Aa3, with a negative outlook, as Moody’s re- evaluated its level of state support. BNP Paribas, the largest French bank, had its Aa2 long-term rating kept on review for a possible cut.
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Credit Agricole’s new ratings “are more consistent with the bank’s sizeable exposures to the Greek economy,” Moody’s said in the statement.

The western world is getting a long-overdue lesson on the relationship between pipers, payments and tunes:

And, reminding his audience of his nation’s economic power, he said China is ready to invest more in Europe, but called on Europe to take “bold steps” toward recognizing China as a full market economy.

The World Trade Organization set a 2016 deadline for its member nations to recognize China’s market economy on the country’s admission to the organization in 2001. But, to China’s frustration, neither EU countries nor the United States have done so, amid continuing disputes over dumping of cheaply made Chinese consumer goods and anti-dumping tariffs in the receiving countries.

“We have been concerned about the difficulties faced by the European economy for a long time, and we have repeated our willingness to extend a helping hand and increase our investment,” Mr. Wen said. “To show one’s sincerity on this issue [of the market economy] a few years ahead of that time is the way a friend treats another friend.”

And by the way, shut up about that stupid human rights thing, OK? And spies? Shut up about them too, got it?

The TRE puts situation is causing headaches:

After a hearing on Wednesday morning, the Ontario Securities Commission announced that it needed an extra day before ruling whether or not Sino-Forest Corp.’s (TRE-T4.81—-%) put options that are affected by its cease-trade order will be allowed to be exercised.
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CDCC’s main argument is that these puts are insurance contracts that were signed before the halt was put into effect, and that letting the holders exercise them does not constitute a new investment decision. (The new investment decision is a key part of the argument because the cease prevents new decisions from being made.)
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Sino-Forest options in question are American style, which means that they can be exercised at any time up to and on the exercise date. (Whereas European options can only be exercised on the exercise date.) Those who argue against CDCC claim that the right to have exercised before the puts makes these options equivalent to stocks. In other words, they say, holding a put is no different than being short the stock, and like the short sellers who are now stuck, the put holders should have exercised earlier.

I certainly hope that the argument regarding equivalency to stocks has been very badly reported, because it’s nonsensical as stated. They aren’t stocks. They’re put options. Losses for both parties are limited (which is not the case for call options).

Saying they’re insurance contracts can lead to murky consequences as well. We’ve already had to listen to shrill screams that buying a credit default swap on a security you don’t own is like buying fire insurance on a house you don’t own. It’s a slippery slope.

Unfortunately, the Financial Post has a direct quote:

“The holder was buying insurance against the situation that has arisen,” said lawyer James Tory of Torys LLP, who is representing the CDCC.

Those words may yet come back to haunt us.

I continue to be amazed that this issue was not dealt with long in advance; and continue to believe that in future the CDCC should simply adjust the expiration dates by a term equal to the term of the cease-trading order. Wasn’t there something a long time ago, with options having strike prices that were unaffected in Canada by a major special dividend, when every other options exchange in the world made an adjustment? It was a $5 dividend if I remember correctly, which is by no means a sure bet.

The Financial Post claims that a National Bank – HSBC retail brokerage deal is all over but the shouting.

The Canadian preferred share market fared poorly today, with PerpetualDiscounts down 8bp, FixedResets losing 12bp and DeemedRetractibles off 3bp. Volatility was OK, with BAM issues well represented – to some extent reversing their sparkling performance yesterday. Volume was on the high side of average.

Assiduous Readers will be aware of my admiration for American institutions. The politics may be crazy – and I feel that the SEC has been compromised by politicization – but there’s no doubt but that the finest quality ingredients go into the sausage-making process, regardless of what one might think of the final product. The latest example of this is living-will regulations:

U.S. regulators approved two sets of guidelines that banks including Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM) will have to follow in drafting plans to protect the broader economy in the event of their own collapse.

The Federal Deposit Insurance Corp. board voted unanimously today to release a joint final rule laying out what the largest and most complex financial firms must include in so-called living wills they’re required to file. The panel also approved contingency planning guidelines for insured banks.
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Regulators are requiring financial firms to file plans that are developed under the context of the bankruptcy code, with each designed to give a blueprint for how a firm could be taken apart. Subsidiaries with critical operations or core functions would also have to be addressed in resolution plans, a senior FDIC official said before today’s meeting.

Can you imagine? Requiring the plans to be compatible with the bankruptcy code that has been developed globally over three hundred years, adjusted, tweaked and refined in response to every conceivable contingency? It’s unheard of! It’s brilliant! I think the FDIC board members should all get Nobel Prizes, and that’s just for starters.

The Italian 5-year auction didn’t go too well:

Italian borrowing costs jumped at a 6.5 billion-euro ($8.8 billion) bond auction as contagion from Europe’s debt crisis leaves investors shunning the region’s most-indebted nations.

The Rome-based Treasury sold 3.9 billion euros of a new benchmark five-year bond to yield 5.6 percent, up from 4.93 percent when similar-maturity securities were sold on July 14.

Greece is finally getting some good advice:

Greece should default on its bonds to stop a deterioration of the economy, said Mario Blejer, a former Bank of England adviser who took the reins of Argentina’s central bank after its 2001 default on $95 billion.

“Greece should default, and default big,” Blejer, who was an adviser to Bank of England Governor Mervyn King from 2003 to 2008, said in an interview in Buenos Aires. “You can’t jump over a chasm in two steps.”

Rescue programs backed by the International Monetary Fund and European Central Bank are “recession creating” efforts that will leave Greece saddled with more debt relative to the size of its economy in coming years and stifle growth, Blejer said. A Greek default would push Portugal to do the same and would put Ireland “under tremendous pressure to at least symbolically default” on some of its debt, he added.

IIROC has published a rather cutesy Guide to Trading on Equity Markets. The interactive graphics are in desperate need of proof-reading … for example, item #5, purportedly indicating the “last trade” on the explanation of buy and sell orders is misplaced; while the explanation of limit orders illustrates the instruction “Sell 500 @ 20.00” with an explanation of the consequences if the order had in fact been “Sell 500 @ 20.40”. Good old IIROC, always good for a laugh.

Click for Big

Click forBig

The situation with TRE options is a disgrace:

Shareholders of Sino-Forest Corp. (TRE-T4.81—-%) aren’t the only ones with headaches after the Ontario Securities Commission halted trading in the company’s shares.

Investors who thought they were buying insurance using “put” options against a decline in the forestry company’s shares are facing the prospect that their protection could be worthless.
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Last week, the OSC extended the cease-trade order to Jan. 25, 2012. During the four-month break, about 9,000 put options are scheduled to expire. Each put allows the holder to sell 100 shares at a predetermined price.
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The issue first flared up on Aug. 26 when the Canadian Derivatives and Clearing Corp., which oversees options trading in Canada, announced that Sino-Forest options could not be exercised while trading in the stock was halted. That rattled investors who held put contracts that were now frozen.

After discussions with the investors, the CDCC filed a request with the OSC asking for permission to allow some investors to exercise the options.

It is requesting special treatment for contracts that were purchased as protection against a long position in the shares. That means anyone who bought puts purely for speculative purposes will still be out of luck if the OSC approves the request.

I’m surprised at two things – mainly that such a situation isn’t common enough that it was foreseen and provided for in the contract specifications. It seems to me – at first blush – that the most logical way to address the problem is to extend the expiration date of the options by a term equal to the term of the cease trading order.

CDCC’s press release states:

In accordance with CDCC prior practice, CDCC made application to the OSC on September 7, 2011 for an order varying the Cease Trade Order to permit the outstanding put contracts to be exercised.

OSC staff are considering CDCC’s application and have advised CDCC that, if OSC staff determine it is appropriate to recommend that the requested variation order be granted, OSC staff may recommend that a condition be included in the variation order that limits the relief to holders of outstanding put contracts who are not current or former members of management or other insiders of Sino-Forest Corporation.

However, the application for the variance states:

CDCC members will be informed that if they (or their clients or other beneficiaries) wish to exercise a Put Contract, they must currently own the shares to make good delivery.

Even this wouldn’t be so bad, if you could at least sell your puts to somebody who did own shares (or who was short the puts already) – but the Montreal Exchange reports no trading in TRE options since the cease-trading order became effective. And I don’t know whether it would be legal to borrow the shares required to make good delivery.

If you were given the task of thinking up a response to such a situation most harmful to market integrity, you would suggest treating puts differently according to the moral virtue of the holder (speculators, of course, being EVIL! EVIL! EVIL!).

I don’t know much about the intricacies of the option market, but would dearly love to be guided to some authoritative discussion of the topic by somebody who does.

IAG issued equity:

DBRS regards favourably the decision by Industrial Alliance Insurance and Financial Services Inc. (IAG or the Company; Subordinated Debentures rated “A”, Claims Paying Ability rated IC-2, and Non-Cumulative Preferred Shares rated Pfd-2 (high)) to privately place six million common shares worth close to $200 million with the Caisse de dépôt et placement du Québec. Pro forma the new issue, the new shares will represent 6.7% of the Company’s 90 million in outstanding common shares. The Company’s solvency ratio will increase by 14 percentage points as of June 30, 2011, to 208%. Ostensibly, the raising of capital at this time was a reaction to the recent weakness in the global economy as suggested by soft equity markets and continued downward pressure on interest rates. Both market developments could result in a required increase in actuarial reserves, which could erode earnings in the short run. To issue new capital in the current uncertain economic and market environment is therefore regarded as prudent.

IAG has been increasing its exposure to equity markets by virtue of segregated fund guarantees, increased equity assets held opposite long-tailed liabilities, and through the impact on management fee income in both the segregated fund operations and in the IA Clarington mutual fund operation. The Company is also exposed to falling interest rates. While IAG, like most life insurance companies, is dynamically hedging some of these market exposures, it is increasingly exposed to financial market volatility, which justifies the decision to increase its regulatory capital relative to the peer group.

IAG has stated:

The Company considers that its solvency ratio will remain above 175% as long as the S&P/TSX remains above 9,600 points (compared to 10,600 points without this issue) and will remain above 150% as long as the S&P/TSX remains above 8,100 points (compared to 8,800 points without this issue).

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts winning 16bp, FixedResets up 10bp and DeemedRetractibles losing 3bp. There was good volatility, all positive and dominated by BAM – perhaps the market forgot that all those issues went ex-Dividend today. Volume was low.