PrefBlog

Moody’s put Spain on Review-Negative:

Spain faces a possible downgrade by Moody’s Investors Service as its regions struggle to cut budget deficits and last week’s Greek bailout increases the risk that bondholders will have to pay for further European rescues.

Moody’s is reviewing the nation’s Aa2 classification, the ratings company said in a statement today. A cut would probably be “limited to one notch,” Moody’s said. The euro fell. Spain has the same credit rating as Italy, which is also on review for downgrade at Moody’s.

The trouble with regulators, as a class, is their inability to think things through. Increased transparency in the public bond market has brought with it reduction of choice for public investors, as more deals are done on a private placement basis, and thinner markets for the ones that remain, as capital gets redeployed to more profitable areas. Another example of this is hedge fund regulation:

There’s a two-word explanation for closing what was once one of the world’s biggest hedge funds and consistently one of the best-performing — with returns of about 30 percent annually in its first 30 years: Dodd-Frank. The law requires hedge funds to register with the Securities and Exchange Commission and provide information about customers, employees and assets. By returning outsiders’ money, Soros Fund Management escapes that rule and the loss of privacy that goes with it.

“An unfortunate consequence of these new circumstances is that we will no longer be able to manage assets for anyone other than a family client as defined under the regulations,” the brothers wrote in a letter to investors.

Or maybe regulators do think things through – a regulator’s ideal world is one in which everybody holds only plain-vanilla investments, nobody every complains and regulators are never subjected to criticism, informed or otherwise.

I would love to offer Malachite Aggressive Preferred Fund to the general public … but the process isn’t just expensive, it’s stupid expensive. To make such an idea work, I would have to convert my firm into just another marketting and distribution firm, with investment management tacked on as an unfortunate operating expense to be minimized.

There has been lots of noise about the City of Toronto cost-cutting programme … the problem as I see it is not so much that the City is doing things it doesn’t need to do (although there’s plenty of that) as it is that it grossly overpays for what it does. Take librarians, for example. CUPE BC claims that Toronto librarians make almost $35/hr – and that report was dated June, 2007! Add pension and benefits to that and I’ll bet there’s not much change from $100,000 annually. My girlfriend tells me that when she goes to the library and uses the scanner to check out books, there are generally three – count ’em, three – librarians watching her do it.

YLO closed the Trader Corp. deal yesterday, but it didn’t do them much good on the market as three of their four preferreds were down significantly on the day (bid/bid) – the exception was the short-term retractible, YLO.PR.A.

These issues did horribly on the month, occupying four of the bottom six positions on the total returns ranking of the HIMIPref™ universe: only YLD.PR.B (worst) and BBD.PR.D (fifth worst) managed to break the hegemony. Total returns for the YLO prefs ranged from -6.4% (YLO.PR.A) to -18.4% (YLO.PR.D).

The Canadian preferred share market closed the month on a mixed note,with PerpetualDiscounts down 2bp, FixedResets down 2bp and DeemedRetractibles gaining 7bp. Volatility was low. Volume was … pretty close to non-existent!

PerpetualDiscounts now yield 5.44%, equivalent to 7.07% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 5.1% (maybe a little under) (!) so the pre-tax interest-equivalent spread is now about 200bp, a widening from the 185bp reported on July 27 as the two yields have moved in opposite directions over the past two days.

And that’s it for another month!

According to the chatterati, credit rating agencies are heroes this week:

At a House subcommittee hearing yesterday, U.S. financial regulators acknowledged that the rating companies lately have been doing a better job. Alarmed by Greece’s unsustainable borrowing, the companies have slashed Greek debt to below investment grade. Troubles in Ireland, Portugal and Spain aren’t as severe, but those countries are under appropriately close scrutiny by rating services. Even the U.S. has been tagged for a downgrade if it can’t sort out its debt-ceiling and spending problems — and maybe even if it does.

It was a quiet, slightly negative day for the Canadian preferred share market, with PerpetualDiscounts up 2bp, FixedResets losing 6bp and DeemedRetractibles down 3bp. Big volume continued for BNS.PR.Z, but was otherwise volume was only average.

The Bank of America takes wealth destruction seriously:

Bank of America Corp. (BAC), faced with a glut of foreclosed and abandoned houses it can’t sell, has a new tool to get rid of the most decrepit ones: a bulldozer.

The biggest U.S. mortgage servicer will donate 100 foreclosed houses in the Cleveland area and in some cases contribute to their demolition in partnership with a local agency that manages blighted property. The bank has similar plans in Detroit and Chicago, with more cities to come, and Wells Fargo & Co. (WFC), Citigroup Inc. (C), JPMorgan Chase & Co. (JPM) and Fannie Mae are conducting or considering their own programs.
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The lender will pay as much as $7,500 for demolition or $3,500 in areas eligible to receive funds through the federal Neighborhood Stabilization Program. Uses for the land include development, open space and urban farming, according to the statement

Speaking of wealth destruction, S&P downgraded Greece:

Greece will partially default on its debt once European officials push through a plan that will see bondholders foot part of the bill of a second bailout agreed to last week in Brussels, Standard & Poor’s said.

The rating company also cut its ranking for Greece to CC, two steps above default, from CCC, according to a statement published in London today. The outlook on the debt is negative.

“The proposed restructuring of Greek government debt would amount to a selective default under our rating methodology,” S&P said. “We view the proposed restructuring as a ‘distressed exchange’ because, based on public statements by European policy makers, it is likely to result in losses for commercial creditors.”

But stupid people can relax – the authorities are taking steps to ensure that nobody will ever lose money in the PPN market:

These are a way for banks to get cheap funding by packaging an unsecured debt security with an equity/credit/commodity/whatever derivative and selling it to customers who don’t have ISDAs or otherwise aren’t down with OTC derivatives. They’re called “principal protected” because even if the linked index goes down, you still get all your money back (albeit at zero yield). But that only happens if the issuer doesn’t go bankrupt – if they go bankrupt, you’re hosed just like other noteholders.

Which, duh, or so we thought. The notes after all said that they were Lehman’s unsecured obligations and that “an investment in the Notes will be subject to the credit risk of Lehman Brothers Holdings Inc, and the actual and perceived creditworthiness of Lehman Brothers Holdings Inc. may affect the market value of the Notes.” But that wasn’t enough for these plaintiffs, or for the judge, who is going to let the structured notes claims go to trial:
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So the advice to structured notes desks is (1) put everything on the first page and (2) don’t assume that your customers are “careful and intelligent readers.”

Canadians, on the other hand, are indeed “careful and intelligent readers.”. I proved this on January 5:

Click for Big

In the States, though the SEC must be vigilant:

Among other things, the staff observed that broker-dealers might have:

• recommended unsuitable structured securities products to retail investors;
• traded at prices disadvantageous to retail investors;
• omitted material facts about structured securities products offered to retail investors;
• engaged in questionable sales practices with customers.

YLO will release 11Q2 results on August 4.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts losing 6bp, FixedResets off 2bp and DeemedRetractibles up 10bp. Volatility was muted (but all negative); volume was average, but with massive volume in BNS.PR.Z (which had a “last” quote with a gigantic spread) on the back of some very nice tickets by RBC.

PerpetualDiscounts now yield 5.38%, equivalent to 6.99% interest at the standard equivalency factor of 1.3x. Long corporates now yield 5.15% (!!) so the pre-tax interest-equivalent spread is now about 185bp, a tightening from the 200bp reported on July 20 as the PerpetualDiscounts played catch-up to the prior downward move in bond yields.

The SEC has invented more paperwork:

The rule contains the following requirements:

Filing a Form: Traders who engage in a substantial level of trading activity will be required to identify themselves to the SEC by filing a form, Form 13H, with the Commission. A “large trader” will be defined as a person whose transactions in exchange-listed securities equal or exceed two million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month.

The rule provides guidance on certain types of transactions that can be excluded for purposes of calculating trading levels.

Getting an Identification Number: After it files Form 13H to register with the Commission, the SEC will then assign each large trader a unique large trader identification number (LTID), which will allow the agency to efficiently identify and analyze trading activity by the large trader. A large trader will be required to disclose to its broker-dealers its LTID and highlight all of the accounts at the broker-dealer through which the large trader trades.

Recordkeeping, Reporting, and Monitoring: The rule requires broker-dealers to maintain and report data that is largely identical to the information covered by the Commission’s Electronic Blue Sheets (EBS) system – the system the SEC currently uses to collect transaction data from broker-dealers. The only additional items that broker-dealers will be required to maintain and report are the LTID and the time a transaction occurs. Accordingly, the rule leverages the existing EBS system, with modifications, to accommodate the specific requirements of the new rule. In addition, the rule requires broker-dealers to monitor whether their customers meet the threshold levels that define a “large trader” (based on transactions handled at the broker-dealer) in order to encourage compliance by their customers with the requirement to identify themselves as large traders to the SEC.

Ready Access to Data: The rule requires transaction data to be available for reporting on the morning after the day the transactions were effected. When the SEC requests data from broker-dealers, it would not under normal circumstances require responses earlier than the opening of business on the day after it makes its request. Prompt access to this data will assist the SEC in reconstructing market activity and performing other trading analyses, and also will assist in investigations of manipulative, abusive, and other illegal trading activity.

The Ontario Ministry of Pretending to Do Things So We Can All Feel Good has:

released comprehensive teacher guidelines that identify places in the Grade 4 through 12 curriculum where financial literacy can be inserted into classes as varied as mathematics, computer science and native studies.
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Ontario, for example, suggests that in high school, “when studying classical civilizations, students could address aspects of trade, economics and use of money in ancient times,” according to the new teacher guidelines.

It was another positive day on the Canadian preferred share market, with PerpetualDiscounts winning 20bp, FixedResets up 2bp and DeemedRetractibles gaining 5bp. Volatility was low; volume was below average.