PrefBlog

European banks have a lot of refinancing to do:

Banks in Europe’s most indebted nations need to refinance $122 billion of bonds this year, likely paying high interest costs even after receiving a clean bill of health from regulators.

Italy’s Intesa Sanpaolo SpA has the most debt coming due at $28 billion, followed by UniCredit SpA with $21 billion, according to data compiled by Bloomberg. Italian banks must refinance a total $69 billion of bonds this year and $157 billion in 2011, while Spanish lenders have $28 billion and $73 billion of debt that needs to be paid.

Banks in so-called peripheral European countries from Greece to Ireland have been largely shut out of debt markets since April amid concern their governments will struggle to cut budget deficits.
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The extra yield investors demand to own European financial- company bonds has climbed 0.5 percentage point to 2.17 percentage points from a 29-month low on April 16, according to Bank of America Merrill Lynch’s EMU Financial Corporate Index.

Spanish bank spreads average 333 basis points, 62 percent wider than at the beginning of April. Portuguese lenders’ margins average 495 basis points, 85 percent wider, while Irish financial debt pays a 585 basis-point margin, 35 percent more. Italian bank spreads are 218 basis points, an increase of 34 percent compared with four months ago.

With many frozen out of the bond market, banks in the peripheral countries are relying on the European Central Bank for the bulk of their funding. Spanish lenders, which account for 10.5 percent of assets in the EU financial system, borrowed a record 126.3 billion euros from the Frankfurt-based ECB in June, the most recent Bank of Spain data show.

The Americans found out during the S&L Crisis that there is a vital difference between “illiquid” and “insolvent” banks, and that the Fed should not prop up the latter. Have the Europeans learnt the same lesson?

There are encouraging reports from Greece:

Prime Minister George Papandreou has raised taxes, cut wages and overhauled the state-run pension system, while braving months of strikes against the measures that helped shrink the budget gap by 45 percent in the first half. Sustaining the effort and qualifying for another 9 billion euros of EU-IMF funds will be complicated by a recession that has been deepened by his steps.
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For Papandreou, abiding by the EU-IMF recommendations may trigger further protests. Both institutions have said part of the inflation jump is from a lack of competitiveness that can be addressed in part by opening up professions deemed “closed,” such as trucking.

Truckers last week starved Greek gas stations of fuel as they opposed the government’s plan to issue the first new licenses since 1971. The strike was called off on Aug. 1 after the government commandeered trucks and said the drivers would be prosecuted. Papaconstantinou has pledged to push ahead with changes to open up professions ranging from pharmacists to architects.

“Closed professions will open,” he said in Parliament on July 28. “They will open because prices must fall. They will open because this will help the budget of each household and they will open because that is how the country’s growth will be helped.”

I’m not sure how far their deficit numbers can be trusted, but increased competition amongst previously closed shops has to be a good thing.

There is the possibility that US Banks are finally putting their excess reserves to work, buying Mortgage-Backeds:

Large U.S. commercial banks added $51.4 billion of so- called agency mortgage-backed securities in the two weeks ended July 21, according to the latest data released by the Federal Reserve. The holdings fell from $696.6 billion in the middle of 2009 to $687.2 billion on July 7 even as the lenders’ portfolios of Treasuries and agency corporate debt grew $104 billion.

Large banks, which now hold $736.8 billion of the securities, avoided the debt as the Fed’s $1.25 trillion of buying drove down yield premiums to record lows relative to 10- year Treasuries, and acquisitions by private investors then restrained spreads.
Fannie Mae’s current-coupon notes, or those trading closest to face value, yield 3.54 percent as of 12:37 p.m. in New York, according to data compiled by Bloomberg. That’s 0.64 percentage point more than 10-year Treasuries, up from a record low of 0.54 percentage point reached July 30, Bloomberg data show.

Checking accounts, among the means through which banks raise money that they can invest in securities, pay depositors 0.53 percent on average, according to Bankrate.com data. Rates on the accounts typically vary based in part on the Fed’s target rates. A rise in banks’ deposits, which Fed data show growing for large banks by $37 billion from April 21, has contributed to their desire to invest more in mortgage securities, [Barclays analyst Derek] Chen wrote.

Additionally, excess reserves are down by a preliminary $35-billion in the period June 2 – July 28. Who knows? Maybe this new-found interest in RMBS is a tiny step towards James Hamilton’s archetypal car loans.

The SEC’s Department of Making Prospectuses Longer has been working overtime:

U.S. regulators said mutual funds aren’t telling investors enough about why they use derivatives, with some funds providing “generic” disclosures and others failing to explain how the products affect performance.

Regulators said they are concerned that the use of derivatives has increased in the mutual-fund industry without shareholders comprehending the risks or investment strategies. Some funds offer information that “may not be consistent with the intent” of required registration forms, the Securities and Exchange Commission wrote in a July 30 letter to the Investment Company Institute, the industry’s biggest trade group.

The SEC also raised concerns about “abbreviated” disclosures that give investors a false sense of security about how much funds rely on derivatives.

Speaking of the SEC, former Countrywide CEO Mozila is fighting his battles in (gasp!) court:

“The undisputed evidence establishes, and the SEC now admits, that stockholders understood Countrywide’s underwriting guidelines expanded over time,” lawyers for Mozilo and the two other defendants said in the filing.

The SEC admitted in response to inquiries from the defendants’ lawyers that information about its riskier loans was reflected in the company’s stock price, according to Mozilo’s filing. Countrywide provided information about those loans in prospectus supplements for mortgage-backed securities sold in the secondary market, Mozilo said in the filing.

John McCoy, a lawyer for the SEC, didn’t immediately return a call seeking comment.

The SEC sued Mozilo in June 2009, saying he publicly reassured investors about the quality of Countrywide’s loans while he issued “dire” internal warnings and sold about $140 million of his own Countrywide shares. Mozilo wrote in an e-mail that Countrywide was “flying blind” and had “no way” to determine the risks of some adjustable-rate mortgages, according to the SEC complaint.

I don’t have a view on Mozilo’s guilt or innocence … but I have a view on the desirability of the SEC getting a black eye!

Interesting article about Somali piracy, but the world has become awfully wussy. Julius Caesar knew what to do about pirates; so did Thomas Jefferson.

Premier Dad has clearly identified “morons” as a crucial demographic for the next election with his ‘Zero-Brains’ policy on young drivers and alchohol. “Better enforcement tools for the police!” cheer the dimwits. “So much more efficient than the silly old court system!”. After all, police would never abuse their authority, would they? And they always tell the truth, right? So what do we need the courts for, anyway?

The Canadian preferred share market moved up today on light trade, as PerpetualDiscounts gained 2bp and FixedResets gained 16bp, taking the median weighted average yield to worst of the latter class all the way down to 3.44%. That’s the eighth lowest yielding close on record … can we push past the 3.31% mark, set March 26? Stay tuned! The Bozo Spread (Current Yield PerpetualDiscounts less Current Yield FixedResets) remains in its range at 51bp … which makes me laugh.

There was a very good essay (which means: “one that I agree with”) in The Economist of July 24 titled Too many laws, too many prisoners that included the information:

For bringing some prescription sleeping pills into prison, he was put in solitary confinement for 71 days. The prison was so crowded, however, that even in solitary he had two room-mates.

Comrade Peace Prize is touting the automaker bail-out (far more expensive than the banking bail-out, but probably cheaper than the Fannie/Freddie bail-out):

Heading into a congressional election season in which polls show the public skeptical about the $84.8 billion rescue and anxious about economy, Obama is using the backdrop of Detroit- area plants owned by GM and Chrysler to promote what he says is an industry revival that has saved more than a million jobs.
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“We are going to get all the money back that we invested in those car companies,” Obama said on ABC’s “The View” program.

For sure the money will be paid back! All GM needs is more subsidies:

The price tag? About $41,000. Luxury car prices for a car that is much more about what is under the hood than between the doors. Comfort and feature-wise, the volt is more like a Focus than a Lexus. For that kind of sticker-price you can get a BMW convertible, a Cadillac CTS or a number of well-known luxury cars. This creates a problem in making the desired electric vehicle commercially viable.

In order to compensate for the high cost and the desire to have a more ‘green’ economy, the Federal government implemented a $7,500 tax credit for electric vehicles, reducing the overall price of the Volt to $33,500. That’s right, much like the abomination that was the “Cash for Clunkers” program, our federal government is spending other people’s tax dollars to subsidize the purchase of cars by people who might otherwise choose to buy something else. By doing so they hope that the price tag will be more acceptable to potential buyers.

At least with Cash for Clunkers this taxpayer money was spread around the industry. In this case, however, the qualifying candidates for the program are narrow indeed, although it has provided a boon to the golf cart industry by allowing this subsidy to be given to purchasers of road-worthy golf carts, if equipped with side mirrors and seat belts (wittily referred to by the Wall Street Journal as a “Cash for Clubbers” program).

Still, even after the tax break, the Volt remains a pricey alternative to the typical gasoline-only cars.

Why do we subsidize the auto industry? Because they’re good jobs. Why are they good jobs? Because they’re subsidized.

Moody’s is increasingly dubious regarding whether Iceland is investment grade:

Moody’s is “taking it too far,” Economy MinisterGylfi Magnusson said in an interview yesterday, after the rating service cut the outlook on Iceland’s Baa3 foreign currency debt to negative. Moody’s said it will lower the rating to junk if a June court ruling banning some foreign loans hurts the recovery or forces the government to raise debt levels by bailing out the banks.
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Iceland’s financial crisis was exacerbated by banks that borrowed in currencies such as Japanese yen and Swiss francs to take advantage of lower interest rates, then repackaged them as kronur loans for clients. The krona has lost 38 percent against the yen and 30 percent against the franc since Sept. 15, 2008. The government is struggling to pay down a gross debt burden that will swell to 150 percent of economic output this year, Moody’s estimates.

The prospect that Iceland’s economy will return to growth next year is “subject to significant downside risks,” Moody’s said. The economy contracted 6.5 percent in 2009 and will probably shrink a further 2.6 percent this year, the central bank estimates. Output will expand 3.4 percent in 2011, the bank said in its latest forecast in May.

CIBC has reopened some USD covered bond deals:

DBRS has today assigned ratings of AAA to the Series CB5 (Tranche 2) and Series CB7 (Tranche 2) covered bonds issued under the Canadian Imperial Bank of Commerce (CIBC) Global Public Sector Covered Bond Programme (the Programme). The USD 400 million Series CB5 (Tranche 2) covered bonds are a re-opening of the existing Series CB5 (Tranche 1) covered bonds and have the same coupon rate (2.00%) and maturity date (February 4, 2013). Similarly, the USD 600 million Series CB7 (Tranche 2) covered bonds are a re-opening of the existing Series CB7 (Tranche 1) covered bonds and have the same coupon rate (2.60%) and maturity date (July 2, 2015). All covered bonds issued under the Programme (the Covered Bonds) rank pari passu with each other.

I wasn’t able to learn the price at which these went out the door, but was able to learn that they were issued as Rule 144a private placements: so retail can go suck eggs, the regulators have destroyed the market.

And now Toronto hosts Caribana again – complete with its perennial funding problems, despite the fact that it brings a tidal wave of cash into the city. Meanwhile, the totally synthetic Luminato is awash in cash (like its cousin, Nuit Blanche) despite having an economic impact, as near as I can figure, of half a dozen extra coffees being sold so the ribbon cutters can stay awake during each others’ speeches. But synthetic events are just so much easier to control than grass-roots ones, don’t you agree? And provide employment for the right sort of people. But anyway, have fun at Caribana, everyone – and if you’re under thirty, kiss a girl for me!

The month ended on a somnolent note, with very quiet trading in the Canadian preferred share market. PerpetualDiscounts gained 4bp and FixedResets were up 10bp, taking the median weighted average yield to worst on the latter class down to 3.46% – the eighth-lowest on record. All seen lower market yiels were at the end of March, 2010.

PerpetualDiscounts now yield 5.89%, equivalent to 8.25% interest at the standard 1.4x conversion factor. Long Corporates now yield about 5.5%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now 275bp, a surprising increase from the 265bp recorded on July 28. Corporates have been on wheels!

Click for Big

The Europeans are taking a look at High Frequency Trading:

High-frequency trading will be investigated by regulators to “better understand any risks,” Europe’s top market watchdog said in a report on proposed industry rules.

A planned European Union market regulator should also have the power to set standards for the tools used by high-frequency traders, such as the practice of placing computer servers close to trading venues to speed up market access, the Committee of European Securities Regulators told the European Commission.

Powers for the proposed European regulator should keep pace “with new technological advances, increasingly fragmented equity markets” and “shortcomings” in post-trade information, Sally Dewar, a managing director at the U.K. Financial Services Authority, said in an e-mailed statement today.

There’s nothing wrong with them familiarizing themselves with the issue – the rules-makers should know how the game is played! – but the Europeans have come up with so much wierd stuff lately that it will be most interesting to see what comes of it.

The bill to encourage banks to extend small-business credit has stalled in the Senate:

Senate Republicans blocked a measure that would cut taxes and ease credit for small businesses, saying they objected that Democrats refused to consider their amendments to extend expiring tax breaks.

The Senate voted 58-42 today to end debate on the bill, falling short of the 60 votes required to consider the legislation for passage.
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The legislation was faulted by Republicans such as Senator Richard Shelby of Alabama for being a government rescue similar to the $700 billion bank bailout of 2008. The program might induce banks to make risky loans, lawmakers said.

“The lack of credit for small businesses is a problem that needs to be addressed,” Shelby said during Senate debate last week. “I do not, however, believe that we should try and solve this problem with another expensive and bureaucratic government program.”

There will be congressional hearings into Basel III, which should satisfy my desire to understand the changes better. I mean, we’re certainly not going to see any discussion by OSFI or the Ottawa Mickey Mouse League, are we?

Christopher Dodd and Barney Frank, authors of the U.S. financial overhaul, plan hearings on the status of global talks to revise bank-capital standards amid worries that proposed rules are being watered down.
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The Senate Banking Committee, chaired by Dodd, will hold the discussions on the Basel process in September, said Sean Oblack, a spokesman for the Connecticut Democrat. Frank, the Massachusetts Democrat who heads the House Financial Services Committee, also plans to hold a hearing on the subject, said spokesman Steven Adamske. Neither panel has set a date nor decided who will be asked to testify.

Say what you like about what comes out of Congress – and I do! – the research that goes into these hearings is first-rate.

TD Bank has issued 5-year covered bonds in USD at 2.20%:

DBRS has today finalized the rating of AAA on the Covered Bonds, Series 1 (the Covered Bonds) issued under The Toronto-Dominion Bank (TD) EUR 10 billion Global Public Sector Covered Bond Programme (the Programme). The Covered Bonds (USD 2 billion) have a coupon rate of 2.20% and a hard-bullet maturity date of July 29, 2015.

The ratings are based on several factors. First, the Covered Bonds are senior unsecured direct obligations of TD, which is the second largest bank in Canada and rated AA and R-1 (high) with a Stable trend by DBRS. Second, in addition to a general recourse to TD’s assets, the Covered Bonds are supported by a diversified collateral pool (the Cover Pool) of prime credit home equity lines of credit (HELOCs) insured by Canada Mortgage & Housing Corporation (CMHC). CMHC is an agent of Her Majesty in right of Canada and is rated AAA by DBRS. The Cover Pool was approximately $10.7 billion as of April 19, 2010. Third, the Covered Bonds benefit from several structural features, such as a reserve fund, when applicable; a minimum rating requirement for swap counterparties, servicer and cash manager; and, lastly, the funding of pre-maturity liquidity if TD’s rating falls below certain thresholds.

Little of interest happened on reasonably good volume today, with PerpetualDiscounts up 2bp and FixedResets about as close to flat as you can get.