PrefBlog

Bernanke announced that his boss is doing a great job. The American Bankers’ Association isn’t so sure:

The American Bankers Association is very disappointed with the regulatory reform bill that is now headed for enactment. While its core provisions provide needed reform, it is overloaded with new rules and restrictions on traditional banks that did not cause the financial crisis. The result will be over 5,000 pages of new regulations on traditional banks and years of uncertainty as to what the massive new rules will mean.

To my great disappointment, Goldman knuckled under to regulatory extortion:

The Securities and Exchange Commission today announced that Goldman, Sachs & Co. will pay $550 million and reform its business practices to settle SEC charges that Goldman misled investors in a subprime mortgage product just as the U.S. housing market was starting to collapse.

However, the SEC agrees that Goldman committed no actual wrongdoing:

Goldman agreed to settle the SEC’s charges without admitting or denying the allegations by consenting to the entry of a final judgment that provides for a permanent injunction from violations of the antifraud provisions of the Securities Act of 1933.

The SEC trumpets the Goldman statement:

Goldman acknowledges that the marketing materials for the ABACUS 2007-ACI transaction contained incomplete information. In particular, it was a mistake for the Goldman marketing materials to state that the reference portfolio was “selected by” ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that Paulson’s economic interests were adverse to CDO investors. Goldman regrets that the marketing materials did not contain that disclosure.

I can see it’s time to take legal advice; perhaps my fund documents should include a disclosure to the effect that “Everything the fund owns was sold to it by somebody else.”. Perhaps that will help keep me out of trouble.

The rally in the Canadian preferred share market continued on heavy volume today, with PerpetualDiscounts up 24bp and FixedResets up 18bp.

Nothing happened today, either. Except …

Another day of heavy volume and positive returns in the Canadian preferred share market today, with PerpetualDiscounts gaining 34bp and FixedResets up 24bp … taking the Yield-to-Worst for the latter index down below 3.50%. Hallucination! – JH 7/15

PerpetualDiscounts now yield 5.92%, equivalent to 8.29% interest at the standard equivalency factor of 1.4x. Long Corporates now yield about 5.5%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 280bp, a nice little tightening from the 290bp reported on July 7.

Nothing happened today.

PerpetualDicounts were up 16bp and FixedResets gained 8bp on very heavy volume.

Regulators have discovered there’s one teeny-tiny problem with quality: it costs money:

A push to water down stringent standards proposed last year by the Basel Committee on Banking Supervision, and to allow more time to implement them, is led by France and Germany, according to bankers, regulators and lobbyists involved in the talks. Representatives from the U.S. and the U.K., who have sought to rein in risk-taking, are willing to compromise on how capital is defined to reach an agreement at a committee meeting that begins tomorrow, the people said.

Another concession may involve granting transition periods of up to 10 years to ease concerns of some member countries that their banks and economies won’t be able to bear the burden of tougher capital requirements until a recovery takes hold. As a result, the amount of capital European banks will be forced to raise in the next two years won’t be as much as investors fear.
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One part of the definition would exclude minority interests that banks hold in other financial institutions when calculating common equity on the theory that they can’t readily withdraw the capital. Many European lenders, which have lobbied against the rule, have non-controlling stakes in emerging-market banks that would no longer count as the highest level of capital, while the assets of the subsidiaries would have to be included in the banks’ risks.
…
European banks are likely to win a concession on the minority-stakes rule, according to the people involved in the talks. One possible compromise would allow a bank to count part of its stake in relation to the risk the capital is supposed to cover at the entity in which it invested, the people say.
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A study released in June by the Institute of International Finance, which represents more than 375 financial companies, said the regulations could erase 3.1 percent of gross domestic product in the U.S., the euro region and Japan by 2015. About 9.7 million fewer jobs could be created over the five-year period than would otherwise be the case, the IIF said.

Regulation is “never free,” said Bank of New York Mellon Corp. Chief Executive Officer Robert Kelly, who visited London and Brussels in June to meet lawmakers and regulators with the Financial Services Roundtable, a Washington-based industry group. “There has to be some impact on growth and jobs.”

The Basel committee, whose members have touted the benefits of financial stability, is preparing its own economic impact study with the help of the Bank for International Settlements in Basel and the International Monetary Fund.
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Banks currently need to hold capital equal to a minimum of 8 percent of risk-weighted assets. Half of that must be Tier 1 and half of the Tier 1 needs to be common stock. The Basel committee might triple the common ratio requirement and double Tier 1, [Paul Miller, an analyst for FBR Capital Markets] estimates.
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BNY Mellon’s Kelly said the original Basel proposals would have forced some banks’ return on equity, a measure of profitability, to mid-single digits.

“If that was true, then they effectively become government utilities, because you couldn’t really raise capital in the private markets after that,” he said.

The IIF report is titled Interim Report on the Cumulative Impact on the Global Economy of Proposed Changes in the Banking Regulatory Framework and is available via a lengthy press release.

I will be most interested to see the promised regulatory response to that and will review the papers on PrefBlog when available … but I am ecstatic that this is being discussed. In Canada we – or OSFI and the politicians, anyway – are always touting the benefits of a very highly capitalized banking system, but never discuss the cost; and there is a cost. That’s a lot of capital tied up that could be invested in other things. I’m not saying I advocate lower capitalization … what I am advocating is an honest debate.

The Canadian experience is interesting … with banks, we obsess about stability and never discuss cost, whereas with electricity we obsess about cost and never discuss stability.

A good day on low volume for the Canadian preferred share market, with PerpetualDiscounts gaining 11bp and FixedResets up 15bp.