PrefBlog

Nomura is finding out that rainmakers are mobile:

Nomura has been hitting turbulence. At least 12 senior former Lehman managers, including Nomura’s deputy investment banking chief, have defected since the firm began paying out guaranteed bonuses last month, casting doubt on Watanabe’s efforts to bridge cultural gaps. Japan’s largest brokerage is struggling to match a rebound in profit at Morgan Stanley, Goldman Sachs Group Inc. and Citigroup Inc.

“Investment banking is ferociously competitive,” said Giorgio Questa, a finance professor at London’s Cass Business School. “I strongly doubt Nomura can develop a strong international investment banking business” because it will struggle to integrate Lehman’s culture, he said.

In shocking news, it appears that Goldman personnel discussed which asset management firms might have wanted to sell what other clients wanted to buy:

Newly disclosed Goldman Sachs Group Inc. internal e-mails cast light on how the investment bank devised collateralized debt obligations called Abacus, including one at the center of a U.S. Securities and Exchange Commission fraud lawsuit.

The e-mails show employees discussed which outside firms would be “easiest” to work with while creating Abacus CDOs to bet against the housing market.

The e-mails were released yesterday by Senator Carl Levin, the Michigan Democrat who leads the Senate’s Permanent Subcommittee on Investigations, as the panel prepares to question Goldman Sachs executives today. In one message, a Goldman Sachs worker asked which outside firm would most likely approve assets that hedge fund Paulson & Co. wanted to include in a CDO and bet against.

“The way I look at it, the easiest manager to work with should be used for our own axes,” the author wrote in December 2006, using industry jargon that can refer the firm’s financial interest in a deal. The writer also expressed concern that two firms being considered weren’t likely to sign off on Paulson’s suggested assets. “They will never agree to the type of names [P]aulson want to use[.]”

Even more horrifically, Senator Levin has learned that Goldman was acting as principal:

In another December 2006 e-mail, Tourre discussed other business opportunities for Abacus, outlining a strategy in which Goldman Sachs would “‘rent’ our Abacus platform to counterparties” that wanted to short the market. The messages show “Goldman repeatedly put its own interest and profit ahead of the interests of its clients,” Levin said.

Can you imagine? Putting a trade in front of an asset manager, just as if they were adults? The mind boggles!

In the actual hearing, Senator Levin stated that in the future, institutional clients will not be allowed to take views on the market that are contrary to those of their broker’s research department:

“Goldman Sachs didn’t just make money, it profited by taking advantage of its clients’ reasonable expectation that it would not sell products that it did not want to succeed and that there was no conflict of economic interest between the firm and its customers,” Levin said today in his opening remarks. “Its conduct brings into question the whole conduct of Wall Street.”

The political rhetoric is getting a little wearisome. Senator Levin is, I am quite confident, a knowledgable and intelligent man with a knowledgable and intelligent staff and access to knowledgable and intelligent Treasury / Fed / private analysts. So I can only find solace in the idea that it’s just political breast-beating with the aim of passing his favoured legislation and extorting a little fuck-off money from Goldman to highlight in his next re-election brochures.

There’s nothing on the the company website, no press releases I can find and nothing on SEDAR … but Canadian Banc Recovery Corp. had a footer ad on the front page of the Globe & Mail Report on Business today touting their “Attractive Distribution” … and the PrefBlog Forecasting Department thinks this means that a treasury offering will be forthcoming soon for BK and BK.PR.A.

Another rough day for the Canadian preferred share market, with PerpetualDiscounts down 21bp while FixedResets lost 27bp. Volume continued heavy.

IIROC has announced that downtown Toronto will be safe and accessible under any conceivable conditions:

IIROC recently decided to cancel the industry business continuity planning test that was scheduled for June 26, 2010 due to complications associated with the G20 meeting which is now scheduled in Toronto for June 26-27, 2010. IIROC considered rescheduling the test for the latter part of 2010 but that again proved to be impractical considering the length of time utilities require for participation in such tests.

As a result we have rescheduled the industry test to September 10, 2011. Subsequent business continuity planning tests will be conducted on a bi-annual basis thereafter.

We can only hope that when Al-Quaeda decides to nuke Toronto, they give the utilities proper notice. It is of interest to learn that firms must, by regulatory decree, prepare for fire, famine, earthquakes, terrorism, tornados and plagues of frogs; but that G-20 meetings are considered Acts of God. Our glorious Finance Minister will be pleased!

Senator Carl Levin is shocked at Goldman Sachs’ attitude:

“Investment banks such as Goldman Sachs were not simply market-makers, they were self-interested promoters of risky and complicated financial schemes that helped trigger the crisis,” Levin, 75, said in a statement released with the e-mails.

Self-interest? Promotion? In the co-operative game that is the financial world? Oh, the horror!

At least Fabulous Fab writes entertaining eMails:

The so-called ABX index is “the type of thing which you invent telling yourself: ‘Well, what if we created a ‘thing,’ which has no purpose, which is absolutely conceptual and highly theoretical and which nobody knows how to price?’” [Goldman Sachs executive director Fabrice] Tourre said in a Jan. 29, 2007, e-mail released yesterday by Goldman Sachs. Watching the index fall is “a little like Frankenstein turning against his own inventor.”

The shortcomings – well, they’re more like odd nuances, actually – of the ABX index have been discussed on PrefBlog throughout the Credit Crunch.

DBRS has commented on the Bank of Ireland capital raise:

Today’s comment follows Bank of Ireland’s announcement of a fully underwritten proposal to raise EUR 3.421 billion equity tier 1 capital. This proposal includes a EUR 0.5 billion institutional placing of ordinary shares, a partial conversion of the Irish Government’s preference shares of EUR 1.036 billion to ordinary shares, and a rights issue of up to EUR 1.885 billion. The latter rights issue may be reduced by the equity generation and profits from the also just announced debt for equity exchange offer.
…
Importantly, the completion of the proposed actions will allow Bank of Ireland to fulfil its obligation to raise an additional EUR 2.7 billion of equity capital to meet the requirement established as part of the completion of the Financial Regulator’s Prudential Capital Assessment Review for the Irish banking sector. As a result of these actions and the expected National Asset Management Agency (NAMA) transfers, the Group’s equity tier 1 capital ratio, on a pro-forma basis, at 31 December 2009, will increase to 8.0% and the Group will be able to maintain a minimum equity tier 1 ratio of greater than 7% going forward. Moreover, the announcement includes the full cancellation of the Government’s warrants in the Group in return for a cash payment of EUR 491 million, reducing the potential for the Government to increase its holdings in the Group. As a result, the Irish Government’s maximum ownership will be 36% that compares to a current fully diluted ownership of 34%, prior to completion of this transaction.

The Irish bank capital requirements have been previously discussed.

PerpetualDiscounts were hit hard today, losing 26bp on heavy volume while FixedResets lost a mere 4bp,

Greece has gone to the well:

Debt-stricken Greece appealed to its European partners and the IMF for emergency loans on Friday, yielding to overwhelming market pressure to set in motion the first financial rescue of a member of the euro zone.

Prime Minister George Papandreou requested the 45 billion euro ($60.5 billion) package after a months-long selloff by investors pushed borrowing costs to record levels and undermined Athens’ efforts to cut its 300 billion euro debt pile.

“This is the moment. The time that was not granted to us by the markets will be given to us by the support of the euro zone,” Papandreou said in a statement broadcast live from the remote, tiny Aegean island of Kastellorizo.

It appears that, at the very least, there was internal strife at Moody’s:

In September 2007, a manager at the New York-based ratings company resisted a plan to grade new collateralized debt obligations filled with mortgage bonds by including the assumption that Moody’s rankings on the underlying home-loan securities were no longer accurate, Eric Kolchinsky told the Senate Permanent Subcommittee on Investigations in prepared testimony today.

A more senior manager eventually agreed to allow the new policy, which Kolchinsky, who headed the company’s mortgage-bond CDO group, thought was needed after a meeting earlier that month where its home-loan securities analysts revealed that they planned to downgrade a large number of subprime notes, he said. The change was announced Sept. 21, 2007, and followed a similar shift at Standard & Poor’s announced in July.

“I believed that to assign new ratings based on assumptions which I knew to be wrong would constitute securities fraud,” said Kolchinsky, who said he was demoted as a result of his actions then and later suspended after complaining about “a nearly identical situation” in 2009.

An employee at hedge-fund firm Paulson & Co. said it had a chance to keep betting against subprime mortgages in January 2007 in part because companies including ratings firms had “incentives to keep the game going,” the Securities and Exchange Commission said April 16 in suing Goldman Sachs Group Inc. over a CDO that the agency alleged Paulson helped create.

An 18-month inquiry by the congressional panel, led by Senator Carl Levin, found that ratings companies “used outdated models and inadequate data, were too influenced by investment bankers, allowed chronic resource shortages to undermine ratings, and delayed downgrading investments,” according to a statement yesterday from the Michigan Democrat.

There’s some fascinating revelations about IKB, one of Goldman’s so-called victims:

Yesterday, I reported that IKB Deutsche Industriebank was not the sucker at the table that the SEC depicts in its lawsuit against Goldman. Indeed, its executives were wily and wealthy financiers who employed financial engineering shenanigans to escape the watchful of eye of regulators, shareholders, and auditors.

Now a document exclusively obtained by the Daily Beast demonstrates (view them here) that just a few months before it invested in the derivatives at the center of the SEC’s case, the German bank was touting its prowess as a sophisticated investor in those derivatives

In other words, IKB were not just sophisticated financial professionals. They were—or claimed to be—sophisticated and experienced when it came to exactly the kind of junky CDOs, dubbed Abacus, they bought from Goldman Sachs.

“Securitisation and CDO investments are an integral part of IKB AG’s business model,” the document—a marketing brochure for one of IKB’s off-balance sheet conduits—claims.

The brochure describes a man named Dr. Thomas Wolwer as the “Senior Portfolio Manager,” who has the “responsibility for investing in CDOs both cash and synthetic.” His qualifications include working for Dresdner Kleinwort, where he structured and sold various cash and synthetic CDOs. In short, this guy was as experienced in these black financial arts as you can get.

In short, according to me, this guy was just another sell-side bozo. I will never understand why people listen to track-recordless stockbrokers and institutional salesmen. But they do! Even their managers do! The financial crisis has shown that even people in a very good position to know otherwise somehow equate the ability to keep inventory turning over with regularity with an understanding of what it is.

It’s like hiring the best used-car salesman you can find as chief mechanic! It’s exactly the same thing as the Madoff fiasco … Funds of Funds were talking up their due diligence while stuffing money down the Madoff rat-hole. So-called due diligence is mostly just box-ticking by staff completely unable to do a proper job anyway.

One way or another, the marketting document obtained by The Daily Beast is in the very best tradition of investment sales … experience of everybody on the team is meticulously recorded and there’s not a word about performance.

However, the whole thing has become a political issue:

U.S. Securities and Exchange Commission Chairman Mary Schapiro may face an investigation into whether politics drove the agency’s decision to sue Goldman Sachs Group Inc. for fraud.

Representative Darrell Issa, a California Republican, asked SEC Inspector General H. David Kotz to determine whether the agency’s April 16 lawsuit was timed to bolster the Obama administration’s push to overhaul U.S. financial rules. Schapiro, a political independent, said on April 21 that neither the White House nor Congress have any influence on SEC enforcement actions.

The IMF’s bank tax is not a slam-dunk:

Group of 20 finance ministers and central bank governors pushed a debate over a global bank tax to June, saying more study is needed on how best to ensure banks, rather than taxpayers, pick up the cost of future bailouts.
…
“We call on the IMF for further work on options to ensure domestic financial institutions bear the burden of any extraordinary government interventions where they occur, address their excessive risk-taking and help promote a level playing field, taking into consideration individual countries’ circumstances,” the G20 said in a statement at the conclusion of the meeting.

Britain, Germany, France and the United States – among the world’s most powerful nations – all have been supportive of a global bank tax. The decision to order the IMF back to the drawing board suggests that Mr. Flaherty, who was the co-chair of the meeting, was successful in rallying countries such as Australia and Russia to resist the push for a global levy. For weeks, Mr. Flaherty has mounted a vocal stand against the pro-tax lobby, saying it would unfairly punish countries such as Canada that avoided multi-billion dollar bank rescues during the financial crisis.

Canadian inflation declined:

Statistics Canada reported Friday that Canada’s annual inflation rate slipped by two-tenths of a point to 1.4 per cent, and the closely watched Bank of Canada core rate fell even further – by four-tenths of a point to 1.7 per cent in March.
…
The agency said the big reason for the drops in both annual indexes was that the price-distorting Olympics ceased being a major contributor to inflation with the conclusion of the Winter Games at the end of February.

Prices for traveller accommodation soared 16 per cent in February – 64.1 per cent in British Columbia – but in March they dropped back to earth to a more tame 2.8-per-cent increase from March, 2009.

Volume continued heavy in the Canadian preferred share market today, as PerpetualDiscounts lost 6bp while FixedResets put in a gain of 27bp. FixedResets scored a shut-out on the volume table.

Moody’s has downgraded Greece one notch:

Greece had its credit rating cut one step by Moody’s Investors Service as the government’s debt servicing costs surge on concern that the country will struggle to reduce its budget deficit.

Moody’s lowered the rating to A3 from A2, four grades above junk, the company said in a statement today. Moody’s also put a “negative” outlook on Greek debt, indicating it’s more likely to cut it again than raise it or leave it unchanged.

“This decision is based on Moody’s view that there is a significant risk that debt may only stabilize at a higher and more costly level than previously estimated,” a team led by Pierre Cailleteau in London said in the statement.

The Bank of Canada has released its April 2010 Monetary Policy Report:

Core infl ation has been firmer than projected in January, the result of both transitory and more fundamental factors. Although core infl ation was expected to remain relatively stable over the near term, it rose from 1.5 per cent in November to 2.1 per cent in February (Chart 13). This upward movement partly refl ects transitory factors, such as the unusual pricing pattern for new passenger vehicles since the introduction of the 2010 models into the CPI in November, and the surge in the price of travel accommodation associated with the 2010 Winter Olympics in Vancouver.

More broadly, the firmness of core inflation over the past year, despite the large amount of excess supply in the economy, refl ects the resilience in the prices of some components of core services, including a significant rise income regulated prices (e.g., communications, tuition fees, and cable services). This resilience refl ects the slower-than-anticipated deceleration in wages, since labour costs represent a large portion of total production costs in core services. Shelter prices have also increased at a faster-than-expected rate, refl ecting the more rapid rebound in housing demand as households pulled forward some of their expenditures.

SEC boss Mary Schapiro has denied the Goldman charges are politically motivated:

“The SEC is an independent law enforcement agency. We do not coordinate our enforcement actions with the White House, Congress or political committees. We do not time our cases around political events or the legislative calendar.

“The fact is that regulatory reform has been pending for over a year. We have brought many cases related to the financial crisis over that period.

“On a personal level, I am disappointed by the rhetoric.

Goldman disagrees:

Yesterday, Lloyd Blankfein attacked the SEC’s fraud suit in calls to Goldman clients–describing it as a political hit job that will ultimately hurt the country.

He also brought up the exculpatory evidence that the SEC left out of its complaint, saying that a staffer of the supposedly swindled ACA knew that Paulson & Co. was planning to go short the Abacus CDO.

This case might even go to trial!

[The Financial Times] said that in conversations with private equity executives and others, Blankfein left clients with an impression he is eager to fight the case in court.

I hope so – it would be marvellous to see a rebuff of regulatory extortion. But given the highly unequal risks experienced by the two parties, a settlement of some kind seems more likely – that’s why regulatory extortion works in the first place, right?

Former (Republican) SEC boss Harvey Pitt thinks the SEC is taking a big risk:

this SEC litigation takes it places it hasn’t been before—

• challenging the premier firm of Goldman Sachs,
• about a synthetic derivative transaction,
• on which Goldman lost millions of dollars,
• where the parties were sophisticated and not in obvious need of SEC protection,
• after a year-and-a-half investigation,
• filed immediately after the President threatened vetoing financial reform legislation that doesn’t strongly regulate derivatives,
• and a few hours before release of the Inspector General’s Report on SEC inadequacies in attacking Alan Stanford’s Ponzi scheme,
• but apparently without giving Goldman advance notice of the filing,
• or exploring possible settlement, and
• splitting 3-2 along political lines in a major enforcement action.

What do I think? It can hardly have been something so overt as a call from Comrade Peace Prize ordering Schapiro to take down Goldman. That would be sufficiently unethical that neither party would have anything to do with such a thing (maybe). But a lot can be done with nods and winks … the SEC desperately needs a scalp … and Goldman – as the sole major investment bank to get through the crisis without blowing up – is the most luxuriant one out there.

There’s more commentary on the BNN Blog (hat tip: Assiduous Reader MS):

But after trillions of dollars in destroyed value, the near collapse of the global financial markets, millions in lost jobs and the deepest recession since the Second World War, is this the best the chief law enforcement agent on Wall Street can muster? That Goldman let a then little-known hedge fund pick some mortgage bonds and put them into a pedestrian-sized CDO?

It’s hardly the plot of an Oliver Stone movie. But it serves a purpose. Especially when the suit was filed four days before Goldman released its first quarter earnings, and published what it plans to set aside for bonuses.

It also doesn’t hurt if your objective is to gather support in Congress for a far-reaching financial services bill that was expected to hit the floor of the Senate this week.

Julie Dickson, Superintendent of Financial Institutions, has delivered a speech to the Empire Club. No new OSFI initiatives were announced, nor were there any hints regarding policy.

The International Monetary Fund has released the April 2010 Global Financial Stability Report, with chapters:

• Resolving the Crisis Legacy and Meeting New Challenges to Financial Stability
• Systemic Risk and the Redesign of Financial Regulation
• Making Over-the-Counter Derivatives Safer: The Role of Central Counterparties
• Global Liquidity Expansion: Effects on “Receiving” Economies and Policy Response Options

Continued heavy volume today saw PerpetualDiscounts getting wallopped for 41bp, while FixedResets were down a mere 4bp.

Goldman may be showing the same cut-throat ruthlessness in its personnel policy as it shows in its customer relations:

Goldman Sachs Group Inc. said the U.S. fraud case against the firm hinges on the actions of the employee it placed on paid leave this week.

Fabrice Tourre, the 31-year-old Goldman Sachs executive director who was accused of misleading investors about a mortgage-linked investment in 2007, will also be de-registered from the Financial Services Authority, a spokeswoman at the firm in London said yesterday.

“It’s all going to be a factual dispute about what he remembers and what the other folks remember on the other side,” Greg Palm, Goldman Sachs’s co-general counsel, said in a call with reporters yesterday, without naming Tourre. “If we had evidence that someone here was trying to mislead someone, that’s not something we’d condone at all and we’d be the first one to take action.”

By characterizing the case as a dispute involving a single employee, Goldman Sachs may be taking its first steps to publically distance itself from Tourre in the case, some lawyers said. That could reduce bad publicity and ultimately make it easier for the company to settle the case.

Very surprising, if true. Regulatory announcements and responses are generally well-orchestrated, with all parties concerned knowing what’s going to happen by the time an issue becomes public; but after two days of honourable conduct by management, it loos like Tourre’s being thrown to the wolves.

There are rumours that Tourre has agreed to testify to a US Senate panel; there is no word on whether anybody from, you know, the Selection Agent will be asked any questions like, f’rinstance: why did you agree to buy this stuff?

In the meantime, Rabobank has sued Merrill regarding similar allegations, which seems to me to be an admission that Rabobank is completely incapable of evaluating a potential investment.

Paulson has addressed investor concerns regarding the issue. In 2007, Paulson wasn’t seen as a member of the Savvy Investor Club (I presume they didn’t have enough employees from the right schools) and the Smart Money was more than happy to bet against them:

Mr. Paulson sent a letter to investors Tuesday night saying that in 2007 his firm wasn’t seen as an experienced mortgage investor, and that “many of the most sophisticated investors in the world” were “more than willing to bet against us.”
…
On the conference call, Mr. Paulson calmly explained the trade with Goldman, which involved a “short” bet on mortgage bonds. He said that the very nature of the transaction required both a “long” and “short” investor, suggesting that investors knew that a bearish investor had bet against the deal.

Mr. Paulson suggested to clients that the large investors who purchased the Goldman deal and others relied on rating firms, and didn’t do enough of their homework, investors say.

For those of you who don’t understand the whole Goldman / ACA / Paulson / Rabobank / Merrill / regulators / government thing, here’s a helpful graphic illustrating the financial world in mid-2007:

The spread on Greek bonds hit an all-time high:

The yield on the Greek 10-year bond surpassed 8 percent today, the highest in more than a decade and more than twice the comparable German rate. The spread, or difference between the security and bunds, Europe’s benchmark government securities, climbed to an all-time high of 521 basis points.

This is all happening as US debt issuance is cresting:

The U.S. Treasury may sell an unprecedented $128 billion in notes next week as expectations increase that the amount of securities auctioned by the government is peaking with the economy strengthening.

The U.S. will sell $44 billion in two-year notes, $42 billion in five-year securities, $32 billion in debt maturing in seven years and $10 billion in five-year Treasury Inflation Protected Securities, according to the average estimate of nine primary dealers in a Bloomberg News survey. The $118 billion in nominal debt matches a record. The U.S. will announce the amounts tomorrow for the auctions conducted over four days beginning April 26.

Good interview on the Queers Against Israeli Apartheid thing that was mentioned yesterday; at best – at absolute best – this is a cat-fight between competing visions of the Pride Parade, in which city bureaucrats have been stupid enough to become involved. It’s strictly an internal matter for Pride. In fact, the Pride parade ceased to have much to do with Gay Pride years ago – nowadays it’s a celebration of sex, the kinkier the better. Ah, to be twenty again! Not that this little news-stream has much to do with finance, of course, but I reserve the right to go off on tangents occasionally whenever I find something particularly annoying.

It was a very rough day for the Canadian preferred share market, with PerpetualDiscounts losing 60bp and FixedResets down 83bp (!) bringing the median weighted average yield on the latter index up to 4.38%, a level not seen since the beginning of July, 2009. Volume was exceptionally high and the Volume Highlights table is split equally between FixedResets and PerpetualDiscounts.

PerpetualDiscounts now yield 6.26%, equivalent to 8.76% interest at the standard equivalency factor of 1.4x. Long Corporates now yield about 5.7% (maybe just a little more?) so the Pre-Tax Interest-Equivalent Spread (also called the Seniority Spread) is now about 305bp, up substantially from the 295bp reported April 14 and pushing the high of 310bp reported April 7.

I don’t usually provide mid-day comments on the market, but this is really interesting.

As of about 1pm, PerpetualDiscounts have lost 43bp and FixedResets are down 77bp, with three issues in the latter class down over 2% on the day so far: IAG.PR.C, MFC.PR.D and GWO.PR.J

There are many, many issues down between 1% and 2%.