PrefBlog

The Office of the Chief Actuary (part of OSFI) has released its eighth actuarial study, titled Technical Aspects of the Financing of the Canada Pension Plan, complete with OSFI’s usual dollop of patronizing paternalistic Panglossian pablum:

The review panel expressed concern that most readers would be unduly distressed that the Canada Pension Plan (CPP or the “Plan”) is not expected to ever be even one-third funded. As such, the panel recommended minimizing or removing “point-in-time” funded status indicators from the actuarial report and to focus instead on the fact that the adequacy and stability of the steady-state contribution rate is the critical tool for judging the sustainability of the CPP, and that the funded ratio (ratio of assets to liabilities), if kept in the report, is at most an indicator of the projected mprovement in the funded level. This paper was thus written with the purpose of analyzing and comparing the financing of the CPP using different measures, in particular, the unfunded obligations (liabilities less assets) and funded ratios of the Plan under various closed and open group methodologies, including a methodology more consistent with that used for occupational defined benefit pension plans.

Let’s donate the Chief Actuary to Europe – he can help advise them on what to do about those CDS-trading terrorists, who caused the Greek crisis all by themselves.

Speaking of the Greek crisis:

Europe’s stalemate over possible aid for debt-encumbered Greece deepened as European Central Bank President Jean-Claude Trichet spoke out against offering low- interest loans for which the Greek government has pressed.

Trichet’s demand for stringent terms and German Chancellor Angela Merkel’s push for sanctions against nations that breach deficit limits heightened the chance that Greece will leave a March 25-26 summit empty-handed. That could force Prime Minister George Papandreou to decide whether he’s ready to fulfill his threat and turn instead to the International Monetary Fund.

Looks like there might finally be some action on the Fannie & Freddie front:

U.S. Treasury Secretary Timothy F. Geithner said the government should end the “ambiguity” over the government’s involvement in mortgage finance companies Fannie Mae and Freddie Mac.

“Private gains can no longer be supported by the umbrella of public protection, capital standards must be higher and excessive risk-taking must be appropriately restrained,” Geithner said in testimony prepared for the House Financial Services Committee that was obtained today by Bloomberg News. The hearing is scheduled for tomorrow at 10 a.m. in Washington.

Volume jumped up as PerpetualDiscounts got hammered again, losing 36bp, while FixedResets continued to show strength, gaining 3bp which took yields on the latter down to 3.42%. Volatility was also pretty good.

Spend-Every-Penny gave a speech to the UK Chamber of Commerce deemed to be too boring for the Department of Finance website. Highlights were:

“Issues like the concept of ‘too big to fail’ and ‘systemically important’ — quite frankly our view is that these are not useful discussions, and at the end of the day that these concepts are not workable.”

“We are against capital tax, we are against the tax on financial transactions, we are prepared to consider certain issues on contingent capital.”

“When you look at the causes of the crisis, one of the clear causes was excessive leverage, not only in some of the American institutions, but also some of the European institutions.

“Our primary concern overall is to get the leverage rules right and to try and get an agreement on that among our colleagues.”

Boston Fed boss Eric Rosengren also endorsed the idea when giving a speech on March 3, but only when answering a question; it was not part of his prepared remarks.

There was a good long article on the US TruPS CDO market today, albeit a little short on what I consider the interesting detail:

Hildene is part of a lawsuit seeking to prevent a TPG Credit Management LP affiliate from buying trust preferred securities from CDOs for pennies on the dollar. The firm tried to fire Cohen & Co. from managing deals in which Hildene invests. It’s attempting to block BankAtlantic Bancorp from retiring debt held by CDOs at a fraction of face value.

The moves by TPG Credit and BankAtlantic have in part kept the $50 billion market for CDOs backed by the trust securities, known as TruPS, from rebounding, according to Citigroup Inc., even as credit markets recover from the biggest financial crisis since the Great Depression. Since 2000, 1,813 banks and thrifts sold TruPS and other debt that were packaged inside the deals, according to Fitch Ratings.
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Financial institutions relied on TruPS before credit markets began to seize up in 2007 because interest on the securities is paid from pre-tax income and may be suspended without penalty. The securities, which rank between senior bonds and common equity for repayment in a bankruptcy, also count toward regulatory capital requirements. New York-based Citigroup, 27 percent owned by the U.S. government, sold $2 billion of TruPS last week after repaying bailout funds.

Community banks need the CDO market to revive to issue TruPS because they sell debt in increments of as little as $10 million, which insurers or mutual funds won’t buy. CDOs bought the most TruPS issued by smaller banks before credit markets froze, according to Citigroup.

European CDS spreads are increasing:

French President Nicolas Sarkozy is opposing Germany’s push for an International Monetary Fund loan to Greece, favoring a European solution for the nation as it struggles to lower the region’s biggest budget deficit. Greek bonds fell as the EU divisions widened.
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Swaps on Greece jumped 22 basis points to 337.5, according to CMA DataVision prices. Contracts on Portugal climbed 14 to 138, Ireland rose 11 to 135.5, Italy increased 7.5 to 105.5 and Spain was up 11 basis points at 112. These countries are collectively known as the PIIGS.

PerpetualDiscounts got hammered today, losing 52bp, while FixedResets gained 7bp to set a new all-time yield low for that index. Volume was good, and there were a lot of entries on the performance highlights. Volatility = Good!

Brinksmanship regarding the Greek bail-out is getting … er … brinkier:

Greek Prime Minister George Papandreou set a one-week deadline for the European Union to craft a financial aid mechanism for Greece, challenging Germany to give up its doubts about a rescue package.

Papandreou said he may turn to the International Monetary Fund to overcome Greece’s debt crisis unless leaders agree to set up a lending facility at a summit March 25-26. The IMF option has already been dismissed by European Central Bank President Jean-Claude Trichet and French President Nicolas Sarkozy, who say it would show the EU can’t solve its own crises.
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Papandreou toyed with the idea of going to the Washington- based fund, saying today that Greece is already living in an IMF-style fiscal corset without the financing that goes along with it.

“We are under a basically IMF program,” he told a European Parliament committee earlier. “We don’t want to be in a situation where we have the worst of the IMF, if you like, and none of the advantages of the euro.”

The IMF stands ready to respond to a Greek aid appeal, which hasn’t come yet, spokeswoman Caroline Atkinson told reporters in Washington today. Papandreou said he still prefers a European solution and that the EU announcing more explicit support for Greece would be enough to bring down borrowing costs without the need to actually tap emergency funds.

That poor little boy who said the Emperor had no clothes! Now he’s a terrorist!

Germany’s Finance Minister Wolfgang Schaeuble told the Bundestag on March 16 that the country may have to consider ordering “intelligence agencies to set up surveillance of who is getting together with whom for which kinds of speculative processes, and where” to protect the euro.

“I find it sinister and silly, it is a complete overreaction,” said Philip Whyte of the Centre for European Reform, a pro-European Union research institute in London. “There is a certain school of thought in continental Europe that everything is always the fault of hedge funds.” Schaeuble’s comments reflected “a longstanding paranoia about the Anglo-Saxon model of capitalism.”

European politicians blamed speculators after the euro tumbled against the dollar and the cost of insuring Greek government debt rose by a third this year, causing budget cuts that triggered street protests in Athens. Greek Prime Minister George Papandreou and French President Nicolas Sarkozy said that trading in credit default swaps exacerbated the crisis.

I’ve previously noted international problems in bank regulatory reform … but there are also national problems:

If the Senate can produce sweeping bank-reform legislation, expect House and Senate lawmakers to continue squabbling at least a year more or longer, said House Republican Leader John Boehner on Wednesday.

“If the Senate is able to produce a bill, I think it’s just as likely that we’ll be talking about the same issue a year from now as we are right now,” Boehner, R-Ohio, told an enthusiastic crowd of bankers at the American Bankers Association government relations summit.
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Senate Banking Committee Chairman Christopher Dodd, D-Conn., on Monday introduced a revised bank-reform bill without Republican support. He plans to have the panel vote on the bill next week and hopes to have the bill considered by the Senate in April.

“I don’t know how they ever come to an agreement on some kind of a bill they can bring back to both houses and pass,” Boehner said.

Summers has defended his staff.

Good volume in the Canadian preferred share market today, led by the two TD OperatingRetractibles, with the selling dominated by National Bank. There was also a decent bit more price volatility, with six entries on the Performance Highlights, while PerpetualDiscounts lost 3bp at the same time as FixedResets gained 8bp. That took the FixedReset median weighted average yield down to 3.46%, equal (to five significant figures) to its all-time low on January 11.

Former Lehman executives (and note that an “executive” can be anybody with a title) who, it would seem, prefer to remain anonymous, are trying to play down Repo 105, discussed on PrefBlog on March 12. But it’s a tangled web we weave…:

The only people who would worry about using an old trick to reduce leverage from 13.9 to 12.1, the second executive said, are “yappers who don’t know anything.”

Again, the examiner’s report takes pains to show otherwise. It quotes a senior vice president calling Lehman’s leverage targets “a very hot topic.” The firm’s own definition of a material leverage shift was one-tenth of a point.

In my experience, 95% of the sell-side are yappers who don’t know anything, and the other 5% are simply disingenuous.

And, of course, blind faith in the regulators is misplaced:

Securities and Exchange Commission Chairman Mary Schapiro said her agency’s oversight of Lehman Brothers Holdings Inc. was “terribly flawed,” days after a bankruptcy examiner found the SEC didn’t try to stop the firm’s exaggeration of liquid assets.

“It was so terribly flawed in design and execution,” Schapiro testified to a Congressional committee today, referring to SEC examinations aimed at monitoring the soundness of Wall Street’s biggest investment banks. “We were ill-suited because of our enforcement and disclosure mentality.”
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Valukas’s March 11 report describes a gap between how Lehman and the SEC viewed the firm’s so-called liquidity pool, used to pay bills in a pinch, in the firm’s final months. Behind the scenes, the SEC questioned how quickly some assets could really be tapped. Still, Lehman didn’t tell investors that a growing share of the pool was being pledged as collateral to clearing firms, the report found.

The SEC deemed assets to be liquid only if they were convertible to cash within 24 hours. Lehman afforded itself five days. The SEC told Lehman it preferred the shorter limit and never enforced it, according to the report.

In another instance, the SEC didn’t take action after determining in June 2008 that Lehman had counted a $2 billion deposit at Citigroup Inc. among cash-like assets available in an emergency, according to the report. SEC analysts deemed the deposit’s designation as “problematic,” because withdrawing the money could have impaired Lehman’s trading.
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The silence of examiners, who focused more on stability than honesty with investors, was invoked as a defense as Valukas quizzed more than 100 executives and other witnesses about the financial health and reporting at Lehman, based in New York.

The Bloomberg story doesn’t explore the regulators’ obsession with “stability” in detail, or even define what it is. Stability of the Financial System? Stability of Lehman? Stability of their jobs? What? One way or another … so much for the third pillar!

Greece is still trying to extract better terms for its EU bail-out:

As long as “Greece is still borrowing at an unreasonably high interest rate, over 6 percent,” the country will keep “all options open” while preferring an EU solution, Papandreou said at a press conference in Brussels today with European Commission President Jose Barroso.

Bad news at the trough on St. Patrick’s day! The little green piggies haven’t spent enough on lobbying:

“Until government policies favor renewable energy over dirty coal, solar may seem too risky now for some investors,” said Landis, whose $260 million fund include SunPower Corp. and Suntech Power Holdings Co. “Coal may make sense short term.”

Solar companies’ profitability is falling because of competition from China and cuts to state support in Germany and Spain, where about 72 percent power-producing photovoltaic panels were installed in 2008.
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Germany may install 3,000 megawatts, or about a third of the world’s total, Simonek said. In the Czech Republic, a country of 10 million people, about 900 megawatts of solar power will be deployed, almost matching existing U.S. installations.

The rising global demand will help some companies weather the slump in panel prices caused by Chinese manufacturers stepping up production and cuts in solar subsidies in Germany and Spain known as feed-in tariffs, said Richard Caldwell, chairman of Australia’s Dyesol Ltd., which makes a conductive dye that produces electricity on glass and sheet metal.

“Companies in the industry like First Solar have had a shocker,” he said. “The Chinese have been flooding the market with cheap product. And we’re still getting over the change to the German feed-in tariff. It hasn’t been a good market.”

Who woulda thunk it? Competition in solar panels! And there we all were, thinking it was all about peace, love, granola and subsidized green jobs to replace all those subsidized auto jobs that have evaporated! Just think, if they can cut costs by another 90%, maybe it will even be worth thinking about!

Volume was good in the Canadian preferred share market today, but PerpetualDiscounts fell by 7bp. FixedResets gained 2bp to take yields to within a hairsbreadth of their all-time lows … another tenth of a beep in yield and we’ve got a new record.

PerpetualDiscounts now yield 5.97%, equivalent to 8.36% interest at the standard equivalency factor of 1.4x. Long Corporates now yield about 5.7% (maybe a little bit more) so the pre-tax interest equivalent spread (also called the seniority spread) now sits at about 265bp, a significant widening from the 245bp reported on March 10. I consider it highly peculiar that the spread should be so wide in the absence of any serious credit-based panics; I can only conclude that retail has decided that massive inflation is imminent – which is consistent with low yields on FixedResets – contrary to the beliefs of institutional bond investors. I note that Long Canadas now yield 4.02% while long RRBs yield 1.57% real, for a breakeven of 245bp.

Click for Big

…. and you can call the recent rocketing in the breakeven spread either a return to normalcy or a harbinger of hyperinflation, depending on what answer you want to get … or what your client wants to hear.