PrefBlog

There are mutterings that maybe London isn’t as bad as all that, taxes and all:

Heavy tax demands on London’s under-fire hedge fund industry are unlikely to spark an exodus of operators to rival financial hubs such as Dublin or Geneva, a survey by property advisor Cushman & Wakefield showed.

The study into the impact of taxation on corporate locations showed only one in 10 UK-based companies considered national tax policy or government incentives as an “absolutely essential” factor when choosing a location for their businesses.

Instead, financial occupiers like hedge funds prize ease of international travel, good internal infrastructure and access to a diverse labour market over fiscal policy, putting London ahead of traditional rival Geneva on all counts, the report showed.

Volume moderated a little on a day enlivened by the ACO.PR.A redemption announcement and a a new FixedReset issue, 5.25%+262, from Brookfield Renewable Power Preferred Equity. PerpetualDiscounts lost 6bp and FixedResets were down 4bp.

Assiduous Readers will remember that I am rather curious about the social benefits of increasing bank capital. It is all very well to say that more capital is good, but in a world of limited resources, socking away huge amounts of capital and taking it away from productive investment elsewhere is going to have costs as well as benefits. I haven’t seen any econometric analysis of those costs, but JP Morgan is starting the conversation:

Top banks will need an extra $221 billion (139.6 billion pounds) of capital and see annual profits slump by $110 billion if all proposed regulations to reform the industry are brought in, leading analysts said on Wednesday.
If all the initiatives from regulators are implemented it would cut the average return on equity to 5.4 percent from 13.3 percent next year, hurt economic growth and raise costs for bank services, JPMorgan analysts warned.

“The cumulative impact of all the proposed regulation suggests that there is a real risk that we may move from a system that was under regulated to one that is over regulated and that that could cause a significant increase in lending costs and a negative impact on the economy,” Nick O’Donohue, head of research at JPMorgan, said in a research note.

KPMG has issued a TaxNewsFlash titled CRA Narrows GST-Exempt Financial Services; one of the items is:

Investment dealers’ trailer fees
In this example, an investment dealer who arranges to purchase units of a mutual fund for an investor receives a “trailer commission or fee” from the fund manager. The prospectus describes these fees as being paid in recognition of investment advice and ongoing administrative services provided by the dealer to the investors.

In this situation, the CRA says the services provided by the investment dealer including advice, arranging for the purchase of the units and ongoing administrative services are GST-taxable.

Volume picked up again today, but prices were off by a hair, with both PerpetualDiscounts and FixedResets losing 2bp on the day. The day was enlivened by the announcement of a new IAG 5.90% Straight after the close.

PerpetualDiscounts now yield 5.85%, equivalent to 8.19% at the standard equivalency factor of 1.4x. Long Corporates have eased of to a yield of about 5.9% so the pre-tax interest equivalent spread (also called the Seniority Spread) is now about 230bp, coming in a bit from the 240bp reported February 10.

The Kansas City Fed has published a working paper by Pier Asso, George Kahn and Robert Leeson titled The Taylor Rule and the Practice of Central Banking, a review of the manner in which policymakers’ views have been shaped by the availability of a simple tool for prescribing systematic policy actions. Unfortunately, the KC Fed has seen fit to encrypt the file and content copying is not allowed … so if you want to learn a little more, you’ll have to read it yourself, because I’m sure not going to do all that retyping.

There may be funding pressure on the UK mortgage market:

British banks will struggle to refinance 319 billion pounds ($500 billion) of bonds backed by home loans as the government prepares to withdraw two aid programs, Moody’s Investors Service said.

“It is highly uncertain that the mortgage-backed securities market will have the capacity to absorb the level of refinancing needed in the required timeframe,” according to the report.
…
Banks have raised about 10 billion pounds of mortgage- backed securities publicly since mid-2009 without state aid, Moody’s said.

“The funding gap may once again put financial pressure on mortgage originators, in particular smaller lenders, ” according to the report.

Spend-Every-Penny announced new mortgage rules today:

The Government will therefore adjust the rules for government-backed insured mortgages as follows:

• Require that all borrowers meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term. This initiative will help Canadians prepare for higher interest rates in the future.
• Lower the maximum amount Canadians can withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes. This will help ensure home ownership is a more effective way to save.
• Require a minimum down payment of 20 per cent for government-backed mortgage insurance on non-owner-occupied properties purchased for speculation.

The backgrounder elucidates:

These adjustments to the mortgage insurance guarantee framework are intended to come into force on April 19, 2010. Exceptions would be allowed after April 19 where they are needed to satisfy a binding purchase and sale, financing, or refinancing agreement entered into before April 19, 2010.

My first impulse is to laugh. First, the politicians decide that borrowing for real estate is more socially worth-while than borrowing for (e.g.) capital investment, so subsidize it by writing cheap Credit Default Swaps out of the CMHC. Then they pretend to be surprised when the distorting effects of these subsidies become apparent. Finally, instead of yanking the price on the CDSs to reflect their contribution to overall systemic risk (a very cool phrase to use nowadays) they create new rules instead, to gratify their central planning instincts.

However, there was no announcement of one rule that needs action: extending deposit insurance to cover GICs and term deposits with more than a five-year term.

Testimony of Daniel K Tarullo of the Federal Reserve to the Senate Subcommittee on Security and International Trade and Finance,
Committee on Banking, Housing, and Urban Affairs lays out the case that the best possible institution to regulate systemic risk is (surprise!) the Federal Reserve. There was one item of note:

One key feature of the recent crisis was the heavy reliance on short-term sources of funds to purchase long-term assets, which led to a poor match between the maturity structure of the firms’ assets and liabilities. Such maturity transformation is inherently fragile and leaves institutions and entire markets susceptible to runs.

In Canada, of course, we address the problem, in part, by offloading the problem onto consumers of mortgages – by making 5-year terms standard – thus exacerbating housing price responses to changes in five-year rates. It’s a funny old world.

Prof Lars E O Svensson, Deputy Governor of the Sveriges Riksbank delivered a speech titled Inflation targeting after the financial crisis in which he opined:

Many have claimed that excessively easy monetary policy by the Federal Reserve after 2001 helped cause a bubble in house prices in the U.S., a bubble whose inevitable bursting proved to be a major source of the financial crisis.5However, as I see it, the crisis was mainly caused by factors that had very little to do with monetary policy and were mostly due to background macro conditions, distorted incentives in financial markets, regulatory and supervisory failures (also when central banks have been responsible for regulation and supervision), information problems and some specific circumstances, including the U.S. housing policy to support home ownership for low-income households.

Footnote: See Bean (2009) for an extensive and excellent discussion of the crisis, including the credit expansion and housing boom, the macroeconomic antecedents, the distorted incentives, the information problems, the amplification and propagation of the crisis into the real economy, the policy responses and the lessons for monetary policy and economics generally. The Bank for International Settlements (2009) provides a more detailed account of the possible macro- and microeconomic causes of the crisis.

Reference: Bean, Charles R. (2009), “The Great Moderation, the Great Panic and the Great
Contraction”, Schumpeter Lecture, Annual Congress of the European Economic Association,
www.bankofengland.co.uk.

A solid day for preferreds, with both PerpetualDiscounts and FixedResets gaining about 7bp on the day, amidst an uptick in volume. Floaters continued to astonish.