PrefBlog

Patric Edspar is now running the investment banking unit of Citadel Investment Group; there are two reasons that the Bloomberg story is instructive. The first is the mere existence of an investment banking unit at a hedge fund; this is good for the financial system and bad for the regulators. The second is his nickname “Juggernaut” and its origins:

People who know Edsparr describe him as outspoken, with a forceful personality. He earned the nickname “juggernaut” during his first job at Lehman Brothers Holdings Inc., where one of his tasks in the research unit was to collect daily price data from senior traders, one of the people said. Most of his predecessors failed because they were too intimidated to interrupt the traders, who would shout at them. Edsparr would stand behind them, often for up to two hours, until they gave him the data.

This is indicative of horrible management practices that are endemic in the industry. Anyone with a brain doesn’t hire a guy with three degrees to stand behind a trader for two hours begging for information. A well run firm will decide whether or not information transfer needs to take place and if it does, transfer it. As well, a well run firm does not permit any of its employees to treat other employees like that – as I recall, that was one of the major reasons why RT Capital blew up.

William C Dudley of FRBNY made a speech at the Center for Economic Policy Studies (CEPS) Symposium. Nothing particularly new, but I was very pleased to see him note that all these wonderful stabilizing ideas have a cost:

Higher capital requirements work to reduce the risk of liquidity runs, but potentially at the cost of making the process of financial intermediation much more expensive. In particular, a requirement that firms must hold more capital increases intermediation costs. Moreover, banks may respond to higher capital requirements by taking on greater risk. If an increase in risk-taking were to occur, the movement of the probability distribution to the right in Figure 2 might be offset by an increase in the degree of dispersion. Thus, higher capital requirements might not necessarily be sufficient to push all of the probability distribution above zero.

Second, regulators could require greater liquidity buffers. These buffers would help protect the firm against having to liquidate assets under duress, and would therefore help prevent the probability distribution from sliding left toward the zero line in Figure 2. But there is a cost to the firm from holding greater liquidity buffers in terms of lower returns on capital. So, requiring greater liquidity buffers would also tend to drive up intermediation costs. And, just as in the case of higher capital requirements, banks could respond by taking greater risks.

It doesn’t happen very often, but occasionally there’s a glimmer of sense in the world:

The U.K. government will oppose a European Union plan to impose the same pay restrictions on hedge-fund managers and private-equity firms that it proposed for bankers, the Treasury said.

The EU last week added the pay rules to alternative investment fund legislation that under review in the European Council and European Parliament. It suggests that senior managers defer a minimum of 40 percent of bonuses for at least three years and a “substantial amount” is paid in shares.

A spokesman for the Treasury said the last-minute addition to the rules failed to properly distinguish between funds and banks. He said regulation should be proportionate to the risk funds pose to the financial system. Hedge funds don’t take retail deposits and haven’t required bailouts despite a number of failures, the Treasury said.

Still no word on the results of the DFN / DFN.PR.A Rights Issue. The unit value was 18.98 on November 13, compared with the exercise price of 19.75, so success seems a little dubious … but there’s a twist: DFN closed at 12.51 on the announcement date, October 16, and stayed above $10 for the next two weeks, trading about 350,000 shares in the interim. One strategy might have been to short the hell out of the capital units (which were well above NAV at the time), aiming to replace with either a subscription to the rights or taking the chance. Still, I’ll bet a nickel that exercise was negligible.

A good solid day for preferreds, with PerpetualDiscounts up 15bp and FixedResets gaining 13bp. Volume continued to be relatively light, without much volatility.

Take that! How long will it be before official Chinese pronouncements include the phrase ‘Helicopter Ben’?

China’s banking regulation chief joined Hong Kong’s leader in blaming the Federal Reserve’s interest-rate policy for fueling speculative capital flows that may spur asset-price inflation.

“The continuous depreciation in the dollar, and the U.S. government’s indication that, in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation,” Liu Mingkang, chairman of the China Banking Regulatory Commission, said in Beijing yesterday.
…
“I’m scared and leaders should look out,” [Chief Executive of Hong Kong Donald] Tsang said in Singapore Nov. 13. “America is doing exactly what Japan did last time,” he said, adding that Japan’s zero interest rate policy contributed to the 1997 Asian financial crisis and U.S. mortgage meltdown.

Bernanke himself points out that bubbles are a little easier to spot in hindsight:

Federal Reserve Chairman Ben S. Bernanke said it’s “not obvious” that asset prices in the U.S. are out of line with underlying values after a 64 percent jump in the Standard & Poor’s 500 Index from its March low.

“It is inherently extraordinarily difficult to know whether an asset’s price is in line with its fundamental value,” he said today in response to audience questions after a speech in New York. “It’s not obvious to me in any case that there’s any large misalignments currently in the U.S. financial system.”
…
“The best approach here if at all possible is to use supervisory and regulatory methods to restrain undue risk-taking and to make sure the system is resilient in case an asset-price bubble bursts in the future,” Bernanke said.

His prescription is entirely sensible and will therefore be ignored.

DBRS has published an amusing letter to the SEC:

The Commission initially put these proposals out for comment last year. With very few exceptions, the proposals elicited an overwhelmingly negative response from the public commenters, including DBRS. The Commission recently adopted the few proposed rule changes that the public found unobjectionable. However, instead of heeding the cogent arguments the commenters put forth regarding the rest of the proposals, the Commission has asked for more comments, hoping this time to elicit a different response.
…
Footnote: For example, with regard to the proposed elimination of NRSRO references from Regulation M, the Commission says, “In light of the uniform opposition in the comment letters and the Commission’s remaining concern regarding the undue influence of NRSRO ratings, the Commission is seeking additional comment.” Re-proposing Release, at 6, 74 Fed. Reg. at 52375.

No word yet on the DFN / DFN.PR.A Rights Issue. Maybe tomorrow.

The preferred share market continued its rally today, with PerpetualDiscounts up 8bp and FixedResets gaining 17bp. Not much price volatility, volume was lukewarm.

A good solid day for the Canadian preferred share market, with PerpetualDiscounts up 15bp while FixedResets gained 4bp … reasonably close to a parallel shift in yields, given the difference in their weighted-median average modified duration. Not a lot of price volatility, not a lot of volume.