PrefBlog

I understand that Scotia has done an Innovative Tier 1 Capital deal, described as “650 million deal June 30, 2019-2108 … at 7.804%”, but have no further details, no press release, nothing on SEDAR.

One of my favourite words has been banned in the UK:

Liquidity, equity and stabilization are “grandiose or ambiguous” words that shouldn’t be used in investment brochures, Britain’s financial regulator said.

Short, punchy sentences with sub-headings and colored graphs should replace swathes of text, the Financial Services Authority said in a paper yesterday. Too much data is as bad as no information as it deters customers from properly reading documents, the London-based agency said.

If financial companies bamboozle customers with technical language, they won’t be treating them fairly — one of the principles by which they must abide — the FSA said. The regulator may not be following its own advice: FSA Chairman Adair Turner used the word “liquidity” 187 times in a 126-page report in March on financial regulation.

The actual paper is something of a hoot. The intent of the FSA is laudable, but … when you explain complex investment instruments to retail, you can have precision or comprehension. Pick One.

The Chrysler bankruptcy is becoming a political circus:

President Barack Obama said Chrysler LLC lenders who turned down his buyout offers are a “small group of speculators” who forced the automaker into bankruptcy.

“A group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout,” Obama said today in Washington before Chrysler filed for bankruptcy protection.
…
While lenders representing 70 percent of the Chrysler loans agreed to Obama’s offer of $2.25 billion in cash, the dissidents ignored a deadline of 6 p.m. yesterday, according to one of the investors who declined to be named.
…
Chrysler’s dissident lenders have on their side the “absolute priority” bankruptcy rule, which holds that value must be distributed according to the legal priorities of the stakeholders. What riled the group that put out the statement today was the fact that junior creditors, consisting of a workers healthcare trust, would get equity in a new Chrysler entity while they would not.

In the deal Chrysler was trying to conclude out of court, Fiat would have become a 20 percent owner of Chrysler, and a union retiree health-care trust fund would hold 55 percent, with the rest of the company staying in the government’s hands initially, according to people familiar with the matter. The government intends to replicate this, using bankruptcy to set up a new company, people familiar with the plan said.
…
“The U.S. bankruptcy code foresees the possibility that it may be necessary to vary from ‘absolute priority,’ in particular when a two-thirds majority is convinced it makes legal or business sense,” said Richard Hahn, co-chairman of the bankruptcy practice at Debevoise & Plimpton LLP, a New York law firm that isn’t involved in the Chrysler negotiations. “If the government has consents from 70 percent, that’s more than enough” to give equity to junior creditors.

The dissidents “may be calculating that they can get more money by waiting a bit longer,” Hahn said. “Presumably they will file objections in court. The issue is less whether they’ll win than whether they can cause a meaningful delay that may cause Chrysler or the government to come to an accommodation.”
…
The objections from the group of lenders also drew criticism from Michigan lawmakers, including Democratic Representatives John Dingell and Sander Levin.

“The rogue hedge funds that refused to agree to a fair offer to exchange debt for cash from the U.S. Treasury — firms I label as the ‘vultures’ — will now be dealt with accordingly in court,” Dingell said.

Histrionics, flat declarations and squabbling over the carcass is nothing new in bankruptcy proceedings. The fact that one of the squabblers in the President of the United States of America is worrisome.

A paper on VoxEU titled Private pensions and policy responses to the crisis drew my attention to the OECD Pension Outlook 2008 that had many interesting things to say, for instance:

and (from the related documentation on Pension Plan fees, emphasis added):

While competition is normally expected to bring down costs, individual account pension markets behave in a counterintuitive manner. Marketing and sales agents have been used in the past to encourage members to switch providers, leading to an increase in operational expenses and fees. As members are not very responsive to higher fees, systems that a priori seemed to be highly competitive, with many players, have actually turned out to do rather poorly in terms of fees.

and

The paper argues that the particularly low fees observed in Bolivia and Sweden at the inception of their respective systems stem largely from a decision to force cost competition among providers via a central agency or ‗clearing house‘.
…
One possible explanation for the low costs in countries like Bolivia and Uruguay may be the conservative asset allocation of pension funds in these countries (Bolivian pension funds invest more than 90% in domestic treasury bonds).

There’s also ancilliary documentation on performance which shows Canada doing well, although data is limited.

Volumes came down a little today, but remain very healthy – and the market continued to rise, with some very high prices being seen for recent fixed-resets.

Bloomberg reports that:

American Express Co.’s preferred stock rating was cut to BB, or non-investment grade, from BBB by Standard & Poor’s Ratings Services.

I don’t see anything on the S&P site as yet. Moodys downgraded on April 24:

Moody’s Investors Service downgraded the long-term and short-term ratings of American Express Company (“Amex”). The senior long-term debt rating was lowered to A3 from A2; and the short-term rating was lowered to Prime-2 from Prime-1. The outlook for the Amex long-term ratings is negative.

Moody’s also downgraded the long-term ratings of American Express Travel Related Services (“TRS”) and its rated operating subsidiaries, including American Express Credit Corp. The senior debt and deposit ratings of TRS and subsidiaries were downgraded to A2 from A1. The Bank Financial Strength Ratings of American Express Bank, FSB and American Express Centurion Bank were also lowered to C+ from B-. The Prime-1 short-term ratings for TRS and its rated operating subsidiaries were affirmed. The rating outlook for the TRS debt and deposit ratings is now stable. The outlook on the Banks’ Financial Strength Ratings (“BFSR”) is negative. These rating actions conclude the review initiated on February 25, 2009.

Today’s rating actions reflect the erosion of Amex’s asset quality and weaker revenue trends stemming from the severe U.S. economic recession and the firm’s relatively high credit exposure in the states most heavily affected by home price declines, particularly California and Florida. Moody’s believes that these developments, in combination with structural and regulatory changes in the credit card and consumer lending industry, pose longer term challenges to the company’s franchise.

Chrysler is bust and there could be a fascinating catfight in the works:

The iconic company, third biggest among U.S. automakers, missed a U.S. government deadline to come up with a restructuring plan by today that was rigorous enough to avoid bankruptcy and qualify for more bailout aid. The carmaker tried to negotiate an alliance with Fiat, reduce $6.9 billion in secured loans and cut $10.6 billion owed to a pension fund. Some lenders refused to slash the debt to $2.25 billion.
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Bankruptcy can involve uncertainty and delay. Dissident creditors intend to object to the company’s reorganization plan, a person familiar with their thinking said. That might thwart President Barack Obama’s goal of a “surgical” bankruptcy that would put a viable carmaker quickly into the market.

Funny story on credit ratings:

[Retired lawyer Ron] Grassi says the companies’ faulty debt analyses have been at the core of the global financial meltdown and the firms should be held accountable. Exhibit One is his own investment. He and his wife, Sally, held $40,000 in Lehman Brothers Holdings Inc. bonds because all three credit raters gave them at least an A rating — meaning they were a safe investment — right until Sept. 15, the day Lehman filed for bankruptcy.

“They’re supposed to spot time bombs,” Grassi says. “The bombs exploded before the credit companies acted.”

In the brave new world of credit ratings, there won’t be any of this mealy-mouthed “A” and “A(high)” stuff. Only two ratings will be allowed: “Good as Gold” and “Going Bankrupt Next Week”. Any errors will be prima facie evidence of a crime.

The Bank of Canada has released a new working paper, Price Movements in the Canadian Residential Mortgage Market:

The authors empirically analyze the price-setting behaviour of the major Canadian banks in the residential mortgage market over the period 1991–2007. They use weekly posted prices of the major mortgage providers to study the degree of competition in mortgage price setting. Their results suggest that the residential mortgage market is imperfectly competitive. They find distinct price leaders and that, as market concentration increases, so does price dispersion – helped by the increased use of discounting from posted prices. The authors also find that, although banks’ pass-through of input price changes to mortgage prices is complete in the long run under reasonable assumptions regarding discounting, there exists some level of pricing asymmetry in the short run.

And the FDIC has circulated a new batch of ticky-boxes:

A number of insured banks with portfolio holdings in private label mortgage-backed securities, collateralized debt obligations (CDOs), or asset-backed securities (ABS) are facing heightened losses as a result of significant investments in these products. Certain structured credit products, particularly private label mortgage-backed securities (MBS) and CDOs, have experienced deteriorating collateral performance, price declines, and credit rating downgrades. Management due diligence regarding purchases of these products was often lacking. This Financial Institution Letter reiterates and clarifies existing supervisory guidance on the purchase and holding of complex structured credit products. It focuses on the various supervisory concerns related to these securities: pre-purchase analysis, suitability determination, risk limits, credit ratings, valuation, ongoing due diligence, adverse classification, and capital treatment.

Whoosh, what a day! The seminar went well (by which I mean, nobody actually threw rocks at me) and I’ll be arranging the next one shortly. The preferred share market roared ahead on good volume.

Daniel Bouton is resigning as chairman of SocGen, brought down – at least in part – by the Kerviel scandal which exposed grossly incompetent management.

And Ken Lewis is defending his role in BofA’s Merrill purchase, on the grounds that he is responsible for the global financial system. Perhaps the global financial system should be the one paying him.

Ravi Balakrishnan (IMF), Stephan Danninger (IMF), Selim Elekdag (Central Bank Turkey) and Irina Tytell (IMF) have published an essay on VoxEU, How financial stress spreads – A first comprehensive look at the current crisis, in which they claim:

The twist in the current crisis is that bank-lending linkages appear to be the main driver, rather than the more mobile portfolio investment links that drove the Asian crisis. Since the mid-1990s, Western European banks have dominated bank-lending flows. Emerging Europe stands out as the largest recipient (Figure 2). Using an econometric model for stress transmission, we find that an increase in bank liabilities to Western Europe from 15% to 50% of GDP (roughly the difference between Emerging Europe and other emerging regions) doubles the strength of stress transmission. It is no surprise therefore that Emerging Europe was the first emerging market region to be hit hard by the crisis.

Just another reason to surcharge Risk-Weighted-Assets for bank size and for recent growth. There is also probably good reason to apply a higher risk-weight to holdings due from other banks.

A very good day for the market on increased volume … possibly artificially juiced by portfolio adjustment for the closing of RY.PR.Y. PerpetualDiscounts now yield 6.79%, equivalent to 9.51% interest at the standard equivalency factor of 1.4x. Long Corporates now yield 7.4% (a hair under? Maybe.), so the pre-tax interest-equivalent spread is now 211bp … about average for the Credit Crunch, well down from the highs of November, but still above the pre-Crunch range of 100-150bp.