PrefBlog

BMO will be exiting the annuity business:

Ottawa is wading into a high-stakes battle between banks and life insurers, ordering the banks to stop selling products that resemble annuities.

The decision is a win for the country’s life insurers and a blow to Bank of Montreal … which kicked off this battle in January when it began selling a product called BMO Lifetime Cash Flow, which provided buyers 55 and older with guaranteed payments for life.
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Finance Minister Jim Flaherty said Friday that the Conservative government will introduce legislation to prevent banks from offering financial products that function like life annuities.

Some of the best investment advice I’ve ever recieved was given to me before I was ten years old. My Dad always said: When the little guys get in …:

Royal Canadian Mint’s retail gold fund is an unheralded success.

Since the books opened three weeks ago, the initial public offering has raised $600-million. That technically makes it the largest IPO of the year.

… it’s time to get out:

While bullion’s slide of as much as 9 percent this week took its drop from the record $1,923.70 an ounce reached in September to almost 20 percent, the common definition of a bear market, investors are still holding the most metal ever in exchange-traded products, a wager now valued at $119.2 billion.

We’re starting to get a little clarity on the MF Global situation. It seems that after six weeks of very costly forensic analysis, the CME looked at its notes from an October 31 meeting:

CME Group detailed its dealings with MF Global in documents released yesterday by the oversight panel of the House Financial Services Committee. Christine Serwinski, chief financial officer for North America at MF Global, and Edith O’Brien, a treasurer, told Mike Procajlo, an exchange auditor, at around 1 a.m. on Oct. 31 in Serwinski’s Chicago office that the customer money was transferred on Oct. 27 and Oct. 28 and possibly Oct. 26, according to a CME Group timeline.
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MF Global had its credit rating cut to junk on Oct. 27 by Moody’s Investors Service and Fitch Ratings as its shares plunged and bonds began trading at distressed levels amid a crisis of investor confidence over the Europe trades.

The downgrades “sparked an increase in margin calls” that were “threatening overall liquidity,” Bradley Abelow, MF Global’s president and chief operating officer, said in the company’s bankruptcy filing.

Customer funds were also used to make a $175 million loan to MF Global’s U.K. subsidiary, Duffy said yesterday.
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A revised MF Global customer segregation report was sent to CME Group on Oct. 31 that showed $891.5 million in missing customer money as of Oct. 28, the CME Group chronology shows.

This has not been previously disclosed because muttering darkly about “missing” funds is a better regulatory career move. Assiduous Readers will doubtless remember that on November 2 I wrote:

Experience suggests to me that the actual players know very well what the answer to the segregated account mystery is, but are posturing for political purposes.

Fitch is gloomy on Europe:

The euro declined against the dollar after Fitch Ratings said it may downgrade Belgium, Spain, Slovenia, Italy, Ireland and Cyprus, adding to concern the region’s debt crisis hasn’t been contained.
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The euro fell 0.1 percent to $1.3004 per euro at 12:53 p.m. in New York. It dropped 0.2 percent to 101.17 yen.

Fitch said a “comprehensive solution” to the euro-zone crisis is “technically and politically beyond reach.”

After years of government waffling, the Belgians have been cut:

Belgium’s credit rating was cut two levels to Aa3 by Moody’s Investors Service, which said rising borrowing costs, slowing growth and liabilities arising from Dexia SA’s breakup threaten to inflate the euro area’s fifth- highest debt load.

Moody’s lowered Belgium’s debt rating to the fourth-highest investment grade, from Aa1, with a negative outlook, the ratings company said today in a statement. The action follows Standard & Poor’s one-step downgrade of Belgium to AA on Nov. 25. Fitch Ratings put Belgium’s AA+ on review for a downgrade today.
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Belgian borrowing costs touched the highest level in 11 years in November, with the yield on the benchmark 10-year bond closing at 5.86 percent before S&P’s downgrade on Nov. 25. They started surging almost two months earlier as the caretaker government bought Dexia SA (DEXB)’s Belgian banking unit for 4 billion euros ($5.2 billion) and agreed to guarantee as much as 54.5 billion euros of the crisis-hit lender’s liabilities for as long as 10 years.

The yield on the 4.25 percent securities due September 2021 was little changed today at 4.26 percent. That’s 240 basis points, or 2.4 percentage points, more than German Bunds of similar maturity.

And Dealbreaker has a very interesting piece on the difficulties of making money on a bet against Greece: It’s Not So Easy To Get Away From This Voluntary Greek Bond Swap. Which will be fine for the politicians – the last thing they want is honest price discovery!

Rob Carrick has a good piece in the Globe: Bond ETFs confuse you? Here’s a simple guide. [Update: Assidiuous Reader prefhound points out in the comments that the article does not mention the horrific effects of taxation on returns when bond ETFs are held in taxable accounts]

But there was some good news today:

The 100-watt incandescent light bulb has been spared from a U.S. phaseout in a spending deal reached by Republican and Democratic leaders in Congress.

Legislation debated today will prohibit the Energy Department from enforcing elimination of the traditional, pear- shaped bulb. Tea Party activists and their Republican allies campaigned against the energy efficiency requirement as an example of government overreach.

The federal standards limited the “freedom of average Americans” to buy whatever type of bulb they wanted, Representative Michael Burgess, a Texas Republican, said today in an interview. The House passed the bill today 296-121.

Never mind petty details like the mercury in fluorescent bulbs … if you want people to use less electricity, just raise the price. What’s so hard about that?

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 9bp, FixedResets gaining 6bp and DeemedRetractibles winning 13bp. There was continued good volatility skewed to the downside, with the SLF FixedResets being prominent on the loser list. Volume was average.

Ontario is on Outlook-Negative by Moody’s:

Ontario’s rating outlook was cut to negative from stable by Moody’s Investors Service on concern Canada’s most populous province faces a higher risk in meeting fiscal targets given a recent slowdown in economic growth.
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The province in November revised its forecasts down for provincial growth in 2011 and 2012 to 1.8 percent and 1.8 percent, from 2.4 percent and 2.7 percent, Moody’s said. The provincial economy is affected by the moderation in U.S. growth, given its higher export share relative to other Canadian provinces and the estimated 80 percent of international exports destined for the nation’s largest trading partner.

“The negative outlook on the province reflects the softening economic outlook, Ontario’s growing debt burden, and the extended timeframe to achieving a balanced budget,” Moody’s Assistant Vice President Jennifer Wong, lead analyst for the Province of Ontario, said in the statement.

Thank you, Premier Dad! Thank you, green energy lobbyists!

Fitch downgraded GS and BAC among others:

The downgrades “reflected challenges faced by the sector as a whole,” Fitch said. “These challenges result from both economic developments as well as a myriad of regulatory changes.”

Credit ratings of the world’s biggest lenders have come under pressure amid weak economic growth and doubts about whether European regulators have done enough to end the continent’s debt crisis. Lenders in the European Union must raise about $149 billion in fresh capital to help address the sovereign-debt turmoil, the European Banking Authority said on Dec. 9.

Long-term issuer default ratings for Bank of America, Citigroup and Goldman Sachs were cut to A from A+, according to the statement. Barclays and Credit Suisse were downgraded to A from AA-, while BNP Paribas (BNP) and Deutsche Bank fell to A+ from AA-. Morgan Stanley’s long-term issuer default rating was affirmed at A.

First Asset has decided there aren’t enough index providers:

Toronto-based First Asset Investment Management Inc. has licensed seven Morningstar indexes to serve as benchmarks for exchange-traded funds that it expects to launch early in the new year on the Toronto Stock Exchange.

… the Morningstar Canada Momentum Index, Morningstar Canada Dividend Income Index, Morningstar Canada Value Index and Morningstar U.S. Dividend Target 50 Index. … Morningstar Canada Liquid Bond Index and the Morningstar Emerging Market Composite Bond Index … the Morningstar Diversified Futures Index
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First Asset Investment Management, a subsidiary of First Asset Capital Corp., entered the ETF business in June and currently manages six ETFs with combined assets of $50 million.

There is well-founded speculation on European bank runs:

Kyle Bass, the Dallas-based hedge fund manager who said in 2009 that governments would default within three years, said Greek, Portuguese and Spanish depositors will withdraw money from banks in the coming months.
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In Greece, business and household bank deposits have slumped 26 percent in the past two years to 176 billion euros ($229 billion), and fell in October by the most since the nation joined the euro, according to the Bank of Greece. There were 2.24 trillion euros of overnight deposits with euro-region financial institutions at the end of September, down from 2.26 trillion in July, according to data compiled by Bloomberg.

Latvians pulled about $54 million from local Swedbank AB automatic teller machines on Dec. 11 and 12 on speculation customers wouldn’t be able to access their funds. “The rumors were knowingly distributed with the goal of destabilizing the situation in Latvia,” Prime Minister Valdis Dombrovskis said, according to the Leta newswire. Clients withdrew about 1.5 percent of total deposits on Dec. 12, the Swedish bank said in an e-mailed statement.

The IMF managing director says the Europeans have to call in the IMF:

The European debt crisis is growing to the point that it won’t be solved by one group of countries, Christine Lagarde, the managing director of the International Monetary Fund said today.

Lagarde said that if countries don’t work together, the world will face a situation similar to the 1930s, before the world slid into World War II.
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Lagarde said international support would probably be channeled through the IMF for “organizing a collective financial responsibility, a fiscal solidarity and that element of risk-sharing that is expected, pretty much, around the globe.”

Let us all give thanks that we will be saved by the heroic bureaucrats of the IMF!

The SEC has released a statement whining that regulatory extortion is getting more difficult:

Last month, a federal district court declined to approve a consent judgment because, in its view, the underlying allegations were ‘unsupported by any proven or acknowledged facts.’ As a result, the court rejected a $285 million settlement between the SEC and Citigroup that reasonably reflected the relief the SEC would likely have obtained if it prevailed at trial.
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We believe the court was incorrect in requiring an admission of facts — or a trial — as a condition of approving a proposed consent judgment, particularly where the agency provided the court with information laying out the reasoned basis for its conclusions.
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The court’s new standard is at odds with decades of court decisions that have upheld similar settlements by federal and state agencies across the country. In fact, courts have routinely approved settlements in which a defendant does not admit or even expressly denies liability, exactly because of the benefits that settlements provide.

In cases such as this, a settlement puts money back in the pockets of harmed investors without years of courtroom delay and without the twin risks of losing at trial or winning but recovering less than the settlement amount – risks that always exist no matter how strong the evidence is in a particular case.

What has happened to ethics? What has happened to respect for the rule of law? If the court system has become so grossly inefficient that trials take too long, then the solution is to reform the court system – not to tell the accused that since a trial would take too long, we’re going to string you up.

Meanwhile, we may finally be getting some clarity on the MF Global fiasco:

Corzine suggested Terrence Duffy, CME Group executive chairman, may have been referring to some funds transfers that occurred as MF Global was selling billions of dollars in securities. JPMorgan Chase & Co. (JPM), which was involved in the transactions, told MF Global the sale could not be completed until overdrafts in some accounts in London were corrected.

“I contacted the firm’s back office in Chicago and asked them to resolve the issues, which I understood they did,” Corzine said. He didn’t say explicitly whether he was aware at the time that the loan may have included funds from customer accounts.
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“The back office in Chicago explicitly confirmed to me that the funds were appropriately transferred,” Corzine said.
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Texas Republican Randy Neugebauer, chairman of the oversight subcommittee, said he was uncomfortable with the amount of power Corzine held at MF Global before he stepped down.

“What we saw was one person had an extreme amount of authority, Mr. Corzine, as the chair of the board and the CEO of the company,” Neugebauer said in his opening statement. “And, according to people we have interviewed, one of the principal traders of this company. There was no real barrier or firewall for protecting the investors of the company.”

Three cheers for Randy Neugebauer, who appears to have a good head on his shoulders! All kinds of criminal instructions are issued with plausible denial by the big boss saying ‘Get it done’.

Ed Clark wants his mummy to look after him:

Ed Clark, the chief executive officer of Toronto-Dominion Bank (TD-T71.85-0.55-0.76%), said in an interview that he believes Ottawa could tighten the rules on housing loans more than it already has, without hurting the economy or putting the housing market at risk.
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The banks prefer that the government direct the industry on mortgage lending, concerned that if one lender were to stop offering 30-year mortgages, another would likely swoop in and try to steal that market share. Last December, Mr. Clark warned that if a bank tried to cut back on longer mortgages on its own, it would be “carved up” by its rivals.

Well, we wouldn’t want to lose any of our likely-to-default customers, would we? Then we might be left only with good customers.

As I have said so many times this year (*sigh*) I can’t figure out what’s going on with YLO. The common is trading at $0.20. YLO.PR.A can be converted by the company into 12.5 common shares at the end of March, after paying one more dividend of $0.26563, and it’s prudent to assume that this will happen. If the company doesn’t convert prior to December 2012, then holders will get $25, which will be highly inconvenient for the company, to say the least, so it will (almost) certainly happen next year, probably sooner rather than later (to avoid either paying a dividend or skipping it).

So here’s my question: why is YLO.PR.A trading for $1.60? That’s an implied conversion price of about $0.10 for the common, half the market price.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts winning 14bp, FixedResets up 1bp, and DeemedRetractibles losing 13bp. The Bozo Spread (Current Yield PerpetualDiscounts less Current Yield FixedResets) is now only 10bp! MFC issues got hammered again today, amid more than usual volatility skewed to the downside. Volume was average.

A sign of things to come?

Credit Agricole SA (ACA), France’s second- largest bank by assets, said it expects to report a loss for 2011 and will eliminate 2,350 jobs at its investment-banking and consumer finance units.

Credit Agricole will book about 2.5 billion euros ($3.24 billion) in writedowns on investments, including its stake in Spain’s Bankinter SA and Banco Espirito Santo SA of Portugal, the bank, based outside Paris, said in an e-mailed statement today.

The company scrapped its dividend for 2011 and said it can’t confirm its 2014 goals because of “the lack of visibility on the economic and financial climate.” The lender joins BNP Paribas SA and Societe Generale SA in reducing corporate- and investment-banking staff.

The overall picture is dire:

Italy had to pay the most in 14 years to sell five-year bonds as Parliament rushes to pass a 30 billion-euro ($39 billion) budget plan that Prime Minister Mario Monti says will bring down record borrowing costs.

The Rome-based Treasury sold 3 billion euros of the bonds, the maximum for the sale, to yield 6.47 percent, the most since May 1997 and up from 6.29 percent at the last auction on Nov. 14.
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The euro region’s third-largest economy has to repay about 53 billion euros in debt in the first quarter from the region’s total maturing debt of 157 billion euros, according to UBS AG. It owes a further 3.2 billion euros in interest payments based on the average five-year yield of the past three months.

The yield on the benchmark 10-year bond was 6.69 percent after the auction at 12:46 p.m. in Rome, up one basis point from yesterday. That pushed the difference with German bonds to 4.69 percentage points. The euro extended its decline against the dollar, trading below $1.30 for the first time since Jan. 12.

On a brighter note, DBRS confirmed the UK:

DBRS Ratings Limited (DBRS) has today confirmed the AAA ratings on the foreign and local currency securities of the United Kingdom (the U.K. or Britain). The ratings are underpinned by the size, openness and diversity of the British economy, its fiscal and monetary policy flexibility, a historical track record of fiscal consolidation, and relatively flexible product and labour markets. In addition, the U.K. benefits from having deep, efficient domestic capital markets and the sterling’s status as a secondary reserve currency.

All this is having an effect:

U.S. stocks retreated, sending the Standard & Poor’s 500 Index lower for a third straight day, as growing funding stress in Europe fueled concern the region is struggling to contain its sovereign debt crisis.
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First Solar Inc. (FSLR), the world’s largest maker of thin-film solar panels, plunged 22 percent after reducing profit estimates and saying it will cut about 100 jobs.

The S&P 500 declined 0.9 percent to 1,214.16 at 3:14 p.m. New York time. The benchmark measure for American equities has fallen 3.3 percent in three days. The Dow Jones Industrial Average decreased 123.82 points, or 1 percent, to 11,831.12. The Nasdaq Composite Index (CCMP) slumped 1.5 percent to 2,541.56 as Apple Inc. (AAPL), the largest technology company, lost 2.3 percent.

Still, it’s nice to see a solar energy company get into trouble. Perhaps those hundred guys laid off can find work doing something useful.

Here’s another chapter about excitable bond markets:

Investors, spooked by bank analyst Meredith Whitney’s prediction of “hundreds of billions of dollars” of municipal defaults in 2011, started fleeing the market in record numbers, sending interest rates soaring, according to Craig Sheagren, the hospital’s chief financial officer. As bond buyers ran, JPMorgan Chase & Co. (JPM) and other underwriters stepped up with offers of loans, letting the institution bypass the public markets.
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Refuting Whitney’s forecast, which helped send borrowing costs to two-year highs in January, the $3.7 trillion municipal- bond market rebounded this year, generating an average total return of 10 percent through Dec. 12, better than U.S. Treasuries and corporate bonds, Bank of America Merrill Lynch indexes show. Munis also trounced equities as the Standard & Poor’s 500 Index lost (SPX) 0.6 percent in the same period.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 10bp, FixedResets losing 21bp and DeemedRetractibles down 20bp. There was quite a bit of volatility, mostly to the downside, with MFC and SLF getting hammered. Volume was below average.

PerpetualDiscounts now yield 5.18%, equivalent to 6.73% at the standard equivalency factor of 1.3x. Long corporates are now at about 4.65%, so the pre-tax interest-equivalent spread is now about 210bp, a significant widening from the 195bp reported December 7.

European banks are frantically raising cash:

European banks, under pressure from regulators to bolster capital, are selling some of their fastest-growing businesses to competitors from outside the region — at the expense of future profit and economic growth.

Spain’s Banco Santander SA (SAN), Belgium’s KBC Groep NV (KBC) and Germany’s Deutsche Bank AG are accelerating plans to exit profitable operations outside their home markets. Santander, which said in October it needs to plug a 5.2 billion-euro ($6.9 billion) capital gap, sold its Colombian unit last week to Chile’s Corpbanca for $1.16 billion. Deutsche Bank is weighing options including a sale of most of its asset-management unit, while KBC may dispose of businesses in Poland.

The MF Global inquiry continues:

Henri Steenkamp, chief financial officer of MF Global, and Bradley Abelow, the firm’s president and chief operating officer, said in testimony prepared for a Senate Agriculture Committee hearing today that they still don’t know the location of the funds.

Jon S. Corzine, former chairman and chief executive officer of the broker, is scheduled to testify at the same witness table, after telling U.S. House lawmakers last week that he never intended to authorize any misuse of client money.

“I do not know why these funds cannot be accounted for, but based on the fact that no shortfalls had been reported to me previously, it appears that any irregularities were likely caused by events that occurred shortly before the bankruptcy filing,” Steenkamp said in the testimony.

I’ve expressed doubts about all this before, and continue to believe that if there actually were nefarious activities, then by now the trustee would be able to testify that “On November X there was a transfer from MF Account Y to a third party account Z instigated by Mr. A” … but that’s not happening. Instead, everybody’s muttering darkly about ‘missing funds’. I suspect that this is mostly, if not entirely, regulatory theatre.

Why do I suspect this? Because that’s what always happens. Nobody’s name will be cleared until nobody cares any more, and in three years we’ll just be left with a hazy memory of executive misconduct foiled by the heroic efforts of dedicated regulatory staff.

But now there’s a theory!

One working theory for the missing money is that it was taken from customer accounts and not replaced with equal collateral, as mandated by law, according to the people familiar with the investigation. Then, they said, after the funds were moved to the broker-dealer unit of MF Global they may have been used to pay margin on the repurchase agreements.

Unless the books are complete spaghetti, I don’t see how that could possibly take more than a day or two to confirm.

The FOMC statement was cheery:

Information received since the Federal Open Market Committee met in November suggests that the economy has been expanding moderately, notwithstanding some apparent slowing in global growth. While indicators point to some improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but business fixed investment appears to be increasing less rapidly and the housing sector remains depressed. Inflation has moderated since earlier in the year, and longer-term inflation expectations have remained stable.
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The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.
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Voting against the action was Charles L. Evans, who supported additional policy accommodation at this time.

DBRS confirmed BNA at Pfd-2(low):

The downside protection available to the Class AA Preferred Shares is approximately 66.0%, based on the market value of the BAM Shares as of November 25, 2011. The dividend coverage ratio is approximately 1.1 times. As a result, the Company will initially be able to fund the Class AA Preferred Shares distributions without relying on other methods for generating income or reverting to the sale of common shares in the Portfolio. In the event of a shortfall, the Company will sell some of the BAM Shares or write covered call options to generate sufficient income to satisfy its obligations to pay the Class AA Preferred Shares dividends.

The Pfd-2 (low) ratings of the Class AA Preferred Shares are primarily based on the downside protection and dividend coverage available to the Class AA Preferred Shares.

S&P has applied revised methodology to North American banks, which has had an effect on TD, BMO, CM, BNS and RY. NA escaped unscathed.

It was a strong day for the Canadian preferred share market, with PerpetualDiscounts winning 18bp, FixedResets up 12bp and DeemedRetractibles gaining 12bp. Volatility was good. Volume was a little below par.