PrefBlog

The Bank for International Settlements has released its Core Principles for Effective Deposit Insurance Systems.

Quis custodiet ipsos custodes?:

The Securities and Exchange Commission today charged two accountants who produced bogus financial statements and an Antiguan regulator who took bribes to look the other way as Robert Allen Stanford conducted an alleged $8 billion Ponzi scheme.
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“Instead of buying the safe and sound investments he promised his clients, Stanford bought Antigua’s top securities cop,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “While Stanford quarterbacked his massive Ponzi scheme, he paid the referee to spy on the huddles and provide an insider’s play-by-play of the SEC’s investigation.”
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The SEC’s complaint alleges that King facilitated the Ponzi scheme by ensuring that the FSRC conducted sham audits and examinations of SIB’s books and records. In exchange for bribes paid to him over a period of several years, King made sure that the FSRC did not examine SIB’s investment portfolio. King also provided Stanford with access to the FSRC’s confidential regulatory files on him, including the SEC’s requests for information from FSRC in its investigation. King went so far as to allow Stanford to essentially dictate the FSRC’s responses to the SEC on those information requests. King made false assurances that there was no cause for concern about Stanford International Bank. He collaborated with Stanford to withhold significant information being requested by the SEC.

Speaking of scams, the FDIC is warning of a new one:

FDIC-insured institutions should be aware of any unsolicited deposits received through third-party referrals. Certain insurance companies and other financial services firms are offering above-market rate certificates of deposit (CDs) through FDIC-insured institutions to attract customers. However, the actual rate offered by the insured institution is usually much lower. In some cases, these third parties use the FDIC official sign, seal, logo or similar representations in connection with these offers.

When a customer expresses an interest in buying a CD, the third party takes the customer’s contact information for future marketing opportunities. When the customer buys the FDIC-insured CD, the third party refers the customer to an insured institution’s Web site. For the customer to receive the above-market rate CD, the third party must make a payment to the issuing institution on behalf of the customer to “make up” the difference between the institution’s actual rate and the above-market rate. This may misrepresent the actual rate offered by the insured institution by adding “promotional” funding to the principal balance of the CD, and therefore could be contradictory with the institution’s Truth-in-Savings disclosures. Institutions may become aware of such practices when they receive two checks for the purchase of a single CD. All insured institutions should have controls in place to flag unusual deposit activity.

Hmm … so at a relatively small cost, you get an address list of people who are willing to write large cheques … I couldn’t figure out the point of the scam at first!

The law firm of Wachtell, Lipton has come out strongly against Credit Default Swaps:

Any action the Commission attempts to take against manipulative short selling will not be completely effective without parallel, reinforcing reforms applied to the derivatives market, particularly with respect to credit default swaps (“CDS”). The responsiveness of equity prices to changes in CDS spreads makes the purchase of CDS a powerful device for bear raids, particularly when used in connection with short sales. Combining a short sale with the purchase of CDS sends a false signal into the marketplace about a company’s credit and, accordingly, causes a drop in the stock price that makes the short position profitable. Such manipulation is dangerously cost-effective, as a relatively small investment in an institution’s CDS is sufficient to spark rumors of default or a ratings downgrade and immediately sink stock prices.

To prevent this and other abuses of the CDS market, we believe that only those who are economically exposed to the underlying credit risk of a company should be allowed to buy CDS protection on the company. The purchase of a “naked” CDS, made by a purchaser with no exposure to the reference company, is more akin to gambling than obtaining insurance, and such instruments are capable of causing serious distortions in the market. A prohibition on naked CDS would allow the appropriate use of these instruments while restraining those using the CDS market in a manipulative and abusive way. As an intermediate step, the Commission should use its ability to regulate short sales to require a waiting period between any purchase of a CDS and short sale involving the same reference company. In addition, to alert the marketplace to situations when CDS are being used to manipulate share prices in conjunction with short selling, the Commission should require disclosure when an actual or synthetic short position in a company’s equity securities is accompanied by a long position in the company’s CDS.

Combining a short sale with the purchase of CDS sends a false signal into the marketplace about a company’s credit, eh? I guess there’s no possibility – none whatsoever – that it could be sending a true signal into the marketplace?

Volume in the preferred share market was off slightly today, but the market was able to advance a little.

The New York Times points out – albeit disapprovingly – one of the good elements of the Obama regulation plan: it leaves Credit Rating Agencies alone:

The proposals call for the agencies to improve disclosure and release more detailed information, as well as establish policies for “managing and disclosing conflicts of interest.”

But the plan does not alter the issuer-pay model, whereby the companies selling securities pay to have them rated. Nor does it encourage competitors to enter the industry, which many regard as an oligopoly.

The proposal does call for regulators to reduce their reliance on agency ratings when deciding whether structured investments are safe enough for banks, insurance companies, pension funds and money market mutual fund investors. Regulators should encourage more independent analysis, a Treasury official said, but the administration did not propose an alternative standard.

Bank of Canada Governor Mark Carney gave a speech today:

The performance of core funding markets during the crisis intensified the financial panic and helped trigger the recession. This is totally unacceptable. As a consequence, one of the Bank of Canada’s top priorities is to promote institutional changes to create more robust core funding markets. Promising avenues to break such (il)liquidity spirals include introducing clearing houses, standardizing products, implementing through-the-cycle margining, and ensuring more effective netting.

Does anybody else think this is non-sequiter? When I think of “core funding”, I think of deposits, deposit notes and GICs. One might well make the argument that the “promising avenues” might contain a mathod whereby the market for these instruments remains stable … but Mr. Carney doesn’t.

There is a possibility that the panel surveyed to calculate US LIBOR will increase:

The dollar rose versus the euro yesterday for the first time in three days after British Bankers’ Association said it may allow more institutions to take part in the daily survey that sets Libor, the benchmark for more than $360 trillion of financial products around the world.
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“It would be a wider group of banks, so some ‘weaker’ ones who would submit higher rates, thus Libor would aggregate higher,” said Scott Ainsbury, a portfolio manager at New York- based FX Concepts Inc., the world’s largest currency hedge fund with about $12 billion in assets.

Not much price action today in Canadian Preferreds, but volume continued high.

That guy who had a baby in 1967 is about to become a grandfather:

The International Olympic Committee has yet to secure two more international sponsors, leading to a $30-million shortfall so far in the money Vancouver organizers had expected to receive from them.

And the recession has scared off potential suppliers, said John McLaughlin, the Vancouver committee’s chief financial officer.

TCA issued about $1.6-billion in equity to fund a major purchase and had its credit rating affirmed by DBRS.

S&P had a mass downgrade of US Banks today:

Standard & Poor’s reduced its credit ratings or revised its outlook on 22 U.S. banks, including Wells Fargo & Co., PNC Financial Services Group and KeyCorp, citing tighter regulation and increased market volatility.

“Financial institutions are now shedding balance-sheet risk and altering funding profiles and strategies for the marketplace’s new reality,” S&P credit analyst Rodrigo Quintanilla said in a statement today. “Such a transition period justifies lower ratings as industry players implement changes.”
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S&P lowered Carolina First Bank, Citizens Republic Bancorp Inc., Huntington Bancshares Inc., Synovus Financial Corp. and Whitney Holding Corp. to “junk” ratings. High-yield, high- risk, or junk, debt is rated below BBB- by S&P.
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Capital One Financial Corp., BB&T Corp., Regions Financial Corp., U.S. Bancorp and were also among the lenders downgraded today.

Meanwhile, the stronger brethren repaid some funds:

JPMorgan Chase & Co. and three of the nation’s largest banks repaid $44.7 billion to the U.S. Treasury’s bailout fund in a step toward ridding themselves of government restrictions on lending and pay.

JPMorgan repaid $25 billion, Morgan Stanley gave back $10 billion, Minneapolis-based U.S. Bancorp refunded $6.6 billion and Winston-Salem, North Carolina-based BB&T Corp. paid $3.1 billion, the companies said today in separate statements.

Interesting that BB&T is on both lists!

Comrade Obama laid out his financial regulation plans today:

The central bank would get responsibility to oversee all systemically risky financial firms, a move that aims to eliminate gaps in oversight that contributed to the collapse of Bear Stearns Cos. and Lehman Brothers Holdings Inc. last year. The Fed would monitor not only banks but large financial companies, such as insurers or hedge funds, whose interconnections in the financial industry mean their failure would endanger the system.

“These firms should not be able to escape oversight of their risky activities by manipulating their legal structure,” the White Paper said. Through higher capital requirements and stronger regulatory scrutiny “our proposals would compel these firms to internalize the costs they could impose on society in the event of failure.”

So, since the Fed designed and supervised a system of bank regulation without a sufficient moat to protect it from EVIL HEDGE FUNDS, the solution is to regulate hedge funds. Goodbye Connecticut, hello Dubai!

And the chief purpose of any Central Bank, lender of last resort, is going to be politicized:

The Fed, while gaining a bigger role as the systemic regulator, would have some of its emergency lending power curbed. The plan calls for the Treasury secretary to approve in writing any emergency funding.

Oh, well, at leastRep. Scott Garrett is keeping his head:

President Barack Obama’s proposal to expand financial capital requirements to non-banking firms that trade in the $592 trillion over-the-counter derivatives market is misguided, said U.S. Representative Scott Garrett.
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“It is unclear how applying the regulatory system that so woefully failed the banking sector to the rest of the U.S. economy could possibly be helpful,” Garrett, the ranking Republican on a subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, said in an e-mail. The subcommittee is part of the House Financial Services Committee, which will have to turn the Obama proposal into legislation.

I’ve said all along: it’s clear that derivatives were a source of fear – and, in the case of AIG’s counterparties, a definite destabilizing force. This may be addressed simply by altering the existing capitalization rules … those exposed to loss (or those buying insurance and exposed to loss if the insurer fails) should obtain collateral. If the counterparty won’t put up the collateral (AIG, MBIA, et al.), then the required collateral is a straight deduction from the regulated entities’ capital. So what’s the problem? Increasing the scope of regulation is simply a make-work project.

The market was off a bit today, although damage to FixedResets was minimal. Volume continues high.

PerpetualDiscounts closed with a yield of 6.32%, equivalent to 8.85% interest at the standard equivalency factor of 1.4x. Long Corporates continued their yield decline to about 6.3%, sending the Perpetual-Discount Interest-Equivalent Spread to 255bp, as PDs continue to lag the extraordinary strength in bonds.

There is a kerfuffle in the UK regarding the FSA’s attempt to increase the bank’s liquidity requirements, in accordance with the Turner Review (previously discussed on PrefBlog):

Similarly, if banks have to hold more assets in liquid form, and more of those in super-liquid form, like cash or government bonds, their income will decline. The FSA’s proposals on the subject accept these increased costs, though they are only sketchily estimated. Against these vague costs it sets a massive “reduction in the costs of systemic instability” of “3 billion to 5 billion bounds on an annualised basis.”

The problem for the banks is that, in contrast to the past, they will bear the costs of increased stability, while the taxpayer will enjoy the benefits.

The BBA’s tactic of playing the UK competitiveness card to stall the unilateral introduction of liquidity requirements is a clever one: international agreements can take years to complete.

It is also politically astute to play up the tension for banks between increasing their liquidity reserves at a time when the government is pressing them to increase lending to homeowners and businesses.
While Knight did not exactly put it like this, the FSA is asking banks to lend to government at the expense of the private sector. But the government is very strapped for cash right now. With regulatory and political interests fully aligned in favour of reform, this looks like a battle the banks will lose.

Those interested in hedging hyperinflation may wish to follow the strategy of Excelsior Fund:

The Excelsior Fund targets returns that will be five times the average annual rate of inflation of the Group of Five economies — France, Germany, Japan, the U.K. and the U.S. — should the rate exceed 5 percent, Jerry Haworth, co-founder of the firm, said yesterday. Raising $100 million for the fund would be a “good” amount, he said.
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36 South’s Excelsior Fund will buy long-dated options it considers cheap and that “stand a good chance of outperforming in an inflationary environment,” Haworth said. Options are contracts to buy or sell a security by a certain date at a specific price.

The fund will wager on an increase in commodity and equity prices, bond yields and increased currency volatility.

“It’s a very high-risk, high-return fund,” said Haworth, who has been trading derivatives for more than 20 years as the former head of equity derivatives at Johannesburg-based Investec Ltd., and co-founder of Peregrine Holdings Ltd., a South African money manager and stockbroker.

The General Secretary of United Soviet Socialist America gave an indication of his plans today:

“Wall Street seems to maybe have a shorter memory about how close we were to the abyss than I would have expected,” Obama said in an interview with Bloomberg Television today at the White House. “All we’re doing is cleaning up after the mess that was made.”
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Crafted by Treasury Secretary Timothy Geithner and National Economic Council Director Lawrence Summers, Obama’s plan would put the Federal Reserve in charge of regulating companies whose collapse could damage the entire financial system. It would also create a new agency for overseeing consumer financial products, such as mortgages and credit cards.

The proposal encompasses areas ranging from derivatives to executive pay to the mortgage-backed securities that helped fuel the housing boom and then touch off the credit crisis.
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Obama called the derivatives market “an entire shadow system of enormous risk” and pledged to make it more transparent.

“Derivatives are a huge potential risk to the system,” he said. “We are going to make sure that they have to register, that they are regulated, that you have clearinghouses.”

However, I like this bit, somewhat:

Financial firms deemed too-big-to-fail will be required to maintain extra capital cushions, which are designed to curb the excessive risk taking that led to the collapse of last year of Bear Stearns Cos. and Lehman Brothers Holdings Inc. and the government seizure of insurer American International Group Inc.

I would like it a lot more if it was rules based … with a progressive risk-weight surcharge applied to risk-weighted assets in excess of a manageable level.

I find it most interesting that political culpability in the crisis has been ignored. If prime mortgages had yielded a little more, maybe the banks wouldn’t have plunged so heavily into sub-prime. But prime mortgages were wink-wink NOT guaranteed by Treasury nudge-nudge and hence traded at razor-thin spreads to Treasuries.

PrefBlog’s One-Born-Every-Minute Department passes on this SEC news release:

The Securities and Exchange Commission today obtained a court order halting an $11 million Ponzi scheme in which a Chicago-based promoter who is a convicted felon promised investors unusually high returns from purported investments in payday advance stores.

The SEC alleges that David J. Hernandez, who was convicted in 1998 for wire fraud arising from his previous employment at a bank, sold “guaranteed investment contracts” through his company that, unbeknownst to investors, was actually out of business. Hernandez promised returns of 10 percent to 16 percent per month and made false and misleading statements about his background, the use of investor proceeds, and the safety of the investment.

Actually, I only looked at the SEC site hoping for a definitive statement regarding a rumoured Madoff settlement, but nothing shows up yet.

Good performance from preferreds of all classes (well … except the single member of the FixedFloater subindex) with continued elevated volume.