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.