PrefBlog

The Irish government is upset about its zombie banks:

Irish Prime Minister Enda Kenny said it’s “grossly unfair” that taxpayers alone should carry the cost of bailing out the country’s banks as he pushed for lower rates on a European-led rescue loan.

Kenny, on a visit to Washington where he says he’s trying to repair Ireland’s “damaged” reputation, called for changes to the rescue package by the European Union and the International Monetary Fund to avoid a situation where Ireland struggles to pay back its loan and can’t generate economic growth.

“It is grossly unfair to expect the taxpayer to have to pay 100 percent for the reckless lending practices of banks which caused this in the first instance,” Kenny said yesterday in an interview with Bloomberg Television’s “InBusiness With Margaret Brennan” that will be broadcast today. The 5.8 percent average rate Ireland pays for its loans is “too severe,” he said.
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Kenny stopped short of saying who should pay along with taxpayers. Asked about the treatment of senior bondholders, Kenny said that his government will put no additional cash into banks “until you see the scale of what the liability is, until there is an understanding of what might be here.”

There was cheering in B-Comm classes across Canada today as Harris Fricker, CEO of GMP Capital, demonstrated that you can achieve enormous success on Bay Street without the ability to construct a coherent argument. There’s really not much worth quoting, but here’s the conclusion:

We cannot help but feel that a major opportunity has been lost to preserve a distinctly Canadian success story. Will the acquisition by the LSEG imperil our markets or impede the formation of capital in Canada? Not at all likely. Is the loss of the standalone status of the TMX regrettable in the face of its success to date and its potential going forward? Undeniably.

There is no support for either concluding assertion in the preceeding mish-mash of unrelated statements.

Mr. Fricker’s effort demonstrates:

• that whatever the TMX debate is about, it has nothing to do with what’s being said in public
• the intellectual bankruptcy of public disourse in Canada.

We’re getting involved in another foreign war:

The United Nations Security Council voted today to ground Libyan leader Muammar Qaddafi’s air force and to grant military authority to the U.S. and its allies to protect civilians and population centers threatened by Qaddafi’s forces.

It seems quite clear to me that the Qaddafi regime is awful, both domestically and internationally, but I’m not sure why we think the alternatives are better. Nobody’s bothered to explain it to me. I’m with Haass:

“Why is anyone so sure that the people we’d be helping, that they would necessarily be dramatically better than Gadhafi?” said Richard Haass, president of the Council on Foreign Relations.

So we’ll happily support the Libyan rebels, giving them carte blanche to fight Quaddafi – just like we gave bin Laden carte blanche to fight the Soviets.

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts down 13bp, FixedResets gaining 2bp and DeemedRetractibles up 16bp. Volume was on the light side.

There are rising doubts about UK growth:

The Organization for Economic Cooperation and Development cut its forecast for U.K. economic growth in 2011 and said the Bank of England should refrain from increasing interest rates until the second half of the year.

Gross domestic product will expand 1.5 percent instead of the 1.7 percent predicted in November, the Paris-based group said in its economic survey of the U.K. published today. It maintained its 2 percent growth forecast for next year.

“The recovery is likely to remain subdued in 2011, as the necessary fiscal tightening and a fading rebound in world trade create headwinds, before picking up again in 2012,” it said.

… and Moody’s downgraded Portugal:

The euro halted three days of gains versus the dollar after Moody’s Investors Service downgraded Portugal’s credit rating, reviving concern about Europe’s ability to solve its debt crisis.

The 17-nation common currency depreciated versus all but two its major counterparts after Portugal was cut two steps by Moody’s yesterday to A3, four steps from so-called junk status.

It was a good day overall for the Canadian preferred share market, with PerpetualDiscounts up 30bp, FixedResets losing 4bp and DeemedRetractibles up 6bp. Volume was average.

Japan’s problems just keep getting worse:

The steepest tumble in Japan’s stocks in a quarter-century threatens to worsen damage to the economy from last week’s earthquake and tsunami in a crisis policy makers have yet to contain.

The Nikkei 225 (NKY) Stock Average fell 16 percent the past two days, the most since 1987, as power outages forced companies to suspend output and officials warned of rising risk of radiation from a nuclear plant. Bank of America-Merrill Lynch further cut its forecasts for gross domestic product, which shrank last quarter, and JPMorgan Chase & Co. may do the same.

“The earthquake’s damage on the economy’s much, much larger than we originally thought,” said Masaaki Kanno, chief Japan economist at JPMorgan in Tokyo. “Continued stock turmoil and disruptions to production will drive the economy into an extremely severe state.”

The situation on the ground appears to be stabilizing although still very risky; but the financial markets are getting a dead cat bounce.

The FOMC statement was released today:

Currently, the unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. The recent increases in the prices of energy and other commodities are currently putting upward pressure on inflation. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations. The Committee continues to anticipate a gradual return to higher levels of resource utilization in a context of price stability.

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

There were two excellent columns in the Globe today regarding the TMX / LSE merger, by which I mean that I agree with them. Boyd Erman wrote LSE a weakling against TMX? Numbers don’t back it up:

That means that TMX will be contributing about 37 per cent of the revenue of the combined company in the next year.
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So TMX will be contributing about 39 per cent of EBITDA. On a net income basis, TMX is expected to contribute 46 per cent.

David Milstead wrote In a TMX/LSE merger, whose rules apply?:

One of [Canadian Foundation for Advancement of Investor Rights executive director] Mr. [Ermanno] Pascutto’s concerns about the proposed merger is the current competitive situation in Canada, where the Alpha trading platform is applying to become a full-blown exchange. “Will Alpha’s listing standards for listed companies be lower than these of the TSX?” he asked last week in his testimony to the Select Committee of the Ontario Legislature. “If so, will this prompt a ‘race to the bottom’ and a lowering of investor protection?”

FAIR Canada suggests the best way forward may be to transfer the TSX’s regulatory functions to another regulator, such as the Investment Industry Regulatory Organization of Canada, which has already taken over the TSX’s trading rules. That will create a uniform set of Canadian listing standards, FAIR says.

FAIR’s position on the merger is:

And while FAIR Canada sees benefits to TMX shareholders, it does not believe that the merger will bring real benefits to Canadian listed issuers or investors.

However, if the proposed merger were to proceed, FAIR Canada submits that the conflicts of interest in the TSX’s management of its listing regulation responsibilities should be addressed as a condition to the approval of the proposed merger.

In July 2009 [sic], FAIR Canada released an expert report outlining how similar conflicts have been addressed in several important developed markets, including the US (both NYSE and NASDAQ), the UK, Australia and Hong Kong. The Report found that all of the other seven major exchanges reviewed have addressed their conflicts of interest by implementing one of three specific and sound approaches to conflict of interest management. The TSX was the only exchange among this group that has not implemented specific measures to manage its conflict of interest in regulating listed companies.

Mr. Pascutto noted, “FAIR Canada does not believe that the TSX is properly discharging its regulatory responsibilities, and this situation will only be exacerbated by a merger with the LSE Group. It is imperative that any structure that the TSX adopts to manage conflicts of interest be independent of the new Group’s commercial listings operations, and be subject to the oversight and supervision of Canadian regulators – primarily the OSC.”

FAIR Canada concluded its submission by noting that, in light of the proposed merger and the recent introduction of competition for listings from Alpha, the best way forward could be to transfer the TSX’s regulatory functions to another regulator (such as IIROC) and to have a uniform set of listing standards so that competition for listings will not be based on reduced investor protection.

The “expert report” was titled Managing Conflicts of Interest in TSX Listed Company Regulation and was prepared by John W. Carson of Compliax Consulting Inc., dated July 2010. The Financial Post had a contemporary article about it. But, you ask, who is John W. Carson?:

Before launching a consulting practice in 2001, John was head of all of the Toronto Stock Exchange’s SRO operations, including Listings, Market Regulation, Member Regulation and Enforcement.

What’s he done?:

•Strategic Advisor for development of Investment Industry Association of Canada’s (IIROC) new Rule Book
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•Strategic review of IIROC’s member inspection programs

FAIR claims to be independent at all times, not just when recommending that IIROC extend its regulatory empire, but note:

The establishment of the Foundation was proposed by Ermanno Pascutto to the boards of directors of Market Regulation Services Inc. (“RS”) and the Investment Dealers Association (“IDA”) as a desirable use of the IDA and RS “restricted” or “discretionary” funds. Mr. Pascutto was then an independent director of Market Regulation Services Inc. and is a former senior securities regulator and lawyer in Canada and Hong Kong.
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RS and IDA, which merged in June 2008 to form the Investment Industry Regulatory Organization of Canada (“IIROC”), agreed to provide $3.75 million funding from their restricted or discretionary funds. This funding is expected to be sufficient for the establishment of the Foundation and its operation for a three year period. The IDA and RS (now IIROC) are the founding financial sponsors of the Foundation.

The IIROC funding to establish the Foundation is a one time event. There is no commitment on the part of IIROC to any future funding. After its launch the Foundation will look for other sources of funding for its ongoing work.

IIROC’s presentation did not address the concerns – when you buy a dog, it barks on your behalf. And that, boys and girls, is how the cosy little Canadian industry works – and why all those interested in advancing investor rights should support the merger.

Incidently, Torontonians will be aware of the kerfuffle over the project housing board of directors. I have a friend who retired from his executive position some time ago; a little while afterwards he applied for a post on the Toronto Hydro board of directors as a citizen representative. Now, I won’t claim – and neither will he! – that my friend’s career was worthy of a Harvard case study, or as many gallons of ink as Buffett gets … but it was much more successful than most and he spend many years managing a big chunk of a big organization, several layers of management and several hundred miles from the front-line guys actually doing the work.

He was told that they weren’t really looking for people with his experience, they were looking for people with neighborhood involvement. In other words, people whose experience of business consisted of an annual volunteer Fun Fair and could easily be cowed by management. And we’re surpised when we have problems with city appointed boards?

The Canadian preferred share market had a mixed day, with PerpetualDiscounts gaining 7bp, while FixedResets lost 14bp and DeemedRetractibles were down 21bp. Volume was average.