PrefBlog

Americans are paying their bills:

Loans at least 30 days overdue, a signal of future write- offs, dropped for the 13th consecutive month to 4.38 percent, the lowest since December 2007, Moody’s said today in a report. Loans delinquent 30 to 59 days, the earliest sign of trouble, declined to 1.14 percent, near an all-time low. Write-offs for loans deemed uncollectible, a lagging indicator, fell to 8.58 percent from October’s 8.79 percent.

The drop in new delinquencies bolsters the firm’s “expectation that charge-offs will ultimately break below the 7 percent mark later in 2011,” Jeffrey Hibbs, a Moody’s analyst, wrote in the report.

The S&P / Experian indices show the improvement to be broadly based – and dramatic!

There’s an interesting twist in the Goldman / Greece derivative imbroglio:

The notes show how Greece used swaps to hide its borrowings, according to a March 3 cover page attached to the papers obtained by Bloomberg News.

ECB President Jean-Claude Trichet withheld the documents after the EU and International Monetary Fund led a 110 billion- euro bailout ($144 billion) for Greece. The dossier should be disclosed to stop governments from employing the derivatives in a similar way again and to show how EU authorities acted on information they had on the swaps, according to the suit, filed by Bloomberg Finance LP, the parent of Bloomberg News.

Ha-ha! The notes will show, I’ll bet a nickel, that everybody knew about it and ignored it.

TD is still looking for deals:

Toronto-Dominion’s bid for the auto-finance company “doesn’t really alter” the Toronto-based bank’s appetite for smaller transactions, Chief Executive Officer Edmund Clark said.

“We’re not deal junkies, but we keep saying what we’re looking for,” Clark said yesterday in a telephone interview. “We want $10 billion (in assets) or less deals; tuck-ins that add to our franchise and meet our strategy.”

Towers Perrin reports:

Near-zero equity returns and slight increases in interest rates translated into stable pension funding in November. The Towers Watson Pension Index remained unchanged for the month at 68.3. The index remains down 4.6% for the year.

They have also published Towers Watson–Forbes Insights 2010 Pension Risk Survey:

There is a strong desire on the part of plan sponsors to reduce the risk of their pension plans. Many plans are signifi cantly underfunded in the aftermath of the financial crisis, and their sponsors have experienced the resulting pressure on corporate cash flows. Rather than rushing to seek higher investment returns to close this funding gap, however, the majority of sponsors attach greater importance to reducing risk. The most favored strategy is to seek a better alignment of assets with liabilities — for example, through liability-driven investment programs. Executives expect to increasingly utilize swaps, options and other hedging derivatives to achieve better risk management. More plan sponsors today are setting formal funding policies in place of ad hoc decisions. Over time, lump sum payments and annuity purchases are also expected to be vehicles for settling DB obligations on a wholesale basis.

There is trouble in the state of Denmark:

Denmark says the Basel Committee on Banking Supervision’s rules will force the country’s lenders to dump top-rated mortgage debt to meet new requirements on holdings and may destroy the world’s third-biggest covered-bond market.

The Nordic country is planning to challenge the rules, published on Dec. 16. and Economy Minister Brian Mikkelsen has already taken Denmark’s grievances to the European Commission.
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Denmark’s lenders, which hold more than half the country’s $490 billion of mortgage bonds, would be forced to sell off holdings to comply with Basel’s 40 percent cap on using the securities as liquid assets, [director of the Association of Danish Mortgage Banks] Arnth Jensen said.
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Denmark’s mortgage bond market is about 1 1/2 times the size of the country’s economy and more than seven times the size of the government bond market, according to the central bank.

The regulation of Money Market Funds is attracting renewed notice:

Federal Reserve Chairman Ben S. Bernanke said investor speculation over which money market mutual funds are likely to be bailed out by their parent companies during a crisis can undermine the stability of the industry that manages $2.79 trillion.

Bernanke, in a Dec. 9 letter to Anthony J. Carfang, partner in Chicago consulting firm Treasury Strategies, said market developments that reinforce speculation whether money funds may be bailed out are a “concern” and sponsor support should be addressed in the context of planned reforms of the industry.

Carfang in November criticized a proposal by Moody’s Corp. that its ratings of money funds take into account the likelihood of a parent bailout in the event of losses. Bernanke, in the letter, encouraged Carfang to submit his views of the Moody’s proposal to the Securities and Exchange Commission.
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Carfang has called the Moody’s proposal “fundamentally disruptive,” saying the ratings firm would have no objective way of gauging whether a money manager would prop up a fund in trouble.

Well, no. A credit rating is a prediction about probabilities, inherently subjective on two counts. CRAs are paid to use their judgement; and when they’re wrong, all the backseat drivers can point out they’re being paid by the issuers. That’s the way the game is played.

I woule much prefer explicit credit support, but the industry prefers boxticking; regulators so far have endorsed boxticking, becaue it requires more manpower to check.

The rally in the Canadian preferred share market continued today, on easing but still elevated volume. PerpetualDiscounts gained 31bp, while Fixed Resets were up 25bp.

PerpetualDiscounts now yield 5.42%, equivalent to 7.59% interest at the standard equivalency factor of 1.4x. Long corporates yields have plumetted to about 5.4% (maybe just a bit over) so the pre-tax interest-equivalent spread now stans at about 220bp, a significant widening from the 210bp reported on December 15, as the improvement in tone in the bond market has not been matched by the preferred market.

But big rallies can tend to be sloppy affairs, as the guys running the BMO Long Corporate ETF can tell you:

Click for big

The TD / Chrysler deal got done:

Toronto-Dominion Bank agreed to buy Chrysler Financial Corp. from Cerberus Capital Management LP for $6.3 billion in cash, adding an auto-finance company in its second-largest acquisition.

The purchase includes $5.9 billion in assets and about $400 million in goodwill, Canada’s second-biggest bank said today in a statement. Toronto-Dominion doesn’t intend to issue stock.

and Cerberus investors are relieved:

Cerberus Capital Management LP will recoup about 90 percent of its initial investment in Chrysler after the sale of the automaker’s former lending unit to Toronto-Dominion Bank, according to two people with knowledge of the transaction.

Cerberus will get about 75 cents on the dollar in cash when the sale of Chrysler Financial Corp. closes, said the people, asking not to be identified because the New York-based firm is private. Including about $900 million of assets Cerberus is retaining as part of the deal, the company will be left with a loss of 10 percent on the initial investment in the automaker and its finance arm.

So basically, Chrysler was a finance company with a captive manufacturing arm. I love it.

DBRS commented:

that TD Bank US Holding Company’s (TD Bank US or the Company) ratings, including its Issuer & Senior Debt rating of AA (low), are unaffected by its announced acquisition of Chrysler Financial’s U.S. operations. The trend on all ratings is Stable.

DBRS believes the acquisition of Chrysler Financial will not have a material impact on the earnings and only a modest impact on the capital of the Company’s parent, The Toronto-Dominion Bank (TD; Deposits & Senior Debt rated AA with a Stable trend). Specifically, TD’s Tier 1 capital ratio is expected to decline by 55 to 60 basis points on a pro forma basis from the 12.2% TD reported at October 31, 2010. Consequently, the risk profile for TD remains solid, notwithstanding the execution risk concerns of growing in the auto finance business. DBRS notes that TD continues to have the resources, motivation and ability to support the Company, if needed. As such, there are no rating implications at this time.

Ernst & Young’s in trouble over Repo 105:

New York Attorney General Andrew Cuomo sued Ernst & Young LLP, accusing the firm of facilitating a “major accounting fraud” by helping Lehman Brothers Holdings Inc. deceive the public about its financial condition.
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The state seeks to recover more than $150 million in fees collected by Ernst & Young for work performed for Lehman from 2001 to 2008, plus investor damages and equitable relief, Cuomo said. He will be sworn in as New York governor on Jan. 1. His successor will be New York Democratic state Senator Eric T. Schneiderman.
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Lehman, once the fourth-largest investment bank, failed in September 2008 because of risky real estate bets and too much debt, which it tried to hide from investors, partly by using so- called Repo 105 trades, according to bankruptcy examiner Anton Valukas’s report.
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Responding to the Valukas report in March, Ernst & Young said leverage ratios reported in Lehman’s management discussion and analysis “were the responsibility of management, not the auditor. They are not part of the audited financial statements.”
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Responding to one suit, filed in April on behalf of retirement funds including the Alameda County Employees’ Retirement Association in Oakland, California, Ernst & Young said in court papers that even Valukas “did not find that Lehman’s accounting for the Repo 105 transactions was wrong.”

In his report, Valukas faulted the accounting firm because it “did not evaluate the possibility that Repo 105 transactions were accounting-motivated transactions that lacked a business purpose,” and didn’t take a stand on whether Lehman’s extensive use of the device was “material” and should be reported.

“Financial statements may be materially misleading even when they do not violate GAAP,” he wrote in his report.
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Cuomo, who has powers to bring criminal charges, brought a civil suit against Ernst & Young. Arthur Andersen LLP, the accounting firm that was accused of destroying Enron Corp. documents, was convicted of obstructing justice in 2002 and is now largely defunct.

“Regulators are concerned there will be no competitors left” to audit U.S. companies, [accountant Barry] Epstein said.

The Valukas report and Repo 105 was discussed on PrefBlog on March 12, 2010.

Patrick Jenkins of the Financial Times points out a rather obvious knock-on effect about the obsession with bonuses … obvious, that is, to all but politicians:

Many US and Swiss banks are considering paying higher salaries and lower bonuses to top bankers based in the European Union, mostly in London, to ensure they comply with new instructions from the Committee of European Banking Supervisors (CEBS), the pan-EU regulator, limiting cash pay-outs.

Some European politicians had expected that non-EU banks would apply their rules globally on a voluntary basis.

But one senior European banker said: “Politicians are naïve if they think we will impose EU rules on a global basis. The ironic effect will be another hike in salaries, which is a fixed cost, which rather makes a nonsense of the idea of pay for performance.”

Speaking of banks, there is some thought that Deutsche is playing a moral hazard game:

Deutsche Bank’s core capital ratio, a buffer against possible losses, may fall to the lowest level among eight competitors under new Basel III rules in 2012, even after it raised 10.2 billion euros ($13.4 billion) in a share sale in October, according to Christopher Wheeler, an analyst at Mediobanca SpA.

[CEO Josef] Ackermann, who shunned German government aid during the credit crisis, warned at a Frankfurt conference in September against a “dangerous race to the top” among banks seeking to lift reserves above Basel III requirements years before the rules kick in. Deutsche Bank, the largest German bank, may be able to hold less capital than peers, and borrow more to enhance returns, because its clients are convinced the government would never let it fail, analysts and investors said.
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Deutsche Bank also relies more than competitors on borrowed funds, or leverage, to increase returns. Its assets amounted to 51 times shareholders’ equity on Sept. 30, up from 48 times at the end of 2006, based on International Financial Reporting Standards. Only Brussels-based Dexia SA has higher leverage among Europe’s 15 biggest listed banks. Investment banks’ extensive use of borrowed funds, which can exaggerate risks, was blamed by Federal Reserve Chairman Ben S. Bernanke for contributing to the financial crisis.
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Deutsche Bank prefers to use U.S. Generally Accepted Accounting Principles, which net out derivatives positions, to measure its leverage. By that standard, its assets at the end of September matched its goal of 25 times equity, up from 23 times a year earlier and down from 38 times in mid-2008, company reports show. By comparison, Goldman Sachs assets were 12 times capital at the end of September.

And the Canadian preferred share market was on wheels … again! PerpetualDiscounts were up 34bp and FixedResets gained 26bp. Volume eased off a little, but remains elevated.

TD is rumoured to be close to a Chrysler Financial deal:

Toronto-Dominion Bank is near an agreement to buy Chrysler Financial, the lender once owned by the third-largest U.S. automaker, from Cerberus Capital Management LP, said three people with knowledge of the matter.

Toronto-Dominion may announce a deal as soon as tomorrow morning, said the people, who spoke on the condition of anonymity because the talks are private. Toronto-Dominion and Cerberus had been discussing a price of about $6 billion to $7 billion, other people with knowledge of the situation said earlier this month.

There are also rumours of a French downgrade:

Costs to insure French government debt trebled this year, rising to an all-time high of 105.5 basis points today, according to data provider CMA. Credit default swaps tied to Czech securities gained 1 basis point to 91 and Chilean swaps were little changed at 89 basis points.

The credit default swaps tied to the French bonds imply a rating of Baa1, seven steps below its actual top ranking of Aaa at Moody’s, according to the New York-based firm’s capital markets research group.

Contracts on Portugal imply a B2 rating, 10 levels below its A1 grade, while swaps tied to Spanish bonds trade at Ba3, 11 steps below its Aa1 ranking, data from the Moody’s research group show. Derivatives protecting Belgian debt imply a rating of Ba1, nine steps below its current rating of Aa1.

It took a while, but it looks as if the IIROC case against TD-Burlington, discussed in March, 2008, has finally reached a conclusion. Yawn. What an abysmal waste of time. If somebody’s putting in silly bids just before the close, then you just programme an algorithm to hit it instantly. The way to get rid of incompetent fools in the industry is by encouraging market efficiency and competition, not more rules. Just ensure retail has access to algorithms, that’s all … a “pounce” algorithm (that will hit any bid over a given price, with or without showing an offer at a higher price) in the hands of retail would have nipped this nonsense in the bud admirably. Or, by not doing so, have showed the breach of UMIR to be inconsequential.

The Canadian preferred share market was on fire today, with PerpetualDiscounts rocketting up 73bp and FixedResets gaining 28bp. Volume continued to be on the heavy side. All the entries on the Volume Highlights table were PerpetualDiscounts; all entries on the Performance Highlights table were winners. Nesbitt did very well on the block trading, but was not quite able to shut out the competition from the Volume report.

Bank of Montreal is buying Marshall & Ilsley:

Bank of Montreal agreed to buy Marshall & Ilsley Corp. for about $4.1 billion in stock to double its U.S. deposits and branches in the largest takeover by Canada’s fourth-biggest bank.

Bank of Montreal will pay 0.1257 of its own share for each share of Marshall & Ilsley, the Toronto-based bank said today in a statement. The deal values Marshall & Ilsley at $7.75 a share, 34 percent higher than yesterday’s closing price of $5.79 on the New York Stock Exchange.
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Toronto-Dominion Bank, the country’s second-biggest lender, may reach an agreement to acquire Chrysler Financial Corp., the auto-loan company owned by Cerberus Capital Management LP, three people with knowledge of the matter said this month.

Marshall & Ilsley has posted eight straight quarterly losses while Bank of Montreal has reported six consecutive quarters of profit growth, a streak unmatched by Canada’s five other large lenders. Marshall & Ilsley traded as high as $40 in 2007.

The takeover has a price-to-book ratio of 0.61 for Marshall & Ilsley, less than half of the median ratio of 1.4 for 33 regional, commercial bank deals since the start of 2009, according to Bloomberg merger data.

Australian Banc Capital Securities Trust, briefly discussed here on November 30, and best known for having a kangaroo as part of its logo, which is really, like, awesome, you know? has closed its initial public offering:

The Fund raised gross proceeds of $145,815,760 from the sale of 14 million Class A Units and 581,576 Class F Units, respectively, at a price of $10.00 per Unit. The Fund has granted to the agents an over-allotment option, exercisable for a period of 30 days from the closing date, to offer an additional 2.1 million Class A Units.

The Class A Units are listed on the Toronto Stock Exchange (“TSX”) under the symbol AUZ.UN. Class F Units will not be listed on a stock exchange but may be converted into Class A Units on a weekly basis.

$146-million. With total agents’ fees, by my calculation, of nearly $7.5-million. Sometimes all one can do is shake one’s head.

Moody’s downgraded Ireland:

The yield on the Irish 10- year Irish bond rose to 8.60 percent, the highest since Dec. 2, and German bund yields fell. Credit-default swaps insuring Irish debt climbed for a third day, the longest streak this month.
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Portuguese bonds also fell as Ireland’s credit rating was cut five levels to Baa1 from Aa2 by Moody’s, with further downgrades possible, as the government struggled to contain losses in the country’s banking system. European Union leaders are meeting in Brussels after agreeing yesterday to create a permanent crisis-management mechanism.

It was a good day on the Canadian preferred share market today, as preferreds finally caught a bid after a long string of losses. TXPR total return is still down about 1.46% on the month-to-date, though, so don’t upgrade your New Year’s champagne plans just yet. PerpetualDiscounts were up 34bp and FixedResets gained 13bp on continued elevated volume.