PrefBlog

Ireland’s causing more trouble:

Senior bonds of Allied Irish Banks Plc and Bank of Ireland Plc slumped today amid concern the government will force holders of such debt to share the cost of bailing out its financial system.

The need for speed in securing a deal for Ireland is growing amid an outflow of funds from its banks and as investors dump the bonds of other European governments on concern they too will be infected by the sovereign debt crisis. As officials from Portugal and Spain rejected speculation that their economies would also need saving, the average yield investors demand to hold 10-year debt from Greece, Ireland, Portugal, Spain and Italy today reached a euro-era record of 7.56 percent.
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Aid negotiators from the EU and International Monetary Fund are taking legal advice on how senior bondholders can share the cost of the 85 billion-euro ($113 billion) bailout without triggering lawsuits, the Irish Times reported today, without saying where it got the information.

Allied Irish’s 750 million euros of 5.625 percent senior notes due 2014 plunged 4 cents on the euro to 73 cents, a 5.2 percent decline, according to composite prices on Bloomberg at 1:25 p.m. in London. Bank of Ireland’s 974 million euros of 4.625 percent senior unsecured notes maturing in 2013 fell 4 cents on the euro, or 4.8 percent, to 81 cents.

Two years ago, the Irish government assured senior bondholders that they wouldn’t lose their money if banks failed.

This is what happens when you throw out 300 years of bankruptcy law because it’s inconvenient. I don’t think the Irish banks have any chance at all of rolling that debt when it comes due.

And the PIIGS are getting slaughtered:

The average yield for 10-year debt from Greece, Ireland, Portugal, Spain and Italy reached 7.57 percent today, a euro- era record. The average premium investors demand to hold those securities instead of German bunds widened to as much as 492 basis points, the highest level of 2010. The average cost of insuring against default by the five nations using credit- default swaps reached a record 517 basis points on Nov. 23.

Hungary’s going a step further: confiscation of pension assets:

The government told Hungarians on Nov. 24 to move private- pension fund assets to government control or lose their state pension, an ultimatum designed to shift 3 trillion forint ($14.2 billion) of privately managed pension assets.

While the extra funds will move Hungary’s budget into surplus next year and may drive down government bond yields, the measure will undermine peoples’ ability to manage their savings, said Sandor Vizkeleti, chief executive of Budapest-based Pioneer Alapkezelo, a unit of UniCredit SpA.
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Hungary, the first European Union country to obtain an International Monetary Fund-led bailout during the credit crisis in 2008, is following the example of Argentina, which in 2001 seized retirement savings by forcing private pension funds to transfer money to a state bank in exchange for Treasury bills.

The government in Buenos Aires nationalized the $24 billion industry two years ago to compensate for falling tax revenue after a 2005 debt restructuring. In Hungary, private fund members have the option of staying outside the state retirement system at the cost of giving up 70 percent of their contributions and the right to a state pension.

Some interesting developments with US pension funding:

United Parcel Service Inc., the world’s largest package- delivery business, Dow Chemical Co., Northrop Grumman Corp. and PPG Industries Inc. sold at least $5.25 billion of investment- grade U.S. corporate bonds in November to fund their pensions, making it the busiest month since June 2003, according to data compiled by Bloomberg.

The Federal Reserve’s effort to hold down interest rates to stimulate the economy has caused corporate pension obligations, which are pegged to bond yields, to rise by $105.8 billion this year to $1.44 trillion as of October, according to Milliman Inc.

Cyborg Trading was featured in a nice piece in the Globe yesterday:

Cyborg, a startup three years ago that today employs 14 math PhDs in its two Canadian offices, is helping day traders build and run their own trading algorithm. “You still have to come up with your own model, but that’s just one part of the equation,” Mr. Bittrolff says. “After that, it becomes, how do you execute it?”

Cyborg helps customers turn their algorithm into a simple trading strategy, and then incorporate that into their own online trading platform. “Our tool lets the trader manage and monitor his own algo,” Mr. Bittrolff adds. “No one wants these things to run amok.”

This was probably inspired by a piece in Business London Magazine, which I haven’t read because the software used to publish it on-line is such a total piece of shit.

One of their “recent developments” is a rather crude tool to monitor trading depth:

Cyborg Trader™ now offers traders the ability to cancel bids or offers based on the number of shares that are present at the top of book. Cyborg Trader™’s depth threshold technology monitors the size posted on the bid or offer of a price level. If the number of shares posted at a given price reduces by a specified amount (or percentage) the order is cancelled. This gives traders the opportunity to be filled on the bid/offer while they are close to the front of the queue without having stocks trade through their price level.

Yesterday’s Globe had an article titled This 7-per-cent yield comes with questions, about Quadravest’s new Dividend Select 15:

Dividend Select 15 uses an established options strategy called covered call writing to generate the additional five percentage points of return necessary to make those payments of 5.83 cents a month and cover fees.. Covered call writing limits your upside gains on a stock, but it also offers the potential to outperform in a slightly rising, flat or falling market. It works best in volatile markets.

Is it feasible to expect Dividend Select 15 to consistently generate the extra returns needed to make its targeted level of cash payouts? For an answer, [president and CEO of Weigh House Investor Services] Mr. [Warren] MacKenzie consulted an outside money management firm with some expertise in dividend investing.

“They said you can’t do that,” Mr. MacKenzie said. “There’s no way to consistently generate [the extra] 5 per cent.”

This points to a familiar theme in my complaints about regulation: Quadravest has been touting covered call writing in just about every single one of its products. yet in their prospectus they are not compelled to talk about their success in implementing the technique … all they have to disclose is their years of experience.

Assiduous Reader BF points out that Garth Turner continues to promote preferred shares as a panacea. His one-size-fits-all views are discussed on FWF – and probably elsewhere. Mr. Turner does not publish his performance track record. Update: He is a stockbroker with Turner Tomenson & Associates Family Wealth Management of Wellington West Capital Inc.

The Canadian preferred share market eased downwards on average volume today, with PerpetualDiscounts down 6bp and FixedResets losing 5bp.

Ireland’s decision to rewrite bankruptcy law on the fly has had a surprising effect:

The cost of insuring bonds sold by European banks rose for a sixth day on concern other governments will follow Ireland in forcing investors to share the cost of bailouts.

The Markit iTraxx Financial Index of credit-default swaps on subordinated debt of 25 European banks and insurers rose 4 basis points to a five-month high of 272 as of 3:30 p.m. in London, according to JPMorgan Chase & Co.
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Markit Group Ltd.’s index of subordinated financial swaps is up from 225.5 on Nov. 19, setting it on pace for the biggest weekly increase since March 2009, JPMorgan Chase data show. The senior index rose 1.5 basis points to 159 today, up from 135.5 at the end of last week.

The Markit iTraxx SovX Western Europe Index of contracts on 15 governments rose 3 basis points to a record 184, according to CMA. Spain increased 8 basis points to an all-time high based on closing prices of 303 and Ireland jumped 11.5 basis points to 591, after earlier reaching a record.

Ireland has also pledged to impose losses on junior bondholders at Irish Nationwide Building Society.

By me, this is just one more argument in favour of contingent capital that converts well before the business has reached the point of non-viability. If it converts when things are bad but not yet horrific, then at least holders will have the comfort that their contractual rights will be honoured.

I had a look at the Canadian Bankers Association recommendations for legislative review:

In our view, the federal government should ensure that financial institutions under the federal oversight system (including Crown lending agencies such as Farm Credit Canada) operate under equivalently strict capital, prudential and risk management standards as banks operating in Canada.

I wonder if that applies to the CDIC as well.

Given the complexity of both the regulatory system and the domestic/international marketplace in which financial institutions operate, the potential for significant and negative unintended consequences of regulatory changes is large. In light of this, we are strongly urging that the government adopt, as its standard practice, the practice of prior consultations with the industry and other stakeholders before any new regulatory requirements are initiated, to better determine the scope and nature of the issue to be addressed, and to explore if there are more effective alternatives to regulation.

That’s one for you, OSFI!

in its 2008-2009 Global Competitiveness Report, the World Economic Forum placed Canada at the top of the list of sound banks.

A tired old canard, as I have previously discussed. There were no comparisons made in the preparation of the WEF report.

Recommendation #2 – Bring the single securities regulator to completion: The banking industry commends the federal government for its efforts to create a national securities regulator. Given the importance of the initiative for the future strength of the Canadian economy, for improved consumer protection, and for stronger influence on international policy development, the industry urges the government to stay the course in its strong efforts to gain the support of provinces and territories.

Then they’ll be able to capture the regulators with one fat salary, rather than the present thirteen.

For example, in 2008 it came to light that the BEA allows for cheque writers to “cross” a cheque (putting two diagonal lines through the cheque) to make the instrument non-negotiable so that the only option for the payee is to deposit the cheque at his/her branch. While common in some other countries, the practice is virtually unknown now in Canada. As such, if cheque-crossing had suddenly come in vogue, it would have created a number of technical challenges and would have required a massive education effort on the part of institutions and the government to ensure that both cheque writers and cheque recipients understood the ramifications of crossing a cheque (since there are implications for both).

I didn’t know that!

Recommendation #12 – Critical need for stakeholder engagement in policy/regulatory planning: Given the complexity of both the regulatory system and the domestic/international marketplace in which financial institutions operate, the potential for significant and negative unintended consequences of regulatory changes is large. In light of this, it is critical that the government undertake prior consultations with the industry and other stakeholders before any new regulatory requirements are initiated, to better determine the scope and nature of the problem to be addressed, and to explore if there are more effective alternatives to regulation.

Hear, hear!

In addition, the federal government should be active in working with the provinces to ensure that financial literacy is part of the school curriculum.

The school curriculum is like a prospectus … things get added continually for very good reason until the system as a whole collapses under the weight of its own box-ticking uselessness.

Currently there is a limitation in the Insurance Companies Act which limits the amount of debt and preferred shares to 2% of overall balance sheet. Under Basel III requirements, banks that own an insurance company may want to have more debt and preferred shares. The limit is believed to be an historical restriction which pre-dates when insurance capital regulations were changed to mimic the banks capital structure, and which therefore is not only no longer necessary, but is also inconsistent with the Tier 1 / Tier 2 insurance capital structure.

Recommendation #32 – Remove limit on debt and preferred shares from Insurance Companies Act: Removing the limit would make the Insurance Companies Act consistent with capital requirements for banks.

The National Securities Regulator pipedream is coming to its predictable end. I’ve said it before … I’ll say it again: like-minded provinces should merge their regulation. Maybe if the OSC merges with the PEISC that won’t be much of a step forward, but you know something? It’ll be better than what we have now.

The SIU investigation of police conduct during the G20 meeting is just another whitewash. Since wrong was clearly done and no line officers are being punished, Chief Blair is clearly obliged to resign. But I’m not holding my breath while waiting for a bit of integrity in the service of the public.

A mixed day on pretty good volume for the Canadian preferred share market, with PerpetualDiscounts up 12bp and FixedResets losing 6bp.

I’d say things in Europe are heading for a crescendo … or should I say cascade?:

Mr. Honohan’s comments, and worries that Ireland’s hugely overextended lenders face nationalization or the butcher’s block, sent shares in Bank of Ireland and Allied Irish tumbling by 20 per cent on Tuesday. Depositors have been fleeing Irish banks since the beginning of the year, with Allied Irish losing €13-billion ($21-billion).
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But the focus of market anxiety is moving from Dublin to other European capitals, especially Lisbon and Madrid, where banks shares were under pressure Tuesday amid refinancing fears.
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Instead of sparking a relief rally in the euro zone bond markets, the €80-billion to €90-billion rescue package for Ireland triggered alarm bells – and a jump in the risk premium that a bondholder pays for insuring Irish, Greek, Portuguese and Spanish bonds. The yields on these bonds continued to rise on Tuesday, exacerbating the feverish market mood.
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The problem is a rolling tide of debt maturities on the horizon. Each wave is bigger than the last and the European Union’s ability to surf this breaker is looking doubtful.

Consider Greece. According to London brokerage Evolution Securities, Greece needs to repay €28-billion in rescue loans in 2014. But under the new German-inspired rules, any new bond Greece issues must contain a clause about debt restructuring, implying that bondholders will take a haircut in the event of default. As Evolution’s Gary Jenkins put it: “Who will lend to Greece €28-billion in 2014 on subordinated terms?”

But Ireland’s teetering government has proposed a budget:

Ireland’s government said it will cut spending by about 20 percent and raise taxes over the next four years as talks on a bailout of the country near conclusion.

Welfare cuts of 2.8 billion euros ($3.8 billion) and income tax increases of 1.9 billion euros are among the steps planned to narrow the budget deficit to 3 percent of gross domestic product by the end of 2014. The shortfall will be 12 percent of GDP this year, or 32 percent including a banking rescue.
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Irish bonds fell today after the country’s credit rating was downgraded yesterday two levels by Standard & Poor’s on estimates the cost of bailing out its banks will escalate.

The decline push the yield on the country’s 10-year debt up 52 basis points to 9.17 percent. The premium investors charge to hold the debt over German bunds, Europe’s benchmark, widened by 33 basis points to 619 basis points. The premium reached a record 652 basis points on Nov. 11.

The premium on Spanish 10-year bonds over bunds climbed to a euro-era record today.
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Finance Minister Brian Lenihan will maintain Ireland’s 12.5 percent corporate tax rate, criticized by some European governments such as Austria. Hewlett-Packard Co., the world’s largest computer maker, said this week it may reconsider its investment in Ireland should the country raise its company tax rate as part of an aid accord.

DBRS has downgraded some Anglo Irish Bank sub debt:

Today’s downgrade follows the execution of the Bank’s note exchange offer. The default status for the exchanged and now-extinguished 2017 Notes reflects DBRS’s view that bondholders were offered limited options, which, as discussed in DBRS’s press release dated 25 October 2010, is considered a default per DBRS policy.

The exchange offer was coercive and Orwellian:

Ireland faces a bill of more than 50 billion euros to prop up its banks and is seeking to ensure the losses of lenders it owns outright are shared with subordinated noteholders. Finance Minister Brian Lenihan has said he will legislate to allow the government to impose penalties on subordinated creditors while making senior investors whole.

… but it’s working:

Nationalised lender Anglo Irish Bank cleared the first major hurdle in its closely watched debt restructuring when a group of subordinated creditors agreed to take an 80 percent write-down on the value of their holdings.

Hear that whistling noise? That was 300 years of bankruptcy law being thrown out the window. It really gives you confidence that Europe will work out its problems in a rational, predictable and legal manner, eh? Maybe tomorrow I’ll rush out and make a great big investment, one that’s backed by the full faith and credit of the Irish government. Or maybe not.

The Canadian preferred share market enjoyed a bit of a bounce today, as volume came off its recent very high levels, but remained above average. PerpetualDiscounts gained 12bp and FixedResets were up 3bp.

PerpetualDiscounts now yield 5.36%, equivalent to 7.50% interest at the standard equivalency factor of 1.4x. Long Corporates now yield about 5.4%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now 210bp, a significant tightening from the 220bp reported on November 17 … although mind you, it was also 210bp on November 10, when the relevant yields were 5.28%, 7.39% and 5.3%.

The Irish government has fallen:

Amid calls for his immediate resignation from at least two MPs in his own Fianna Fail party and the withdrawal of support from coalition partners the Green Party, Prime Minister Brian Cowen was forced on Monday to announce the pending dissolution of his government.

“There will be a time for political accountability to the electorate,” Mr. Cowen said in a terse address Monday night in which he pleaded with MPs to keep his government afloat until the austerity budget passes in exchange for an election in January.

But contagion has set in:

German Chancellor Angela Merkel said the prospect of serial European bailouts was “exceptionally serious,” sending the euro to a three-month low as officials estimated saving Ireland will cost 85 billion euros ($114 billion).

Irish bonds dropped and the premium that investors demand to hold Spanish debt over German counterparts jumped to a euro- era record as the relief rallies triggered by Ireland’s Nov. 21 aid request evaporated. Traders are now betting the turmoil that started in Greece a year ago will spread to Portugal and Spain.

“The markets currently have virtually zero confidence that the bailout in Ireland will solve the European crisis,” Charles Diebel and David Page, fixed-income strategists at Lloyds TSB Corporate Markets in London, said in a note today. “With markets effectively in a position to dictate policy, the risk is that the credibility crisis shifts to more sizeable European Union countries and thereby poses a greater risk to the system as a whole.”

And S&P has downgraded Ireland:

S&P cut Ireland’s long-term sovereign rating to A from AA- and the short-term grade to A-1 from A-1+, today’s statement said.

Wanna buy a bank?:

Ireland’s banks are effectively up for sale, central bank Governor Patrick Honohan said on Tuesday as Dublin sought aid from the European Union and International Monetary Fund to prop up its lenders.

“They are for sale as far as I am concerned,” Honohan said. “I’ve been an advocate for a number of years for small countries to have foreign owners for their banks.”

MFC is not having a nice time:

Shares of Manulife Financial Corp. fell nearly 5% at one point on Monday after a downgrade at Citigroup. Analyst Colin Devine cut his rating to Sell from Buy and reduced his price target to US$14.50 from US$21 after a disappointing trip to the life insurance company’s Annual Investor Day on Friday.

Information provided at the meeting led Mr. Devine to estimate that roughly 35% of Manulife’s capital is tied up supporting three products at its U.S. John Hancock operations: living benefit variable annuities (VA), individual long-term care (LTC), and secondary guarantee universal life (SGUL). By the analyst’s count, each is responsible for losses of at least $1-billion since the beginning of 2009.

Yet the analyst pointed out that management only provided one slide and “did not devote even five minutes to discussing what had gone wrong with these products or what steps were available and a timetable to address them.”

Government Motors’ hybrids are a big hit!

President Barack Obama’s administration has bought almost a fourth of the Ford Motor Co. and General Motors Co. hybrid vehicles sold since he took office, accelerating federal purchases as consumer demand wanes.

Q: What happens when a draconian law hits reality? A: Regulators ursurp power:

The Securities and Exchange Commission extended the ability of asset-backed bond issuers to omit credit ratings from filings to comply with the Dodd-Frank financial reform act that became U.S. law in July.

Pending further notice, the SEC won’t recommend enforcement action if an asset-backed issuer doesn’t include the ratings disclosure required by the legislation, according to a letter today from Katherine Hsu, senior special counsel.
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“Without this extension, the entire public securitization market would have closed in late January,” Tom Deutsch, executive director of the American Securitization Forum, said today in an e-mailed statement.

Well, sure. That’s what happens with every zero-tolerance law, right? Instead of a judicial process, you get a regulatory process, with selective reporting and private decisions.

BMO redeemed some more BOaTS:

Bank of Montreal is back in the market to redeem its second batch of trust capital securities, better known as BMO BOaTS.

This batch, Series B, totals $400-million and pays 6.64 per cent interest annually.
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There are two factors at play here in BMO’s decision to redeem. For starters, as of year-end 2010, holders of these securities can exchange them into a series of preferred shares.

But maybe more important now, under Basel III, these innovative securities will no longer count as Tier 1 capital. Starting in 2013, the amount that they contribute to Tier 1 capital will be phased out by 10 per cent each year, for 10 years.

The FDIC has released its Quarterly Banking Profile: 3Q10, with highlights:

• Year-over-Year Earnings Improve for Fifth Consecutive Quarter
• Net Income Totals $14.5 Billion, Up from $2 Billion a Year Earlier
• Lower Loan-Loss Provisions Remain Key to Earnings Gains
• Asset Quality Trends Continued to Improve
• Industry Assets Increase by $163 Billion

Concerned investors will be pleased to learn there is now a cool name for offshore yuan debt:

Chinese bonds sold in Hong Kong rallied more than debt from the biggest developing nations in the past three months as international investors snapped up the securities to benefit from expected appreciation of the yuan.
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“There’s pent-up demand,” said Per Nordstrom, the head of euro medium term notes in Asia at London-based Standard Chartered Plc. “Investors are generally ‘buy and hold’ as supply is limited. The dim sum bond market is a frontier market and it is growing.”

Got Milk?:

Several studies have argued that the supply management system pushes up dairy prices for Canadian consumers. A recent study by the Conference Board of Canada estimated Canadians pay 60 cents more for a one litre carton of whole milk than Americans and $1.50 more for a one-pound package of butter than Australians, which has a deregulated dairy system. The OECD estimates dairy prices in Canada are more than double the world market.
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An analysis by the Dairy Farmers of Ontario shows that New Zealand has the highest retail price, at $5.69, for a four-litre size package of milk. That was followed by Ontario at $4.66, Britain at $3.57 and the U.S. at $3.38.

Good old farmers … taking milk away from children to finance the bucolic lifestyle of the favoured few.

The market slid slightly lower today on continued heavy volume, with PerpetualDiscounts down 10bp and FixedResets losing 7bp, taking the median weighted average yield on the latter index to 3.14%.

The Irish have some wiggle-room in bail-out negotiations:

Ireland won’t be required to raise its corporate tax rate as part of a European Union bailout, French President Nicolas Sarkozy said, addressing an issue that looms as a stumbling block to an aid agreement.

“When you have to tackle a deficit, you have two levers, spending and taxes,” Sarkozy said today in Lisbon at a summit of NATO leaders. “I can’t believe that our Irish friends, in full sovereignty, won’t look at both since they have more room for maneuver given that their tax rates are lower. But that’s not a demand or a condition, just an opinion.”

So much for bravado:

Finance Minister Brian Lenihan said Ireland will apply for a bailout as it sets itself up to be the second euro member to seek a rescue from the European Union and the International Monetary Fund.

“I will be proposing to my colleagues that they should formally apply for a program,” Lenihan said in an interview with state broadcaster RTE in Dublin. “The banks were too big a problem for the country. The key issue all the time for the government is to ensure that we do not have a collapse of the banking sector.”

And now, it’s official:

Ireland sought international aid, becoming the second euro country to need a rescue as the cost of saving its banks threatened a rerun of the Greek debt crisis that destabilized the currency.

Ireland will channel some of the money from the European Union and International Monetary Fund to lenders through a “contingent” capital fund, Irish Finance Minister Brian Lenihan told reporters late yesterday. The rest of the package, which Goldman Sachs Group Inc. estimates may total 95 billion euros ($130 billion), would help Ireland avoid selling bonds.

“The banks were too big a problem for the country,” Lenihan said in Dublin. “The key issue all the time for the government is to ensure that we do not have a collapse of the banking sector.”

This is interesting in light of the prognostications of Willem Buiter and Ann Sibert in The collapse of Iceland’s banks: the predictable end of a non-viable business model (discussed on November 5, 2008):

Iceland’s circumstances were extreme, but there are other countries suffering from milder versions of the same fundamental inconsistent – or at least vulnerable – quartet:
(1) A small country with (2) a large, internationally exposed banking sector, (3) its own currency and (4) limited fiscal spare capacity relative to the possible size of the banking sector solvency gap.

Countries that come to mind are:

•Switzerland,
•Denmark,
•Sweden
and even to some extent the UK, although it is significantly larger than the others and has a minor-league legacy reserve currency.

Ireland, Belgium, the Netherland and Luxembourg possess the advantage of having the euro, a global reserve currency, as their national currency. Illiquidity alone should therefore not become a fatal problem for their banking sectors. But with limited fiscal spare capacity, their ability to address serious fundamental banking sector insolvency issues may well be in doubt.

One way or another, there are repercussions:

Ireland’s bid for financial aid may trigger a cut in the country’s credit rating, the demise of the government and an exodus of multinational companies.

The euro fell and Irish bonds pared their advance after Moody’s Investors Service said a “ multi-notch” downgrade in Ireland’s Aa2 credit rating was “most likely” because the aid would increase the country’s debt burden. The prospect of January elections loomed as the Green Party said it would pull out of Prime Minister Brian Cowen’s coalition.

Accounting rules are a big issue:

A dispute between U.S. and international accounting groups about how to value financial instruments is threatening to derail efforts to converge global standards, affecting how trillions of dollars of assets are marked on bank balance sheets.

The debate pits the U.S. Financial Accounting Standards Board, which wants to expand the use of fair-value accounting to all financial assets, including loans and deposits, against the London-based International Accounting Standards Board, which opposes such a wide usage. The outcome also will determine how much capital banks have to hold to meet new rules.

FASB’s proposal, announced in May, could cause 26 of the largest U.S. banks to write down the value of about $4 trillion of loans on their books by as much as $138 billion, estimated Jason Goldberg, an analyst at Barclays Plc. Lenders, regulators and some investors have taken IASB’s side, leaving the U.S. standard-setter isolated in its battle.
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The five U.S. banking regulators sent a joint letter to FASB in September voicing opposition as well.

“We are concerned about the potential implications of the proposal for financial intermediation and stability and, therefore, we oppose the proposed requirement to report substantially all of a financial institution’s financial instruments at fair value,” the Fed, the Federal Deposit Insurance Corp. and three other regulators said.

Volcker who was Fed chairman in the 1980s and now advises U.S. President Barack Obama, said he favors IASB’s approach on valuing financial instruments.

“You can’t have everything at fair value,” Volcker, 83, said. “I’m not in favor of fair valuing bank loans because we don’t know their fair value anyway. It’s not consistent with the basic business model of commercial banks.”
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Goldman Sachs Group Inc., the most profitable U.S. securities firm, has said that banks hide losses on loans used to generate investment-banking fees. In a Sept. 1 letter to FASB, Goldman Sachs described how banks lend at below-market rates to win equity and debt-underwriting deals, a practice known as “lend to play.” Goldman Sachs executives have argued that the firm’s practice of marking assets to market value helped it prepare for the credit contraction earlier than rivals.

Spend-Every-Penny says he’s going to make some tough but fair decisions:

The country’s top financial policymakers warned Canadians on Sunday to brace for tough decisions and “very big challenges” ahead as Canada tries to secure its recovery in an ever-changing global economic landscape.

Finance Minister Jim Flaherty — set to deliver a key speech on federal economic policy in Oakville, Ont., on Monday — said the Conservative government is determined to cap program spending so Canada can return to a balanced budget position and avoid the turmoil Europe is undergoing.

He acknowledges this won’t be a popular decision, with certain segments of the population and his political opponents.

I’m astonished! I thought we were going to return to a balanced budget (wooHoo!) without any pain or effort whatsoever, and that anybody who spoke of structural deficits was wrongheaded and politically motivated.

One correlation measure states that stocks and bonds have decoupled:

For the first time since the financial crisis started, U.S. shares are moving independently of the bond market, a sign that profits and valuations are guiding investors more than concern about the economy.

The 30-day correlation coefficient measuring how often the Standard & Poor’s 500 Index moves in tandem with 10-year Treasury yields fell to minus 0.42 from a record 0.89 in June, data compiled by Bloomberg show. Readings of 1 indicate prices are moving together, while zero shows no link and minus 1 means they are going in opposite directions. Stocks and debt are ending a lockstep relationship that began in July 2007 and lasted through the worst recession since the 1930s.

Meredith Whitney thinks the shadow banking system will expand:

U.S. banks will close 5,000 branches in the next 18 months as they face profit declines from decreased loan demand and lower fee revenue, said Meredith Whitney, the former Oppenheimer & Co. analyst who now runs her own firm.
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Whitney has said earnings pressures and new regulation will lead to some lower-income customers losing access to banking services. The number of households without access to the “traditional banking system” will rise to 41 million by 2015 from 30 million in 2009, she said in the Nov. 18 note.

“The most regrettable unintended consequence of some of the quickly written regulatory reform, we believe, will be the inevitable ‘debanking’ of the U.S. financial system,” said Whitney, who started New York-based Meredith Whitney Group after correctly predicting Citigroup Inc.’s dividend cut in 2007. “Fewer ‘bankable’ customers will contribute to the trend in fewer bank branches.”

Potash Corp. is issuing 30-year USD notes at 5.625%. DBRS rates them BBB(high) and comments that the issue has a poison put and continuous call:

The terms of the Notes will include a change of control provision, which upon the occurrence of both (1) a change of control and (2) a downgrade of a particular series of notes below an investment grade rating (as specified), will require Potash to make an offer to purchase such series of notes at a price equal to 101% of the aggregate principal amount of such notes, plus accrued and unpaid interest to the date of repurchase. The Notes will also be redeemable, in whole or in part, at the option of Potash at any time and from time to time at a redemption price equal to the greater of: (1) 100% of the principal amount of the notes to be redeemed; and (2) the sum of the present values of the remaining scheduled payments of principal and interest on the notes being redeemed on the redemption date (not including any portion of any payments of interest accrued to the redemption date) discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at specified discount rate; plus any accrued and unpaid interest.

The draft prospectus makes it clear that the discounting rate is a spread over treasuries, but does not specify the spread.

Moody’s is acquiring CSI Global Education:

Moody’s Corporation (NYSE:MCO) announced today that it has acquired CSI Global Education Inc. (CSI), Canada’s leading provider of financial learning, credentials, and certification. CSI will operate within Moody’s Analytics, strengthening Moody’s capabilities for delivering credit training programs, research and analytical services, and risk management software to financial institutions worldwide.

Moody’s purchased CSI for C$155 million (US$151.4 million), subject to customary closing adjustments. Inclusive of the unfavorable impact of purchase accounting, the acquisition is expected to have a negligible impact on Moody’s GAAP earnings per share (EPS) for the fourth quarter of 2010 and full-year 2011, and to be accretive to EPS thereafter. The acquisition was funded from cash on hand.

This will be an interesting thing to follow, because CSI-GE is a joke of a company, producing the most inadequate training courses in the history of the universe. The only reason they exist is because they’ve got (what amounts to) an exclusive contract with Canadian securities regulators to provide required industry courses for box-ticking purposes. We shall see if quality improves over the next few years … and if the monopoly continues!

It was a day of declines in the Canadian preferred share market, with PerpetualDiscounts down 3bp and FixedResets getting hit for 12bp, taking the median weighted average yield on the latter index up to 3.10%. Volume continued at high levels.