PrefBlog

We’ll probably never know just what the rights of the matters are … but it sure is entertaining!

Weber, who was chief investigator in the inspector general’s office, raised allegations in March that H. David Kotz, the agency’s former inspector general, may have had personal relationships that tainted reports on the SEC’s failure to catch the Bernard Madoff and R. Allen Stanford Ponzi schemes.

Weeks later, a number of Weber’s co-workers submitted complaints that he was creating a hostile work environment through his suggestions that he and others should be able to carry guns on the job. The SEC used an external security consultant to review whether Weber was a threat and then placed him on administrative leave in May.

Weber also reported to the SEC that he found evidence of possible espionage by foreign nationals related to a case he was investigating. The matter involved unencrypted computer hard drives that contained sensitive stock exchange information.

Cary Hansel, Weber’s lawyer, said that Weber received a letter from the SEC last week informing him he had been fired.

So up to now, it looks like the Lone Loony-Toon, right? But:

Weber’s original complaints prompted the SEC to bring in David Williams, the inspector general of the U.S. Postal Service, to conduct a review. Williams concluded that Kotz violated ethics rules by overseeing probes that involved people with whom he has “personal relationships.” Kotz resigned in January amid questions about his tactics and conduct.

Williams also said in his report that he didn’t find any evidence that indicated Weber’s conduct was improper or raised security concerns. Based on the report, Weber asked the SEC to reinstate him.

Humans are complex! When will we realize that an insistence on perfection in every area deprives us of talent? There’s Petraeus:

CIA Director David H. Petraeus, the retired four-star general widely commended for his oversight of the U.S. wars in Iraq and Afghanistan, resigned from his position due to an extramarital affair.

“After being married for over 37 years, I showed extremely poor judgment by engaging in an extramarital affair,” Petraeus wrote in a letter today to Central Intelligence Agency employees. “Such behavior is unacceptable, both as a husband and as the leader of an organization such as ours.”

… and Kubasik:

Christopher E. Kubasik, who was to become the next chief executive officer of Lockheed Martin Corp. (LMT), resigned after the company discovered he had a “close personal relationship” with a subordinate.

The company’s board elected Marillyn A. Hewson president and chief operating officer effective immediately. She is to become CEO on Jan. 1, Lockheed said today in a statement.

Robert Stevens, chairman and CEO of Lockheed, the world’s largest defense contractor, said he asked for Kubasik’s resignation after ascertaining Kubasik had a “lengthy, close and personal relationship with a subordinate who worked for him.”

It would be most interesting to get the inside dirt on these affairs. Not the “affairs”, I mean (as far as I can tell, that’s the business of exactly three people), but the decisions to “resign”. Are Obama and Stevens weeping crocodile tears over the necessity of firing fatally flawed employees? If they had been more cooperative, would they have got one of the special Get Out of Jail Free cards like a certain French politician I remember?

Guess what? An Income Trust is not an equity (according to Octagon Capital):

By letters dated June 27, 2008 and January 23, 2009, Octagon responded saying: … Regarding suitability, it is not unreasonable for a retired person who does not derive much of their income from their investments to split their investments into 50% equities (common shares) and 50% income producing securities (like income trusts).

For all it’s tough talk about “Naming and Shaming”, OBSI doesn’t identify the broker involved: it appears to be Randal William Harding. So nice that all responsibility is corporate, isn’t it? Personal responsibility is so … distasteful. For instance, there aren’t any NAMES of actual PEOPLE making the decisions at Octagon; “Octagon points out …” and “Octagon argues …” The closest is actually gets to actual naming and shaming is:

We discussed the complaint with Octagon’s Chief Compliance Officer, Mr. L.

“Mr. L.”?

Small brokerages are having a tough time:

GMP Capital Inc. has had another rough quarter, and its chief executive can’t pinpoint when things will turn around.

But Harris Fricker hopes a top-to-bottom review of Canada’s second-largest independent brokerage will spur “significant initiatives” that will pay off in 2013.

“Make no mistake, the goal is to increase the torque of our business, the financial benefit of which will become obvious in better market conditions,” Mr. Fricker said on the company’s third-quarter earnings call Friday after GMP reported a net loss of $358,000. “We remain confident we have the right people, platform and global market capabilities to make it happen,” he said.
…
Canada’s largest independent brokerage, Canaccord Financial Inc., also reported earnings this week, and it is finding ways to retool its own business to get through the persistently poor economic conditions. Canaccord posted a net loss of $14.8-million for its second quarter of fiscal 2013, as compared to a loss of $5.3-million in the same quarter in 2012.

The company said that the plan to close underperforming branches of its wealth management business (predominantly in smaller markets) is coming along well. “To date, seven branches have already been closed, with the remainder to close before the end of December,” said Canaccord CEO Paul Reynolds. He indicated this would allow the company to invest more heavily in the unit.

It was another mixed day for the Canadian preferred share market, with PerpetualPremiums off 1bp, FixedResets gaining 12bp and DeemedRetractibles up 20bp. Lots of volatility, with insurance issues notable on the upside. Volume returned to well below average levels.

There’s a bit more gossip on the Rochdale Securities fiasco:

The president of Rochdale Securities said the firm was nearing a rescue deal Wednesday, and its star analyst told potential investors he planned to stay on board if the life line panned out, according to a person familiar with the talks.

When reached by phone Wednesday, firm President Daniel Crowley said he was close to finalizing a deal to bolster Rochdale’s balance sheet. He declined to comment further. The Stamford, Conn. brokerage, a relatively small stock-trading and research firm that serves only institutional clients and doesn’t trade its own money, is best known for employing prominent bank analyst Dick Bove.
…
The stock purchase allegedly took place Oct. 25, just ahead of Apple’s quarterly earnings release. Mr. Miller bought 1,000 times the number of Apple shares a client requested, the person familiar with the rescue talks said, making the trade worth roughly $1 billion. Rochdale had about $3.4 million in capital at the end of 2011, according to a filing with the Securities and Exchange Commission. After the purchase, the person familiar with the talks said, Mr. Miller shut down his computer and left the office. He hasn’t returned calls from firm executives since, according to this person.

Mr. Miller has said the trade was an accident, according to two people familiar with the transaction.

Recent softness in the equity market may well be related to capital gain realization:

President Barack Obama’s re-election means his administration will push to let tax cuts enacted during the George W. Bush era expire for high earners, as scheduled, at year-end. Obama wants to increase the top federal income tax rate to 39.6 percent from 35 percent, boost rates on long-term capital gains to as much as 23.8 percent, and shrink exemptions from estate-and-gift taxes.
…
An investor who sells $100 of stock with a cost basis of $20 in 2012 would see proceeds — after capital gains taxes — of $88, according to an analysis by J.P. Morgan Private Bank. Next year, if Congress doesn’t act, earnings from the sale would drop to $80.96 if rates rise to 23.8 percent. That means the stock price would need to rise by at least 9 percent for an investor to be better off selling in 2013.

It was another mixed day for the Canadian preferred share market, with PerpetualPremiums up 11bp, FixedResets off 5bp and DeemedRetractibles gaining 1bp. Volatility was muted. Volume was average.

With the US election over, the equity boys suddenly remembered that “fiscal cliff” thingamajig:

U.S. stocks slid, sending the Dow Jones Industrial Average to its biggest drop in a year, oil sank and Treasuries surged the most in five months as President Barack Obama’s re-election set up a budget showdown with the Republican-controlled House.

The Dow tumbled 312.95 points, or 2.4 percent, to 12,932.73 for its worst drop since Nov. 9, 2011. The Standard & Poor’s 500 Index, which is up 64 percent since Obama took office in 2009, lost 2.4 percent to 1,394.53, its lowest level since August. Ten-year U.S. yields sank 12 basis points to 1.64 percent. Oil slid almost 5 percent in its biggest decline of the year.

Obama now faces negotiating with Congress to avoid the so- called fiscal cliff of more than $600 billion in tax increases and spending cuts next year that threaten to slow U.S. growth. European stocks erased early gains as concern grew that the debt crisis was hurting Germany’s economy, while Greek police beat back anti-austerity protesters outside parliament.

“It’s a rush to safe haven,” said James Paulsen, the chief investment strategist at Minneapolis-based Wells Capital Management, which oversees about $325 billion. “We’re selling off further on rising fears about what a fiscal cliff negotiation is going to mean here. People bring all their worst fears in. At the end of the day, you have the fiscal cliff, Europe and you see a risk-off trade.”

Ooh! “risk-off trade”! What a totally cool portfolio management concept!

S&P upgraded CI Financial Corp. (a fundco) today – not a preferred share issuer, but there were some nuggets of interest:

• •In our view, CI Investments Inc. (CII) does not face any material regulatory barriers in making payments to its holding company, CI Financial Corp. (CI). Structural subordination exists when there are regulatory restrictions on the operating subsidiary’s ability to upstream dividends to the holding company.
• •CII is only required to maintain positive working capital plus $100,000 to remain registered as an investment manager, which is not much of a hurdle and is really intended to keep very small firms in line.

You have no idea how much it annoys me to kept “in line”.

As of Sept. 30, 2012, CI’s tangible equity was negative C$500.8 million, the consequence of goodwill and intangible assets, which the company generated by several of its acquisitions in the recent past, the most recent being Hartford Investments Canada Corp. in December 2010. But, in our view, asset managers having negative tangible equity is not a primary concern because we focus our analysis on the predictability and sustainability of cash flow generation.
That being said, we believe a minimum of positive tangible equity is necessary to absorb unexpected losses.

It was a mixed day for the Canadian preferred share market,with PerpetualPremiums down 11bp, FixedResets gaining 4bp and DeemedRetractibles off 5bp. Volatility was minimal. Volume was slightly below average.

PerpetualDiscounts (all THREE of them! From BOTH issuers!) now yield 4.93%, equivalent to 6.41% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 4.25%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 215bp, a slight (and perhaps spurious) rise from the 210bp reported October 31.

It’s not a preferred share issuer – but it’s a sign of the times:

DBRS has today downgraded the Issuer Rating of Torstar Corporation (Torstar or the Company) to BBB (low) from BBB. The trend is Stable and the rating is no longer Under Review with Negative Implications. The downgrade reflects DBRS’s view that Torstar’s earnings profile has been structurally affected by a consumer shift to digital forms of media as the Company has struggled to sustain organic revenues and profitability. The new rating also reflects DBRS’s view that weakening demand will continue to place pressure on the Company’s revenues, margins and cash flow generation going forward. DBRS’s concern is not based primarily on the Company’s debt level, as Torstar has remained prudent in terms of financial management, but rather the Company’s income and cash-generating prospects.

There’s an interesting conflict of trends in consumer borrowing:

Overall non-mortgage debt loads continued to increase during the third quarter, up 1.8 per cent from the same quarter of last year, the credit-monitoring firm [Equifax Canada] said in its latest Quarterly Credit Trends Report released Tuesday. However, only 1.22 per cent of debts were unpaid after 90 days or more in the July-September quarter.

That’s down sharply from 1.37 per cent in the previous quarter and the lowest delinquency rate on record going back to early 2007, before the recession began.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 13bp, FixedResets off 1bp and DeemedRetractibles winning 15bp. Volatility was average. Volume was average.

The US Treasury’s divestment of AIG is proceeding rapidly:

American International Group (AIG), the bailed-out insurer/ex-pyromaniac at the epicenter of the global financial meltdown, just posted a $1.86 billion quarterly profit, compared with the $4 billion loss it registered last year. The stat that most matters: Uncle Sam now owns just 16 percent of the company, with a complete disposal of its stake likely by the end of the year. The U.S. Treasury Department has recently been offloading hundreds of millions of shares—it sold $20.7 billion worth in September—after having owned as much as 92 percent of AIG in the wake of a government bailout that ballooned to $182 billion, including aid from the Federal Reserve Bank of New York.

If you’re to believe Treasury’s math—no small controversy there—taxpayers actually are in the black from the bailout. The U.S. profits off anything sold above its stated bailout per-share cost basis of $28.73, according to bank Drexel Hamilton. AIG stock now changes hands at $33, having surged 43 percent this year. That is less than half its book value (a measure of its assets minus liabilities) of just under $70 a share. The more of itself AIG repurchases from the government—and the more its business evolves back into bread-and-butter property-casualty, life insurance, and investing—the more it is thought its stock will approximate that book value. “The government ownership has been a real overhang for the company,” said Josh Stirling of Sanford Bernstein (AB), ahead of the quarterly earnings report.

Mind you, there are significant gimmicks in the numbers:

One point of contention is Treasury’s decision to allow AIG—along with TARP recipients Citigroup (C) and Ally Financial—to use operating losses from previous years to eliminate taxes on current income. The allowance, which typically does not apply to bankrupt or acquired companies, added $17.7 billion to AIG’s fourth-quarter earnings and will allow the company to shield profits from taxes for many years to come. “It’s important to remember that a substantial portion of AIG’s recent earnings were attributable to Treasury’s unilateral decision to preserve AIG’s net operating losses,” says J. Mark McWatters, a law professor at Southern Methodist University who was a Republican appointee to the TARP oversight committee.
…
Barofsky calls the price [that Treasury quotes as its acquisition cost] “a political manipulation of numbers.” He argues the calculation shouldn’t include 563 million AIG shares that Treasury received from the Federal Reserve in January 2011 because the shares were not acquired as part of the TARP program. Removing those shares from the calculation would lift Treasury’s per-share cost to $43.53, which means TARP would show a $16 billion loss if Treasury sold the rest of its holdings at $29.

Still, even if we give full weight to the carping, the AIG bailout has been much less expensive than Government Motors:

U.S. taxpayers kept the nation’s largest auto maker by sales afloat with a $50 billion bailout in 2009 and now own 26.5% of the Detroit company.
…
Earlier this summer, GM floated a plan with Treasury officials to repurchase 200 million of the roughly 500 million shares the U.S. holds in the auto maker, according to people familiar with the discussions. Under the plan, Treasury would sell the remaining shares through a public stock offering.

But Treasury officials aren’t interested in GM’s offer at the current price and aren’t in a rush to offload shares, according to people familiar with the matter. The biggest reason: A sale now would leave the government with a hefty loss on its investment.

At GM’s Friday share price of $24.14, the U.S. would lose about $15 billion on the GM bailout if it sold its entire stake. While GM stock would need to reach $53 a share for the U.S. to break even, Treasury officials would consider selling at a price in the $30s, people familiar with the government’s thinking have said.
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Last month, the Obama administration increased the estimated loss on the $85 billion auto industry bailout, which also included aid to crosstown rival Chrysler Group LLC and auto parts suppliers, by $3 billion to more than $25 billion. That amount is still smaller than the government’s initial estimate of a $44 billion loss. Chrysler is already free and clear from its government bailout after taking out a loan to pay back what it owed.
…
The U.S. is still in the red on its investments in Fannie Mae and Freddie Mac, which have received $188 billion in taxpayer support.

How’s this for bad management? Rochdale Securities levered up 300:1 on Apple common:

Rochdale Securities LLC, the brokerage that employs bank analyst Dick Bove, is in advanced talks to save the firm after unauthorized trades in Apple Inc. (AAPL) went sour, said two people with knowledge of the negotiations

The potential deal to recapitalize Stamford, Connecticut- based Rochdale would be a merger or investment and may be announced as early as today, said the people, who requested anonymity because the talks are private. The deal for the 37- year-old firm could still fall apart, one of the people said.

Rochdale, led by President Daniel J. Crowley, has told potential investors that a trader made an unauthorized purchase last month of $750 million to $1 billion in Apple shares, which dropped in value and depleted capital at closely held Rochdale, the people said.

The firm had $3.44 million of capital at the end of last year, according to a filing with the U.S. Securities and Exchange Commission. Crowley didn’t immediately return phone calls seeking comment on the firm’s status.

There are rumours of naughtiness:

A person familiar with the thinking of Rochdale executives said a trader at the firm received an order for stock in Apple Inc. … but bought 1,000 times the number of shares requested. The trader is saying the extra shares were ordered by mistake, the person said, but the firm is alleging the actions were intentional. The company suspects the trader was working with an outside party to execute the trade and profit at the firm’s expense, according to this person.

Despite all the sound and fury over credit ratings, it looks like the ECB doesn’t do its own credit analysis. What a surprise.

The European Central Bank is investigating claims that it used a high credit rating from a Canadian ratings agency to grant loans to Spanish banks at a sweetheart rate that was not offered to another struggling euro zone country.

An ECB spokesman on Frankfurt, Philippe Rispal, said the bank is “currently investigating this matter” and that the probe would determine whether “the correct haircut has been applied” to the Spanish sovereign bonds that were used as collateral for ECB loans.

The term “haircut” refers to varying discounts applied to the collateral based on its credit quality. On the weekend, the German newspaper Die Welt am Sonntag said that about €80-billion ($102.3-billion U.S.) of Spanish treasury bills posted as collateral received only a 0.5 per cent haircut when a 5.5 per cent haircut would have been more appropriate, given Spain’s rising sovereign risks.

The newspaper said the ECB relied on the relatively high Spanish rating produced by Toronto’s DBRS in determining its collateral requirements. DBRS has assigned an A-low rating, with “negative trend” on all of Spain’s public sovereign debt. The other three ratings agencies – Fitch, Standard & Poor’s and Moody’s – have a lower single-B rating on the 18-month T-bills that were posted as collateral by the Spanish banks (DBRS rates the country, not the individual securities).

DBRS’s rating for Ireland is the same as its rating for Spain. Yet Die Welt said the Irish bonds used as ECB collateral were subject to a 5.5 per cent haircut, meaning the ECB apparently considered them much riskier than the Spanish collateral in spite of the identical country rating.

DBRS has released a new methodology titled DBRS Criteria: Preferred Share and Hybrid Criteria for Corporate Issuers (Excluding Financial Institutions). Not much of interest, but there are a few nuggets:

Rate Reset Preferred Shares
Cumulative redeemable preferred shares featuring rate reset provisions are prevalent in Canada. While having no stated maturity, these securities feature a rate reset mechanism, combined with the option to redeem (both typically occurring every fifth year). The redemption option and rate reset are not viewed as impediments to garnering high levels of equity treatment if (1) the reset spread, set at the time of initial issuance, is not viewed as onerous on a basis relative to market, and would therefore not be expected to be a major incentive to redeem (while this is subjective, as an issuer’s credit spread will change over time due to both market- and company-specific factors, DBRS will compare an issuer’s reset spread to its peer group to assess its potential to impact future actions) and (2) DBRS has a high degree of confidence that the securities will remain a permanent part of the issuer’s capital structure.

Preferred Share Default
A preferred share is only assigned a “D” rating (for default) when the security is in default according to the legal documents. As such, the non-payment of a dividend does not necessarily give rise to the assignment of a default rating. When preferred dividends are not declared, the preferred share rating will likely be downgraded by a minimum of one notch to refl ect the non-payment situation. Further downgrades may occur, should the overall ratings for the organization be downgraded as a result of a negative situation that relates to the decision not to pay preferred share dividends. In addition, DBRS may consider additional downward notching of the preferred share rating to refl ect concerns related to either (1) the expectation that non- payment of dividends may continue for several more quarters or (2) the probability of a future default, as defined in the legal documents, which could occur without any defaults of higher rated securities, including coercive exchange offers.

Cumulative vs. Non-Cumulative
Whether a security is cumulative or non-cumulative does not generally have a large impact on treatment and has no impact on ratings. While a non-cumulative security is more beneficial for an issuer, in that missed payments to do not have to be made up in the future, DBRS views this as a modest factor for equity treatment, as an issuer may be more hesitant to miss a payment on a non cumulative security given potential consequences, as already noted.

Additionally, the rating itself is generally rather indifferent to cumulative vs. non-cumulative, given the minimal difference in expected recovery.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums off 3bp, FixedResets up 6bp and DeemedRetractibles gaining 1bp. Volatility was minimal. Volume was very low.