PrefBlog

Allied Irish is on central bank life-support:

Allied Irish Banks Plc, Ireland’s second-biggest bank, has tripled its reliance on funding from central banks since the end of June as companies and customers pulled money amid the country’s debt crisis.

The bank’s dependence on “monetary authorities” rose to 27 billion euros ($37 billion) from a “high single-digit” billion-euro amount on June 30, Alan Kelly, general manager of group corporate services at Allied Irish, said in a telephone interview today. Funding conditions were “increasingly challenging,” the Dublin-based lender said in a statement.

Irish lenders have become more reliant on European Central Bank funding after being frozen out of wholesale markets. The amount of ECB loans to the country’s banks rose 7.3 percent to 130 billion euros in October from the previous month, Ireland’s Central Bank said on Nov. 1. The data include both international and domestic banks operating in Ireland.
…
Deposits dropped by about 13 billion euros since the start of the year, Allied Irish said in the statement. That equates to about a 17 percent decline, Kelly said. Allied Irish said it will increase the amount it’s seeking to raise in a share sale by the end of the year to 6.6 billion euros from 5.4 billion euros.

More specifically, their interim management statement says:

Customer accounts have been affected by current adverse international sentiment towards the Irish sovereign and banking sector and are down by c.€13bn from the beginning of 2010 to the close of business on 16 November. This reduction was primarily due to lower institutional and corporate balances.
…
General funding market conditions in recent months have become increasingly challenging. This has had a negative impact on AIB’s funding position which has seen a reduction on maturity of debt securities in issue and customer accounts. This reduction has been offset by an increase in secured deposits by banks, in particular by monetary authorities. While AIB had issued term funding of €6.7bn during 2010 in anticipation of term funding maturing in September 2010, current market conditions are limiting funding access to shorter durations, mainly on a secured basis.

Geithner’s upset about the Fed’s politicization:

U.S. Treasury Secretary Timothy F. Geithner warned Republicans against politicizing the Federal Reserve and said the Obama administration would oppose any effort to strip the central bank of its mandate to pursue full employment.

“It is very important to keep politics out of monetary policy,” Geithner said in an interview airing on Bloomberg Television’s “Political Capital with Al Hunt” this weekend. “You want to be very careful not to take steps that hurt our credibility.”

The Republican congressional leadership, including John Boehner, nominated as the next House speaker, has criticized the Fed’s plan to buy $600 billion in assets, saying it would fuel inflation and asset bubbles. Senator Bob Corker, a Tennessee Republican who serves on the Banking Committee, said he favors confining the Fed’s mandate to promoting price stability.
…
“It is very important that we respect and honor what the Congress did when it set up our independent central bank with a mandate to keep prices low and stable over time and to make sure” it promotes “sustainable economic growth,” said Geithner, who was president of the Federal Reserve Bank of New York before taking over as Treasury secretary last year.

FortisBC has issued 40-year MTNs at 5%.

The Canadian preferred share market continued to recover from the damage done earlier in the week on continued heavy volume, with PerpetualDiscounts up 23bp, while FixedResets lost 2bp.

I may have mentioned this before, but there are negative credit spreads in Europe:

The spread does, nevertheless, tell a story about relative risk. In Greece, Ireland, and Portugal, a number of sectors have negative corporate spreads, suggesting that firms are either less likely to default than their governments or will have higher recovery rates if they do default. The sector that stands apart as being much riskier than the government is financials. If these governments partially default, the guarantees they have made to the banking system are no longer credible, and the credit losses may be severe.

Click for Big

There’s some commentary from Felix Salmon and Bloomberg:

An index of credit-default swaps on 15 European governments now exceeds a gauge of investment-grade credit risk by about 50 basis points, according to data from CMA and JPMorgan Chase & Co. Corporate swaps are historically more expensive than sovereign contracts.

The gap between the indexes “highlights the difference between how fundamentally strong non-financial corporate credit is versus how weak governments are,” said Aziz Sunderji, a credit strategist at Barclays Capital in London. “Corporate balance sheets look strong, cash liquidity buffers are large, and earnings have surprised to the upside. Most of the problems are originating from the sovereign side.”

Berkshire Hathaway was touted last spring as having traded through Treasuries, but the data are suspect.

For those who are interested, the relevant CDS indices are the Markit iTraxx SovX Western Europe index and the Markit iTraxx Europe index. Today’s marks are 165bp and 102bp, respectively.

Ireland is going to the well:

Ireland said it may ask for an international bailout as European Central Bank President Jean- Claude Trichet signaled debt-laden nations can’t rely on him to keep their financial systems afloat forever.

Finance Minister Brian Lenihan said in Dublin he would welcome the creation of “substantial contingency capital funding” for Irish banks. In Frankfurt, Trichet said in a speech that policies first used to fight the global credit crisis can’t “evolve into a dependency as conditions normalize.”

The ECB is concerned that banks in Ireland and Greece are becoming too reliant on its unlimited money market operations and is pushing Ireland to accept a rescued funded by European Union governments and the International Monetary Fund. Irish central bank Governor Patrick Honohan said today that an agreement may amount to “tens of billions” of euros.

I’m not sure what exactly is meant by “contingency capital funding”.

Enbridge Gas Distribution, a wholly owned subsidiary of Enbridge Inc., has issued 40-year MTNs at 4.95%.

The Canadian preferred share market bounced back today on continued high volume, with PerpetualDiscounts up 18bp and FixedResets gaining 4bp.

Econbrowser‘s Menzie Chinn brings to my attention a very nice interactive from the NYT on the US budget deficit.

It looks as if the Europeans are thinking about rejecting bank leverage caps:

Banks in Europe may escape global rules designed to limit their debt, as several countries push the European Union to drop a so-called leverage ratio, two people close to the discussions said.

A majority of nations in the 27-country EU oppose introducing a binding leverage ratio that was adopted last week by the Group of 20 countries, according to the people, who declined to be identified because the discussions are private. The countries, including Sweden and France, say the ratio might encourage banks to pursue risky activities, the people said.
…
Opponents of a leverage ratio say that by putting a limit on the scale of banks’ activities, institutions may be tempted to maximize returns by curtailing traditional lending in favor of riskier activities.
…
Almost all EU states have said they oppose implementing legislation that includes a binding leverage ratio, according to the people. The countries are seeking a separate decision on the issue in several years, following further analysis of the financial effect.

“The leverage ratio is unsuitable as a regulatory instrument”, declared Chris De Noose, managing director of the European Savings Banks Group, “due to its lack of sensitivity to the specificities of the business models of the various financial institutions and their riskiness and exposure to market volatility.”

A binding leverage ratio probably leads to banks being given the “wrong incentives,” Lars Hofer, a spokesman for the Association of German Banks, said. Banks could take “higher risks in order to generate higher profits on a given number of risk-weighted assets,” he said.

Well, all I can say is that that doesn’t fit my memories of the Panic of 2007! However, a lack of leverage cap will allow the European banks to load up on nice, save, solid sovereign debt.

Efforts to politicize the Fed continue:

The four top Republicans in Congress wrote to Federal Reserve Chairman Ben S. Bernanke today expressing “deep concerns” over the central bank’s second- round of Treasury bond purchases.

“While intended to improve the short-term growth of the U.S. economy and help maintain a stable price level, such a measure introduces significant uncertainty regarding the future strength of the dollar,” the letter said. The purchases could “result both in hard-to-control, long-term inflation and potentially generate artificial asset bubbles.”

The letter, dated today, was signed by House Republican leader John Boehner of Ohio, House Republican Whip Eric Cantor of Virginia, Senate Republican leader Mitch McConnell of Kentucky, and Senate Republican Whip Jon Kyl of Arizona.

Straight Perpetuals continued to slide today, with PerpetualDiscounts losing 18bp, but FixedReset were able to hold, gaining 1bp. Volume continued to be heavy.

PerpetualDiscounts now yield 5.43%, equivalent to 7.60% 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 220bp, an increase from the 210bp reported on November 10.

Torys securities lawyer Joel Wiesenfeld says Securities officials should defend deals:

A principal rationale by a financial institution for settlement in the first place is to limit the reputational harm caused by long-term media exposure, such as is common if there is a contested hearing, no matter which party wins the hearing.

It is far more difficult to understand why securities regulators do not mount spirited defences of the settlements they enter into, including the purpose of the investigation, the decision to settle, and the terms of the settlement. Inasmuch as that analysis will likely not be forthcoming from the media, it is imperative that securities regulators learn that their job is not complete following the approval of a settlement, for it is in the public interest for the regulator to explain how and why its regulatory imperative in investigating and settling has been achieved. Until that begins to occur, all we will be left with is the usual rant.

I’ve got a better idea: no deals. If they’re guilty, nail ’em to the wall. If they’re not guilty, eschew extortion.

Meanwhile the SEC’s war on competition continues:

The SEC, the top U.S. securities regulator, must address the use of algorithms, the computer codes that power high-frequency trading and disrupt the marketplace, SEC Chairman Mary Schapiro told the Securities Industry and Financial Markets Association annual conference on Monday.

“We hope this will lead to a more stable marketplace,” she said.
…
“Some high-frequency traders are not registered or regulated at all,” Schapiro told reporters on the sidelines of the conference. “There’s an issue about the use of disruptive algorithms in the marketplace, that contribute dramatically to volatility and instability.”

The SEC is considering “certain throttles” that would govern the way algorithms impact the marketplace, possibly slowing them down, she said.
…
Other SEC steps since the crash included adding circuit breakers that pause trading when stocks plunge or soar. Schapiro on Monday said one algorithm recently triggered a breaker when it “tried to sell 10 percent of the daily volume of a stock in two seconds.

“That’s a huge volume disruption,” she said.

Golly! Can you imagine? Somebody trading stocks without being regulated! It’s a scandal!

It strikes me that the new circuit breakers are very prone to moral hazard … even if they’re not already written and in place, I bet a lot of programmers and developers are having a good think about how automatic circuit breakers and automatic trade busts can be used to their advantage. Moral hazard is profitable!

Allied Irish Bank was able to sell senior bonds earlier this year by making them retractible. Guess what’s happening?:

Ireland’s second-largest lender, which has a market capitalization of 418 million euros ($569 million), was able to raise debt this year by giving buyers the right to sell the notes back at face value at set dates prior to final maturity, according to data compiled by Bloomberg. Today the bank said an investor requested repayment of 120 million euros of its floating-rate bonds due in February at the Nov. 30 put date.

And the Europeans are bickering:

Greek 10-year bond yields surged 20 basis points to 11.62 percent amid concern that the nation, which received a 110 billion-euro bailout in May, won’t be able to cut its budget deficit fast enough. Austria is threatening to block its next transfer of funds to Greece unless the government gets back on track a deficit-cutting plan agreed just six months ago with the European Union and International Monetary Fund.

“We are getting indications that the Greeks can’t stick to their plan in a sufficient manner, in particular on the revenue side,” Finance Minister Josef Proell said according to a government e-mail that confirmed remarks made after a cabinet meeting today. “The data we have at the moment doesn’t give any reason to approve the December tranche from the Austrian point of view.”

Greece led a surge in the cost of insuring European government debt. Credit-default swaps on Greece soared 86 basis points to 944, the highest since June 29, according to data provider CMA. Contracts on Ireland rose 22 basis points to 515, Portugal climbed 13 to 426, Italy increased 7 to 188 and Spain was up 8 at 259.

The competitive position of European hedge funds vs. the banks is getting better:

Funds may have the option to explain to the Financial Services Authority why they are unable to comply with rules that require half of bonuses to be paid in shares, said the people, some of whom declined to be identified because negotiations are private. The regulator is reviewing whether the largest hedge funds must fully comply with the rules, according to the people.

The FSA in July proposed expanding the companies covered by its bonus rules from 27 banks to 2,500 firms, including building societies and hedge funds, to comply with European Union legislation on bank capital. The regulator proposed the possibility of giving firms a “comply or explain” exception and the Committee of European Banking Supervisors supported that position last month, said Darren Fox, a partner at Simmons & Simmons, who represents hedge funds.

This may be a good thing. It may be bad. I don’t think anybody’s really thought about it.

The Cleveland Fed has published the November, 2010 edition of Economic Trends:

This, in effect, is like the CPI asking the question, “What does it cost to maintain this fixed basket of goods and services?” while the PCE asks, “What does it cost to maintain this given level of satisfaction?” Because the CPI updates the expenditure weightings only every few years, it doesn’t allow for substitution effects. For example, if the price of coffee suddenly doubles, people may start to drink more tea. Thus, the CPI may tend to overstate the aggregate price level during periods of volatile relative price swings.

The last diff erence between the two series is called the “weight” effect. Due to the differences in the scope of the measures and in the source data for some items, the PCE and CPI have different weights on similar items. The largest difference comes from the shelter (housing) components, which in the CPI carry a relative importance value of roughly 32 percent, while in the PCE it is a little less than half of that. Such a huge difference in weights means that housing prices exert much more of an influence over the trajectory of the CPI than that of the PCE, leading to differences in their growth rates over time.

It was clobberin’ time on the Canadian preferred share market today, with PerpetualDiscounts losing 80bp and FixedResets down 43bp – taking the median weighted average yield on the latter index back above 3%. Volume continued at very high levels. This is great, just like the old days of two years ago! Still, on the theory that misery loves company, have a look at …

Click for Big