PrefBlog

Some public sector funds in the US have banned placement agents:

The move by some U.S. public pension funds to ban middlemen who market the services of private equity and hedge fund investments is misguided, according to Michael Travaglini, Massachusetts system executive director.

The funds would be better served installing more checks and balances to prevent undue political influence, Travaglini said. New York, for instance, should broaden control of its pension so the state comptroller is no longer sole trustee, Travaglini said in a telephone interview.

New York State Comptroller Thomas DiNapoli, who runs the $121.9 billion fund, banned the use of placement agents, lobbyists or other paid intermediaries last month amid a widening pay-to-play investigation. New York City similarly told money managers they could no longer use middlemen get pension fund business.

“There’s a legitimate place for placement agents,” said Travaglini, who’s helped run the $34.2 billion retirement fund for public employees in Massachusetts since 2004. “I’m amazed that a political corruption case has led people to question the legitimacy of a long established part of the asset management business.”

The ban is craziness, but there will be many more babies thrown out with the bathwater as political posturing takes centre stage.

DBRS is forecasting a preponderance of downgrades in 2009:

In a commentary released today, DBRS notes that it has seen a significant increase in credit deterioration in Q1 2009. According to the report, corporate credits finished the quarter on a negative tone, with approximately 16% of the DBRS universe facing negative rating action over the next 12 months. In contrast, only 2% of credits reviewed by DBRS were facing positive rating action.

The preferred share market continued its rally today, with PerpetualDiscounts roaring ahead as – perhaps – the market has realized why embedded calls at par in five years are valuable for issuers of FixedResets.

I understand that Scotia has done an Innovative Tier 1 Capital deal, described as “650 million deal June 30, 2019-2108 … at 7.804%”, but have no further details, no press release, nothing on SEDAR.

One of my favourite words has been banned in the UK:

Liquidity, equity and stabilization are “grandiose or ambiguous” words that shouldn’t be used in investment brochures, Britain’s financial regulator said.

Short, punchy sentences with sub-headings and colored graphs should replace swathes of text, the Financial Services Authority said in a paper yesterday. Too much data is as bad as no information as it deters customers from properly reading documents, the London-based agency said.

If financial companies bamboozle customers with technical language, they won’t be treating them fairly — one of the principles by which they must abide — the FSA said. The regulator may not be following its own advice: FSA Chairman Adair Turner used the word “liquidity” 187 times in a 126-page report in March on financial regulation.

The actual paper is something of a hoot. The intent of the FSA is laudable, but … when you explain complex investment instruments to retail, you can have precision or comprehension. Pick One.

The Chrysler bankruptcy is becoming a political circus:

President Barack Obama said Chrysler LLC lenders who turned down his buyout offers are a “small group of speculators” who forced the automaker into bankruptcy.

“A group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout,” Obama said today in Washington before Chrysler filed for bankruptcy protection.
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While lenders representing 70 percent of the Chrysler loans agreed to Obama’s offer of $2.25 billion in cash, the dissidents ignored a deadline of 6 p.m. yesterday, according to one of the investors who declined to be named.
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Chrysler’s dissident lenders have on their side the “absolute priority” bankruptcy rule, which holds that value must be distributed according to the legal priorities of the stakeholders. What riled the group that put out the statement today was the fact that junior creditors, consisting of a workers healthcare trust, would get equity in a new Chrysler entity while they would not.

In the deal Chrysler was trying to conclude out of court, Fiat would have become a 20 percent owner of Chrysler, and a union retiree health-care trust fund would hold 55 percent, with the rest of the company staying in the government’s hands initially, according to people familiar with the matter. The government intends to replicate this, using bankruptcy to set up a new company, people familiar with the plan said.
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“The U.S. bankruptcy code foresees the possibility that it may be necessary to vary from ‘absolute priority,’ in particular when a two-thirds majority is convinced it makes legal or business sense,” said Richard Hahn, co-chairman of the bankruptcy practice at Debevoise & Plimpton LLP, a New York law firm that isn’t involved in the Chrysler negotiations. “If the government has consents from 70 percent, that’s more than enough” to give equity to junior creditors.

The dissidents “may be calculating that they can get more money by waiting a bit longer,” Hahn said. “Presumably they will file objections in court. The issue is less whether they’ll win than whether they can cause a meaningful delay that may cause Chrysler or the government to come to an accommodation.”
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The objections from the group of lenders also drew criticism from Michigan lawmakers, including Democratic Representatives John Dingell and Sander Levin.

“The rogue hedge funds that refused to agree to a fair offer to exchange debt for cash from the U.S. Treasury — firms I label as the ‘vultures’ — will now be dealt with accordingly in court,” Dingell said.

Histrionics, flat declarations and squabbling over the carcass is nothing new in bankruptcy proceedings. The fact that one of the squabblers in the President of the United States of America is worrisome.

A paper on VoxEU titled Private pensions and policy responses to the crisis drew my attention to the OECD Pension Outlook 2008 that had many interesting things to say, for instance:

and (from the related documentation on Pension Plan fees, emphasis added):

While competition is normally expected to bring down costs, individual account pension markets behave in a counterintuitive manner. Marketing and sales agents have been used in the past to encourage members to switch providers, leading to an increase in operational expenses and fees. As members are not very responsive to higher fees, systems that a priori seemed to be highly competitive, with many players, have actually turned out to do rather poorly in terms of fees.

and

The paper argues that the particularly low fees observed in Bolivia and Sweden at the inception of their respective systems stem largely from a decision to force cost competition among providers via a central agency or ‗clearing house‘.
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One possible explanation for the low costs in countries like Bolivia and Uruguay may be the conservative asset allocation of pension funds in these countries (Bolivian pension funds invest more than 90% in domestic treasury bonds).

There’s also ancilliary documentation on performance which shows Canada doing well, although data is limited.

Volumes came down a little today, but remain very healthy – and the market continued to rise, with some very high prices being seen for recent fixed-resets.