Archive for August, 2009

Why Have Canadian Banks Been More Resilient?

Friday, August 28th, 2009

A VoxEU piece by Rocco Huang of the Philadelphia Fed and Lev Ratnovski of the IMF is based on an IMF working paper, Why are Canadian Banks More Resilient? that is of great interest (paper also available directly from the IMF):

Reviewing the data, we note that the pre-crisis capital and liquidity ratios of Canadian banks were not exceptionally strong relative to their peers in other OECD countries. However, Canadian banks clearly stood out in terms of funding structure: they relied much less on wholesale funding, and much more on depository funding, much of which came from retail sources such as households. We posit that the funding structure of Canadian banks was the key determinant of their resilience during the turmoil.

Although bank capital ratio taken by itself was not a robust predictor of resilience, a more specific dummy variable capturing critically low (under 4 percent) capital was a significant predictor of sharp equity declines and probability of government assistance. Low balance sheet liquidity did well in predicting extreme stress.

The second part of this paper (Section 3) reviews regulatory and structural factors that may have reduced Canadian banks’ incentives to take risks and contributed to their relative resilience during the turmoil. We identify a number of them: stringent capital regulation with higher-than-Basel minimal requirements, limited involvement of Canadian banks in foreign and wholesale activities, valuable franchises, and a conservative mortgage product market.

We measure capitalization as a ratio of total equity over total assets. This leverage-based measure has a number of shortcomings stemming from its simplicity: it is not risk-weighted and does not consider off-balance sheet exposures. However, it is well comparable across countries. We find that this simple measure of capitalization turns out to be a good predictor of bank performance during the turmoil, particularly by identifying vulnerabilities stemming from critically low bank capital (Table 2).

This last point is not particularly earth-shattering: see the first chart (reproduced from an IMF report) in the post Bank Regulation: The Assets to Capital Multiple.

We assess the impact of these ex-ante fundamentals on bank performance during the crisis. We use three objective and subjective measures of performance.

The first is the equity price decline from January 2007 to January 2009, which is an all-in summary measure of value destruction during the turmoil, resulting from credit losses, writedown on securities, and dilution from new equity issuances including government capital injections.

The second (pair) of measures are two dummy variables identifying whether that decline was greater than the median (70 percent) or extraordinarily large (85 to 100 percent), respectively.

The third measure of performance is a dummy capturing the degree of government intervention that a bank required during the turmoil: whether it was used to avoid extreme stress or to address a less dire weakness.

I have a problem with the use of equity prices as a measure of performance. It doesn’t really measure the stability of the bank, it measures the market’s perception of the stability of the bank. On the other hand, we have to live in the real world and perceptions can become reality very quickly.

We now turn to bank liquidity. We measure balance sheet liquidity as the ratio of liquid assets over total debt liabilities. We use the BankScope measure of liquid assets, which includes cash, government bonds, short-term claims on other banks (including certificates of deposit), and where appropriate the trading portfolio. BankScope harmonizes data from different jurisdictions to arrive at a globally comparable indicator. Data for bank liquidity is shown in Table 3.

Note that a large number of U.S. banks have very scarce balance sheet liquidity. The key reason is that those banks, in their risk-management, treated mortgage-backed securities and municipal bond as liquid, and reduced holdings of other more reliably liquid assets such as government securities. Our liquidity measure does not incorporate holdings of such private and quasi-private securities. With hindsight, it is fair to say that this narrow definition is a more accurate measure of liquidity during crisis.

I have a real problem with the incorporation of claims on other banks in a narrow definition of liquid assets – the same problem I have with the preferential treatment accorded bank paper in the rules for risk-weighting assets. Encouraging banks to hold each other’s paper seems to me to be a recipe for ensuring that bank crises become systemic with great rapidity.

Yet overall, balance sheet liquidity was a weaker predictor of resilience to the turmoil than the capital ratio. Although low liquidity was a clear handicap (of twelve least liquid banks, eight had equity price declines of more than 70 percent, and four required a significant government intervention), a large number of banks from different countries (U.S., UK, Switzerland) experienced significant distress despite being relatively liquid. Another way to think about the resilience effects of balance sheet liquidity is to recognize that it can provide only temporary relief from funding pressures. During a protracted turmoil, more fundamental determinants of resilience—such as capital or funding structure—should play a bigger role.

We now turn to bank funding structure (depository vs. wholesale market funding). The financial turmoil has originally propagated through wholesale financial markets, some of which effectively froze on occasions. Our measure of funding structure, a ratio of depository funding over total assets, seeks to reflect banks’ exposure to rollover risks — the wholesale market’s refusal to roll over short-term funding, often based only on very mild negative information or rumors (Huang and Ratnovski, 2008).

And it seems to me that this last paragraph supports my argument.

Canadian banks are clearly the “positive outliers” among OECD banks in the ratio of depository funding to total assets. On this ratio, almost all large Canadian banks are in the top quartile of our sample. Anecdotal evidence also suggests that a higher fraction (than in the U.S.) of Canadian bank deposits are “core deposits,” i.e., transaction accounts and small deposits, which are “stickier” than large deposits.

One likely reason for Canadian banks’ firm grip of deposit supply is their ability to provide one-stop service in mutual funds and asset management. Unlike in the U.S. Canadian banks have been historically universal banks, and there is relatively less competition for household savings from other alternative investment vehicles.

This might be used as an argument to reduce the choices available to Canadians even further. You can bet the banks’ lobbyists will have copies of this paper tucked into their briefcases during the next revision of the Bank Act.

Regression results are shown in Table 5.

The main specification (columns 1, 4, 7, 10) shows that depository funding significantly and robustly explains bank performance during the credit turmoil, consistent with initial casual observations of the data. Balance sheet illiquidity is a good predictor of particularly rapid deteriorations in bank conditions (government intervention under extreme stress or equity decline above 85 percent). However, interestingly, the capital ratio appears as an insignificant explanatory variable.

Assets-to-capital multiple. In addition to risk-based capital, Canada uses an assets-to-capital multiple (inverse leverage ratio) calculated by dividing the institution’s total assets by total (tiers 1 and 2) capital.

This is not quite correct; the ACM includes off-balance-sheet elements in the numerator.

Finally, the Canadian mortgage market is relatively conservative, with a number of factors contributing to the prudence of mortgage lending (see Kiff, 2009). Less than 3 percent of mortgages are subprime and less than 30 percent of mortgages are securitized (compared with about 15 percent and 60 percent respectively in the United States prior to the crisis). Mortgages with a loan-to-value ratio of more than 80 percent need to be insured for the whole amount (rather than the portion above 80 percent as in the United States). Mortgages with a loan-to-value ratio of more than 95 percent cannot be underwritten by federally-regulated depository institutions. To qualify for mortgage insurance, mortgage debt service-to-income ratio should usually not exceed 32 percent and total debt service 40 percent of gross household income. Few fixed-rate mortgages have a contract term longer than five years.

I suggest the last point is the most critical one here. If the CMHC had not stepped up to buy securitized mortgages at the height of the crisis, how many of these mortgages have been rolled over? That would have been catastrophic. The liquidity advantage of Canadian banks is heightened by the fact that so much of their lending has a maximum term of five years.

This research is clearly still in its early stages, but the paper is vastly superior to the OSFI puff-piece published in May.

August 27, 2009

Friday, August 28th, 2009

FixedResets outperformed PerpetualDiscounts today, +13bp vs. -8bp, and grabbed the top three spots in the volume table. Volume eased off a little.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.3968 % 1,464.8
FixedFloater 5.73 % 4.01 % 59,675 18.58 1 0.1055 % 2,678.9
Floater 3.11 % 3.14 % 72,136 19.32 2 0.3968 % 1,829.9
OpRet 4.87 % -7.45 % 138,923 0.09 15 -0.0767 % 2,274.2
SplitShare 5.65 % -9.34 % 99,338 0.08 3 0.7265 % 2,062.3
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0767 % 2,079.5
Perpetual-Premium 5.70 % 5.13 % 70,564 2.40 4 0.1779 % 1,886.7
Perpetual-Discount 5.68 % 5.68 % 189,585 14.33 67 -0.0802 % 1,811.2
FixedReset 5.49 % 4.05 % 493,195 4.11 40 0.1346 % 2,105.8
Performance Highlights
Issue Index Change Notes
POW.PR.D Perpetual-Discount -2.77 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-27
Maturity Price : 21.45
Evaluated at bid price : 21.75
Bid-YTW : 5.82 %
PWF.PR.E Perpetual-Discount -1.71 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-27
Maturity Price : 22.94
Evaluated at bid price : 24.08
Bid-YTW : 5.72 %
CM.PR.A OpRet -1.36 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2009-09-26
Maturity Price : 25.50
Evaluated at bid price : 26.02
Bid-YTW : -14.21 %
BMO.PR.H Perpetual-Discount -1.13 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-27
Maturity Price : 22.77
Evaluated at bid price : 23.73
Bid-YTW : 5.57 %
MFC.PR.C Perpetual-Discount -1.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-27
Maturity Price : 19.73
Evaluated at bid price : 19.73
Bid-YTW : 5.72 %
SLF.PR.D Perpetual-Discount -1.06 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-27
Maturity Price : 19.68
Evaluated at bid price : 19.68
Bid-YTW : 5.66 %
BMO.PR.K Perpetual-Discount -1.01 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-27
Maturity Price : 23.38
Evaluated at bid price : 23.56
Bid-YTW : 5.60 %
BAM.PR.P FixedReset 1.07 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-30
Maturity Price : 25.00
Evaluated at bid price : 27.30
Bid-YTW : 5.35 %
CIU.PR.B FixedReset 1.08 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-01
Maturity Price : 25.00
Evaluated at bid price : 28.06
Bid-YTW : 3.95 %
CGI.PR.B SplitShare 1.11 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2009-09-26
Maturity Price : 26.00
Evaluated at bid price : 26.25
Bid-YTW : -9.77 %
GWO.PR.F Perpetual-Discount 1.11 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-10-30
Maturity Price : 25.00
Evaluated at bid price : 25.51
Bid-YTW : 5.55 %
MFC.PR.B Perpetual-Discount 1.13 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-27
Maturity Price : 20.54
Evaluated at bid price : 20.54
Bid-YTW : 5.68 %
CIU.PR.A Perpetual-Discount 1.23 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-27
Maturity Price : 20.51
Evaluated at bid price : 20.51
Bid-YTW : 5.64 %
BNA.PR.C SplitShare 1.47 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2019-01-10
Maturity Price : 25.00
Evaluated at bid price : 19.34
Bid-YTW : 7.83 %
Volume Highlights
Issue Index Shares
Traded
Notes
BNS.PR.T FixedReset 134,559 Desjardins bought three blocks from Commission Direct (who?) of 14,000 shares, 11,000 and 49,100, all at 27.70, then crossed 11,000 at the same price. RBC crossed 25,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-25
Maturity Price : 25.00
Evaluated at bid price : 27.68
Bid-YTW : 3.92 %
RY.PR.P FixedReset 73,650 RBC crossed 65,700 at 27.65.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-26
Maturity Price : 25.00
Evaluated at bid price : 27.62
Bid-YTW : 3.78 %
RY.PR.T FixedReset 47,392 RBC crossed 44,500 at 27.65.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-09-23
Maturity Price : 25.00
Evaluated at bid price : 27.56
Bid-YTW : 4.06 %
BAM.PR.B Floater 46,600 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-27
Maturity Price : 12.65
Evaluated at bid price : 12.65
Bid-YTW : 3.14 %
TD.PR.R Perpetual-Discount 39,750 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-27
Maturity Price : 24.78
Evaluated at bid price : 25.00
Bid-YTW : 5.66 %
POW.PR.C Perpetual-Discount 31,340 RBC crossed 25,000 at 24.75.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-27
Maturity Price : 24.32
Evaluated at bid price : 24.66
Bid-YTW : 5.96 %
There were 27 other index-included issues trading in excess of 10,000 shares.

DBRS Adjusts SplitShare Rating Methodology

Thursday, August 27th, 2009

DBRS has published its new Methodology: Rating Canadian Split Share Companies and Trusts, August 2009:

DBRS applies a combination of quantitative and qualitative analysis in its Preferred Share rating process. The quantitative analysis includes using an historical value-at-risk (VaR) framework to assess the likelihood of large portfolio losses based on historical data. DBRS uses VaR results together with qualitative analysis relating to general macroeconomic factors and to certain industries or companies to which the Portfolio will be exposed.

DRBS Preferred Share Rating Minimum Downside Protection Required* (Net of Agents’ Fees and Offering Expenses)
Rating Downside
Protection
(per DBRS)
Asset Coverage
(per HIMI Calculation)
Pfd-2 (high) 57% 2.3+:1
Pfd-2 50% 2.0:1
Pfd-2 (low) 44% 1.8-:1
Pfd-3 (high) 38% 1.6+:1
Pfd-3 33% 1.5:1
Pfd-3 (low) 29% 1.4+:1

Due to the unique risk of structured Preferred Shares (i.e., exposure to equity market fluctuations), DBRS will generally not assign a rating in the Pfd-1 range to Preferred Shares unless a de-leveraging mechanism is in place to provide greater protection on the repayment of Preferred Share principal. If a de-leveraging mechanism is in place, a portion of the Portfolio equal to the principal amount of Preferred Shares outstanding will be liquidated and invested in cash or cash equivalents if the Portfolio NAV declines by a predetermined percentage. In addition to the de-leveraging mechanism, there are other structural features to mitigate declines in downside protection that are addressed in this methodology, including the suspension of Capital Share distributions if the NAV drops below a predetermined level.

When rating split share transactions, DBRS will assign higher ratings to Issuers with a Preferred Share dividend coverage ratio suffi ciently greater than 100%.

Level of Diversification Adjustment to Minimum Downside Protection Required (Multiple)
Strong by industry and by number of securities 1.0x (i.e., no change)
Adequate by industry and by number of securities 1.0x to 1.2x
Adequate by number of securities, one industry 1.2x to 1.3x
Single entity 1.3x to 1.5x

In general, DBRS views the strategy of writing covered calls as an additional element of risk for Portfolios because of the potential for the Portfolio to give up unrealized gains when the option gets called and, at the same time, as part of the Portfolio’s mandate, the security may need to be repurchased in the market at the higher price. Furthermore, an option-writing strategy relies on the ability of the investment manager. The investment manager has a large amount of discretion to implement its desired strategy, and the resulting trading activity is not monitored as easily as the performance of a static Portfolio. Relying partially on the ability of the investment manager rather than the strength of a split share structure is a negative rating factor.

DBRS uses a variation of the historical VaR method to assess the likelihood of large declines in downside protection. VaR is the amount of loss that is expected to be exceeded with a given level of probability over a specifi ed time period. For example, if a Portfolio has a one-day VaR of $1 million with a probability of 5%, there is a 5% probability that the Portfolio will lose at least $1 million in a one-day period.

Alternatively, there is a 95% probability that the Portfolio will lose no more than $1 million in a one-day period. Using the historical method, daily returns are calculated for a given Portfolio using price data for a historical period of time specifi ed by DBRS. Daily returns are then sorted from lowest to highest. If there are 100 daily returns and a probability of 5% is desired, the 5% VaR would be approximately equal to the fifth worst return.

Why daily?

The key consideration in gathering historical data is the time period used. There is a balance between collecting enough returns and avoiding irrelevant data due to a major shift in the Portfolio’s environment that may decrease the value of using data observed prior to the shift. DBRS will generally aim to use ten years of historical data to calculate the probability of a large decline in downside protection. Shorter periods will be used if ten years of data is not available for a particular Portfolio; however, the comparison of split share Portfolios will always be completed using identical time periods.

The VaR methodology used here doesn’t make a whole lot of sense to me. Why daily data? Why ten year periods? It seems to me that it would make more sense, for instance, to use all available data over time periods that at the very least approximate the time period of the prediction … that is to say, if a bank-based split share has asset coverage of 2.0:1 and 5-years to maturity, what is the probability of a 5-year loss of 50% for the index? What’s the probability of a such a loss if there is only 1 year to maturity?

What they’re doing is:

(4) Using the initial amount of downside protection available to the Preferred Shares, determine the dollar loss required for the Preferred Shares to be in a loss position (i.e., asset coverage ratio is less than 1.0)

(5) Solve for the probability that will yield a one-year VaR at the appropriate dollar-loss amount for the
transaction.

Contrary to the methodology used, I will assert that the probability of a one-year loss of 50% in a diversified bank portfolios is GREATER THAN the probability of a five-year loss of 50%.

And as for:

(6) Determine the implied long-term bond rating by comparing the probability of default with the DBRS corporate cumulative default probability table.

(7) Link the implied bond rating to the appropriate Preferred Share rating using an assumption that the
preferred shares of a company should be rated two notches lower than the company’s issuer rating.

I’m gonna keep thinking! I’m gonna keep an open mind! But off the top of my head I can’t figure out why this makes sense.

DBRS Serves Up Massive SplitShare Surprise Review

Thursday, August 27th, 2009

DBRS has announced that it:

has today taken a range of rating actions on 54 structured preferred shares issued by 49 split share companies and trusts (the Issuers). All the trends are now Stable.

Each of the Issuers has invested in a portfolio of securities (the Portfolio) funded by issuing two classes of shares – dividend-yielding preferred shares or securities (the Preferred Shares) and capital shares or units (the Capital Shares). The main form of credit enhancement available to these Preferred Shares is a buffer of downside protection. Downside protection corresponds to the percentage decline in market value of the Portfolio that must be experienced before the Preferred Shares would be in a loss position. The amount of downside protection available to Preferred Shares will fluctuate over time based on changes in the market value of the Portfolio.

Of the 54 structured Preferred Share ratings updated today by DBRS, 32 have been upgraded, 18 have been confirmed and four have been downgraded. The majority of the ratings have been upgraded as a result of the strong gains in global equity markets over the past five months. In the first quarter of 2009, DBRS downgraded many of its Preferred Share ratings because of rapid and substantial declines in company net asset values (NAVs). From August 31, 2008, to March 9, 2009, the S&P/TSX Composite Index lost 45% of its value. Since March 9, the index has gained back more than half of those losses. As a result, many of the Preferred Shares that were downgraded in February or March have seen significant increases in NAV and are now being upgraded.

In addition to the recent rebound in equity markets, another factor in today’s rating changes is the release of an updated DBRS split share methodology, “Rating Canadian Split Share Companies and Trusts,” which details DBRS’s approach to rating Preferred Shares issued by split share companies and trusts. DRBS has applied a number of changes to strengthen its split share rating process,

DBRS Review Announced 2009-8-27
Ticker Old
Rating
Asset
Coverage
Last
PrefBlog
Post
HIMIPref™
Index
New
Rating
CGI.PR.B Pfd-1 3.4-:1
8/27
Capital Unit Dividend In Doubt SplitShare Pfd-1(low)
CGI.PR.C Pfd-1 3.4-:1
8/27
Capital Unit Dividend In Doubt Scraps Pfd-1(low)
BIG.PR.B Pfd-2 3.4-:1
8/20
Offering Closes None Pfd-2(high)
CBU.PR.A Pfd-2(low) 3.4+:1
8/26
Completes investment of issue proceeds None Pfd-2
DFN.PR.A Pfd-3 2.0-:1
8/14
Semi-Annual Financials Scraps Pfd-3(high)
UST.PR.A Pfd-2(low) 1.8+:1
8/26
Renews Issuer Bid None Pfd-3(high)
LFE.PR.A Pfd-4 1.6+:1
8/14
Semi-annual Financials Scraps Pfd-3(low)
FBS.PR.B Pfd-4 1.6-:1
8/20
Capital Unit Dividend Reinstated Scraps Pfd-3
ASC.PR.A Pfd-5(low) 1.1-:1
8/21
Downgraded Scraps Pfd-5
ALB.PR.A Pfd-4 N/A Downgraded Scraps Pfd-3
BSD.PR.A Pfd-5 1.0+:1
8/21
Downgraded Scraps Pfd-5
Trend
Stable
DF.PR.A Pfd-3(low) 1.7-:1
8/14
Semi-Annual Financials Scraps Pfd-3
DGS.PR.A Pfd-3(low) 1.7+:1
8/20
Downgraded None Pfd-3
ES.PR.B Pfd-5 N/A Downgraded None Pfd-4(low)
FCS.PR.A Pfd-4 1.4+:1
8/26
Downgraded None Pfd-3(low)
GFV.PR.A Pfd-3 1.6+:1
8/20
Downgraded None Pfd-3(high)
HPF.PR.A Pfd-2(low) Their Numbers Note Calculation Dispute Downgraded Scraps Pfd-2(low)
Stable
HPF.PR.B Pfd-5(low) Their Numbers Note Calculation Dispute Downgraded Scraps Pfd-5(low)
Trend
Stable
FIG.PR.A Pfd-5 In
Transition
Capital Units Rights Offering Scraps Pfd-4
PIC.PR.A Pfd-5 1.3-:1
8/20
Downgraded Scraps Pfd-4
NBF.PR.A Pfd-4(low) 1.4+:1
8/26
Capital Unit Dividend Reinstated None Pfd-3
SLS.PR.A Pfd-5(low) N/A Downgraded None Pfd-4
SNP.PR.V Pfd-4(high) N/A Downgraded None Pfd-3(low)
YLD.PR.A Pfd-5(low) 0.5+:1
1/30
Downgraded Scraps Pfd-5
TXT.PR.A Pfd-4(low) 1.3+:1
8/20
Downgraded None Pfd-4(high)
WFS.PR.A Pfd-4(low) 1.3+:1
8/20
Downgraded Scraps Pfd-4
ABK.PR.B Pfd-3 N/A Miniscule Call for Redemption None Pfd-3(high)
TDS.PR.B Pfd-3 2.3-:1
8/20
Downgraded Scraps Pfd-3(high)
FTN.PR.A Pfd-4 1.8+:1
8/14
Semi-Annual Financials Scraps Pfd-3(low)
FFN.PR.A Pfd-5(high) 1.6-:1
8/14
Semi-Annual Financials Scraps Pfd-4(high)
BXN.PR.B Pfd-3(high) N/A Downgraded None Pfd-3
BK.PR.A Pfd-3 2.0+:1
8/14
Semi-Annual Financials Scraps Pfd-3(high)
BSC.PR.A Pfd-3 N/A Dividend Policy Revised None Pfd-3(high)
SBC.PR.A Pfd-3 2.0+:1
8/20
Capital Unit Dividend Suspended Scraps Pfd-3(high)
PDV.PR.A Pfd-3 1.8-:1
8/14
Downgraded None Pfd-3(high)
BBO.PR.A Pfd-3(high) 2.1+:1
8/20
Downgraded None Pfd-2(low)
LBS.PR.A Pfd-3(low) 1.8+:1
8/20
Downgraded Scraps Pfd-3
RBS.PR.A N/A Dividend Policy Revised None Pfd-3
LCS.PR.A Pfd-4 1.5-:1
8/20
Downgraded None Pfd-3(low)

FDIC Publishes 2Q09 Quarterly Banking Profile

Thursday, August 27th, 2009

The Federal Deposit Insurance Corporation has released its Quarterly Banking Profile, Second Quarter 2009, with the following headlines:

  • Higher Loss Provisions Lead to a $3.7 Billion Net Loss
  • More Than One in Four Institutions Are Unprofitable
  • Charge-Offs and Noncurrent Loans Continue to Rise
  • Net Interest Margins Show Modest Improvement
  • Industry Assets Decline by $238 Billion
  • The Industry Posts a Net Loss for the Quarter
  • Non-interest Income Grows 10.6 Percent Year-Over-Year
  • Margins Improve at a Majority of Institutions
  • Net Charge-Off Rate Sets a Quarterly Record
  • Noncurrent Loan Rate Rises to Record Level
  • Institutions Continue to Add to Reserves
  • Overall Capital Levels Register Improvement
  • Industry Assets Decline for a Second Consecutive Quarter
  • Small Business Loan Balances Declined Over the Past 12 Months
  • Institutions Reduce Their Reliance on Nondeposit Funding Sources
  • “Problem List” Expands to 15-Year High

Fed Releases Proposed Risk-Based Capital Guidelines

Wednesday, August 26th, 2009

The Fed and related US agencies have released:

a proposed regulatory capital rule related to the Financial Accounting Standards Board’s adoption of Statements of Financial Accounting Standards Nos. 166 and 167. Beginning in 2010, these accounting standards will make substantive changes to how banking organizations account for many items, including securitized assets, that are currently excluded from these organizations’ balance sheets.
The agencies are issuing the proposal to better align regulatory capital requirements with the actual risks of certain exposures. Banking organizations affected by the new accounting standards generally will be subject to higher minimum regulatory capital requirements. The agencies’ proposal seeks comment and supporting data on whether a phase-in of the increase in regulatory capital requirements is needed. It also seeks comment and supporting data on the features and characteristics of transactions that, although consolidated under the new accounting standards, might merit an alternative capital treatment, as well as on the potential impact of the new accounting standards on lending, provisioning, and other activities.

Comments on all aspects of the proposed rule are due within 30 days after its publication in the Federal Register, which is expected shortly.

Note to OSFI: This is how professionals do it. They release a draft and ask for comments.

The text of the proposal explains:

The Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Board), Federal Deposit Insurance Corporation (FDIC), and the Office of Thrift Supervision (OTS) (collectively, the agencies) are requesting comment on a proposal to (i) modify their general risk-based and advanced risk-based capital adequacy frameworks to eliminate the exclusion of certain consolidated asset-backed commercial paper programs from risk-weighted assets and (ii) provide a reservation of authority in their general risk-based and advanced risk-based capital adequacy frameworks to permit the agencies to require banking organizations to treat entities that are not consolidated under accounting standards as if they were consolidated for risk-based capital purposes, commensurate with the risk relationship of the banking organization to the structure. The agencies are issuing this proposal and request for comment to better align capital requirements with the actual risk of certain exposures and to obtain information and views from the public on the effect on regulatory capital that will result from the implementation of the Financial Accounting Standard Board’s (FASB) Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140 and Statement of Financial Accounting Standards No 167, Amendments to FASB Interpretation No. 46(R).

They point out:

In the case of some structures that banking organizations were not required to consolidate prior to the 2009 GAAP modifications, the recent turmoil in the financial markets has demonstrated the extent to which the credit risk exposure of the sponsoring banking organization to such structures (and their related assets) has in fact been greater than the agencies estimated, and more associated with non-contractual considerations than the agencies had expected. For example, recent performance data on structures involving revolving assets [footnote] show that banking organizations have often provided non-contractual (implicit) support to prevent senior securities of the structure from being downgraded, thereby mitigating reputational risk and the associated alienation of investors, and preserving access to cost-efficient funding.

Footnote: Typical structures of this type include securitizations that are backed by credit card or HELOC receivables, single and multi-seller ABCP conduits, and structured investment vehicles.

Question 2: Are there features and characteristics of securitization transactions or other transactions with VIEs, other SPEs, or other entities that are more or less likely to elicit banking organizations’ provision of non-contractual (implicit) support under stressed or other circumstances due to reputational risk, business model, or other reasons? Commenters should describe such features and characteristics and the methods of support that may be provided. The agencies are particularly interested in comments regarding credit card securitizations, structured investment vehicles, money market funds, hedge funds, and other entities that are likely beneficiaries of non-contractual support.

It is of particular interest that they are particularly interested in money market funds as beneficiaries of non-contractual support. OSFI refuses to consider the question. I have repeatedly urged that money market funds be considered securitizations; another article on the topic is, by the way, in press.

Of further interest to Canadians is:

The agencies propose to eliminate existing provisions in the risk-based capital rules that permit a banking organization that is required to consolidate under GAAP an ABCP program for which the banking organization acts as sponsor, to exclude the consolidated ABCP program assets from risk-weighted assets and instead assess the risk-based capital requirement against any contractual exposures of the organization arising from such ABCP programs. The agencies also propose to eliminate the associated provision in the general risk-based capital rules (incorporated by reference in the advanced approaches) that excludes from tier 1 capital the minority interest in a consolidated ABCP program not included in a banking organization’s riskweighted assets.

The agencies initially implemented these provisions in the general risk-based capital rules in 2004 in response to changes in GAAP that required consolidation of certain ABCP conduits by sponsors. The provisions were driven largely by the agencies’ belief at the time that banking organizations sponsoring ABCP conduits generally faced limited risk exposures to ABCP programs, because these exposures generally were confined to the credit enhancements and liquidity facility arrangements banking organizations provide to these programs.

Additionally, the agencies believed previously that operational controls and structural provisions, as well as over-collateralization or other credit enhancements provided by the companies that sell assets into ABCP programs, could further mitigate the risk to which sponsoring banking organizations were exposed. However, in light of the increased incidence of banking organizations providing non-contractual support to these programs, as well as the general credit risk concerns discussed above, the agencies have reconsidered the appropriateness of excluding consolidated ABCP program assets from risk-weighted assets and have determined that continuing the exclusion is no longer justified. Under the proposal, if a banking organization is required to consolidate an entity associated with an ABCP program under GAAP, it must hold regulatory capital against the assets of the entity. It would not be permitted to calculate its risk-based capital requirements with respect to the entity based on its contractual exposure to the entity.

August 26, 2009

Wednesday, August 26th, 2009

The FDIC is reducing the capitalization requirements for private equity firms buying banks:

The FDIC board approved the rules today at a meeting in Washington, agreeing to lower to 10 percent from the proposed 15 percent the Tier 1 capital ratio private-equity investors must maintain after buying a bank.

This issue was last discussed on PrefBlog on July 28.

I’m not usually a big fan of bureaucrats, but Jed Rakoff, the US District Judge hearing the SEC / BAC / MER case is saying some unusually sensible things:

U.S. District Judge Jed Rakoff has twice refused to approve the Securities and Exchange Commission’s $33 million settlement over the bank’s failure to better disclose bonuses it had authorized Merrill Lynch & Co, which it was acquiring, to pay.

Rakoff has faulted the SEC for appearing to let the bank off too easily, and dismissed as nonsensical why the bank would agree to pay anything without admitting it had done anything wrong.

Hear, hear, Mr. Rakoff! Regulators are quick to tout their negotiated settlements, but a negotiated settlement without admission of guilt is either a license to cheat or simple regulatory extortion. The politicians who ultimately bear responsibility for the conduct of their regulators should revise legislation such that negotiated settlements are banned.

Not content with saying one sensible thing, Judge Rakoff continued:

In the Bank of America case, executives said they relied on lawyers’ judgments as to what bonus details should be revealed. Yet the bank did not waive attorney-client privilege, meaning the names of the decision makers remained secret. An exasperated Judge Rakoff questioned why the SEC would agree to this.

“If the company does not waive the privilege,” the Manhattan judge wrote, “the culpability of both the corporate officer and the company counsel will remain beyond scrutiny. This seems so at war with common sense.”

The SEC’s position, if it has been reported correctly by Reuters, is nothing short of insane. Everything’s OK as long as you sought legal counsel? This implies that the SEC has out-sourced the interpretation, prosecution and judgement of securities law to any two-bit shyster with a law degree who happens to be consulted. By the SEC’s reasoning, if I put every cent of client money into sub-prime paper and lose the whole whack, I should be able to claim that I consulted the rating agencies and so did nothing wrong!

Where is the responsibility here? Regardless of what was discussed with whom, the fact is that BofA – and BofA’s executives – knew X and disclosed Y. The consultation of legal advisors is irrelevant to the question of whether X is sufficiently close to Y to meet their legal obligations; the consultation is not wholly irrelevant to personal responsibility, but it is merely a detail.

The preferred share market halted its decline today, with FixedResets up 11bp and PerpetualDiscounts eking out a 6bp gain. This left PerpetualDiscounts yielding 5.66%, equivalent to 7.92% interest at the standard equivalency factor of 1.4x. Long Corporates are a little under 6%, call it 5.95%, so the pre-tax interest-equivalent spread is now near-as-dammit to 200bp, widening 12bp from August 19 and bang on what I have come to call ‘Credit Crunch Normal’.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.0000 % 1,459.0
FixedFloater 5.74 % 4.02 % 59,491 18.57 1 0.7443 % 2,676.1
Floater 3.13 % 3.15 % 71,999 19.29 2 0.0000 % 1,822.7
OpRet 4.86 % -8.00 % 143,642 0.09 15 0.0995 % 2,275.9
SplitShare 5.67 % 2.86 % 99,666 0.62 3 0.1957 % 2,047.4
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0995 % 2,081.1
Perpetual-Premium 5.71 % 5.15 % 70,907 2.61 4 -0.3939 % 1,883.3
Perpetual-Discount 5.67 % 5.66 % 190,026 14.33 67 0.0578 % 1,812.7
FixedReset 5.50 % 4.07 % 496,656 4.11 40 0.1128 % 2,103.0
Performance Highlights
Issue Index Change Notes
IGM.PR.A OpRet -2.21 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2009-09-25
Maturity Price : 26.00
Evaluated at bid price : 26.61
Bid-YTW : -11.94 %
MFC.PR.B Perpetual-Discount -1.65 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-26
Maturity Price : 20.31
Evaluated at bid price : 20.31
Bid-YTW : 5.74 %
CU.PR.A Perpetual-Premium -1.56 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-03-31
Maturity Price : 25.00
Evaluated at bid price : 25.20
Bid-YTW : 5.47 %
PWF.PR.G Perpetual-Discount -1.50 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-26
Maturity Price : 24.57
Evaluated at bid price : 24.94
Bid-YTW : 5.97 %
HSB.PR.C Perpetual-Discount -1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-26
Maturity Price : 22.59
Evaluated at bid price : 22.76
Bid-YTW : 5.69 %
BMO.PR.H Perpetual-Discount -1.03 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-26
Maturity Price : 22.90
Evaluated at bid price : 24.00
Bid-YTW : 5.50 %
GWO.PR.H Perpetual-Discount -1.00 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-26
Maturity Price : 21.44
Evaluated at bid price : 21.73
Bid-YTW : 5.66 %
TCA.PR.Y Perpetual-Discount 1.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-26
Maturity Price : 46.21
Evaluated at bid price : 49.50
Bid-YTW : 5.64 %
MFC.PR.E FixedReset 1.18 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-19
Maturity Price : 25.00
Evaluated at bid price : 26.61
Bid-YTW : 4.16 %
SLF.PR.F FixedReset 1.19 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-30
Maturity Price : 25.00
Evaluated at bid price : 27.10
Bid-YTW : 4.03 %
TCA.PR.X Perpetual-Discount 1.22 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-26
Maturity Price : 46.40
Evaluated at bid price : 49.85
Bid-YTW : 5.59 %
BAM.PR.J OpRet 1.41 % YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2018-03-30
Maturity Price : 25.00
Evaluated at bid price : 25.10
Bid-YTW : 5.50 %
NA.PR.L Perpetual-Discount 1.46 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-26
Maturity Price : 21.51
Evaluated at bid price : 21.51
Bid-YTW : 5.69 %
BAM.PR.I OpRet 1.56 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2009-09-25
Maturity Price : 25.75
Evaluated at bid price : 26.00
Bid-YTW : 3.66 %
HSB.PR.D Perpetual-Discount 1.76 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-26
Maturity Price : 22.35
Evaluated at bid price : 22.50
Bid-YTW : 5.65 %
PWF.PR.E Perpetual-Discount 2.64 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-26
Maturity Price : 23.12
Evaluated at bid price : 24.50
Bid-YTW : 5.60 %
Volume Highlights
Issue Index Shares
Traded
Notes
BNS.PR.T FixedReset 303,051 Desjardins crossed three blocks of 100,000 shares each at 27.70. Nice tickets!
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-25
Maturity Price : 25.00
Evaluated at bid price : 27.66
Bid-YTW : 3.94 %
RY.PR.R FixedReset 164,107 Desjardins bought two blocks from National, of 49,400 and 23,500 shares, both at 27.50. RBC crossed 66,100 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-26
Maturity Price : 25.00
Evaluated at bid price : 27.46
Bid-YTW : 3.92 %
TD.PR.G FixedReset 126,900 Desjardins bought three blocks from National, one of 20,900 and two of 25,000, all at 27.65; then crossed 20,000 at 27.70. YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-30
Maturity Price : 25.00
Evaluated at bid price : 27.65
Bid-YTW : 3.95 %
RY.PR.B Perpetual-Discount 109,500 RBC crossed 100,000 at 21.70.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-26
Maturity Price : 21.39
Evaluated at bid price : 21.70
Bid-YTW : 5.43 %
CM.PR.L FixedReset 103,163 RBC bought three blocks from National: 10,000 shares, 29,500 and 20,000, all at 27.80.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-30
Maturity Price : 25.00
Evaluated at bid price : 27.76
Bid-YTW : 4.09 %
CM.PR.P Perpetual-Discount 102,300 RBC crossed blocks of 75,000 and 19,400 shares, both at 24.40.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-26
Maturity Price : 23.11
Evaluated at bid price : 24.40
Bid-YTW : 5.63 %
CM.PR.A OpRet 100,041 Desjardins crossed three blocks, each at 26.20: 50,000 shares, 25,000 and 20,000.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2009-09-25
Maturity Price : 25.50
Evaluated at bid price : 26.38
Bid-YTW : -29.27 %
There were 39 other index-included issues trading in excess of 10,000 shares.

August 25, 2009

Tuesday, August 25th, 2009

Bernanke has been nominated for a second term as Fed Chairman:

Federal Reserve Chairman Ben S. Bernanke, who led the biggest expansion of the central bank’s power in its 95-year history to battle the worst economic slump since the Great Depression, was nominated to a second term today by President Barack Obama.

“Ben approached a financial system on the verge of collapse with calm and wisdom, with bold action and out-of-the box thinking that has helped put the brakes on our economic freefall,” Obama said in Martha’s Vineyard, Massachusetts, with Bernanke at his side.

In his acknowledgement of the nomination, Bernanke noted that Central Banking has been more exciting than usual lately:

It has been a particular privilege for me to serve with extraordinary colleagues throughout the Federal Reserve System. They have demonstrated remarkable resourcefulness, dedication, and stamina under trying conditions. Through the long nights and weekends and the time away from their families, they have never lost sight of the critical importance of the work of the Fed for the economic well-being of all Americans. I am deeply grateful for their efforts.

The old debate about Central Bank transparency is heating up:

A federal judge on Monday ruled against an effort by the U.S. Federal Reserve to block disclosure of companies that participated in and securities covered by a series of emergency funding programs as the global credit crisis began to intensify.

In a 47-page opinion, Chief District Judge Loretta Preska of the federal court in Manhattan said the central bank failed to show that disclosure would cause borrowers in the Federal Reserve System to suffer “imminent competitive harm,” by stigmatizing them for using Fed lending programs.

This has been a bone of contention since at least 1825.

An acquaintance wishes to transfer stock from his full service account at RBC to TD Waterhouse. This issue trades on the TSX, is not particularly illiquid, the position is fully paid for and therefore the stock should be segregated. He has been advised that the transfer should take four to six weeks.

Of all the sleazy tactics used by the brokerage industry, delays on account transfer have to count among the sleaziest; it’s totally unnecessary – any delay beyond three business days (normal settlement time if the client sold the position) has no explanation other than a deliberate corporate policy of delay. A list of RBC Wealth Management key executives shows that responsibility for the deliberately shitty client service at their firm lies with:

  • M. George Lewis
  • David Agnew
  • John Taft
  • Michael J. Lagopoulos
  • John Montalbano
  • Brenda Vince
  • Dan Chornous

Any of these individuals is invited to write in – or, better and more likely, write an essay for public consumption – and explain why they are not sleazebags. Note that ‘because everybody else does it’ is not considered an excuse even in kindergarten.

It’s mostly the clients’ fault anyway … if all such instances of deliberate incompetence were met with a barrage of angry letters and genuine loss of business – as opposed to the usual ineffectual grumbling and occasional abuse of helpless front-line staff – things would change. And if pigs had wings, they could fly.

PerpetualDiscounts eased off again today in their second down day of the month, bringing total return since July 31 to a miserable +6.36%. I will not indulge myself with the usual journalistic pseudo-wisdom and claim it was due to profit-taking … the market went down because it felt like going down, OK? Volume continued high, with straights again dominating the table of volume highlights.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.5185 % 1,459.0
FixedFloater 5.78 % 4.06 % 59,866 18.51 1 1.6757 % 2,656.3
Floater 3.13 % 3.15 % 71,100 19.29 2 0.5185 % 1,822.7
OpRet 4.86 % -8.18 % 144,875 0.09 15 -0.3231 % 2,273.7
SplitShare 5.68 % 2.77 % 102,710 0.08 3 0.0700 % 2,043.4
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.3231 % 2,079.1
Perpetual-Premium 5.69 % 4.02 % 70,444 0.08 4 0.9442 % 1,890.8
Perpetual-Discount 5.68 % 5.66 % 190,291 14.33 67 -0.2367 % 1,811.6
FixedReset 5.51 % 4.10 % 499,696 4.12 40 -0.1975 % 2,100.6
Performance Highlights
Issue Index Change Notes
HSB.PR.D Perpetual-Discount -4.62 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-25
Maturity Price : 21.99
Evaluated at bid price : 22.11
Bid-YTW : 5.75 %
RY.PR.W Perpetual-Discount -2.01 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-25
Maturity Price : 22.26
Evaluated at bid price : 22.41
Bid-YTW : 5.50 %
RY.PR.H Perpetual-Discount -1.91 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-23
Maturity Price : 25.00
Evaluated at bid price : 25.12
Bid-YTW : 5.62 %
NA.PR.L Perpetual-Discount -1.85 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-25
Maturity Price : 21.20
Evaluated at bid price : 21.20
Bid-YTW : 5.77 %
PWF.PR.K Perpetual-Discount -1.68 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-25
Maturity Price : 21.36
Evaluated at bid price : 21.63
Bid-YTW : 5.77 %
HSB.PR.C Perpetual-Discount -1.63 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-25
Maturity Price : 22.81
Evaluated at bid price : 23.00
Bid-YTW : 5.63 %
PWF.PR.E Perpetual-Discount -1.57 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-25
Maturity Price : 22.85
Evaluated at bid price : 23.87
Bid-YTW : 5.77 %
CIU.PR.B FixedReset -1.54 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-01
Maturity Price : 25.00
Evaluated at bid price : 27.57
Bid-YTW : 4.37 %
PWF.PR.L Perpetual-Discount -1.33 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-25
Maturity Price : 22.10
Evaluated at bid price : 22.22
Bid-YTW : 5.80 %
BMO.PR.J Perpetual-Discount -1.31 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-25
Maturity Price : 21.09
Evaluated at bid price : 21.09
Bid-YTW : 5.37 %
RY.PR.F Perpetual-Discount -1.29 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-25
Maturity Price : 20.63
Evaluated at bid price : 20.63
Bid-YTW : 5.43 %
BAM.PR.J OpRet -1.28 % YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2018-03-30
Maturity Price : 25.00
Evaluated at bid price : 24.75
Bid-YTW : 5.71 %
CM.PR.I Perpetual-Discount -1.23 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-25
Maturity Price : 20.80
Evaluated at bid price : 20.80
Bid-YTW : 5.72 %
POW.PR.B Perpetual-Discount -1.13 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-25
Maturity Price : 22.53
Evaluated at bid price : 22.79
Bid-YTW : 5.94 %
MFC.PR.E FixedReset -1.13 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-19
Maturity Price : 25.00
Evaluated at bid price : 26.30
Bid-YTW : 4.42 %
BAM.PR.M Perpetual-Discount -1.01 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-25
Maturity Price : 18.60
Evaluated at bid price : 18.60
Bid-YTW : 6.51 %
RY.PR.E Perpetual-Discount -1.00 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-25
Maturity Price : 20.71
Evaluated at bid price : 20.71
Bid-YTW : 5.47 %
CM.PR.G Perpetual-Discount 1.09 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-25
Maturity Price : 23.81
Evaluated at bid price : 24.05
Bid-YTW : 5.67 %
ELF.PR.F Perpetual-Discount 1.31 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-25
Maturity Price : 20.83
Evaluated at bid price : 20.83
Bid-YTW : 6.46 %
ELF.PR.G Perpetual-Discount 1.33 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-25
Maturity Price : 19.01
Evaluated at bid price : 19.01
Bid-YTW : 6.35 %
BMO.PR.H Perpetual-Discount 1.46 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-25
Maturity Price : 23.01
Evaluated at bid price : 24.25
Bid-YTW : 5.43 %
PWF.PR.G Perpetual-Discount 1.48 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2011-08-16
Maturity Price : 25.00
Evaluated at bid price : 25.32
Bid-YTW : 5.46 %
POW.PR.D Perpetual-Discount 1.64 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-25
Maturity Price : 22.16
Evaluated at bid price : 22.29
Bid-YTW : 5.68 %
BAM.PR.G FixedFloater 1.68 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-25
Maturity Price : 25.00
Evaluated at bid price : 18.81
Bid-YTW : 4.06 %
CU.PR.B Perpetual-Premium 2.79 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2009-09-24
Maturity Price : 25.75
Evaluated at bid price : 25.76
Bid-YTW : 4.02 %
Volume Highlights
Issue Index Shares
Traded
Notes
BAM.PR.N Perpetual-Discount 73,656 Nesbitt crossed 24,700 at 18.70.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-25
Maturity Price : 18.51
Evaluated at bid price : 18.51
Bid-YTW : 6.54 %
RY.PR.Y FixedReset 62,187 Nesbitt crossed 40,000 at 27.50.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-12-24
Maturity Price : 25.00
Evaluated at bid price : 27.47
Bid-YTW : 4.08 %
BMO.PR.L Perpetual-Premium 48,109 Desjardins bought 16,300 from Nesbitt at 24.95.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-25
Maturity Price : 24.68
Evaluated at bid price : 24.90
Bid-YTW : 5.85 %
BAM.PR.M Perpetual-Discount 44,593 Nesbitt crossed 29,300 at 18.75.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-25
Maturity Price : 18.60
Evaluated at bid price : 18.60
Bid-YTW : 6.51 %
RY.PR.N FixedReset 39,330 RBC crossed 32,600 at 27.60.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-26
Maturity Price : 25.00
Evaluated at bid price : 27.52
Bid-YTW : 3.86 %
BNS.PR.N Perpetual-Discount 37,735 Scotia bought 11,700 from Jennings Capital Inc. (who?) at 23.89.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-08-25
Maturity Price : 23.70
Evaluated at bid price : 23.89
Bid-YTW : 5.55 %
There were 54 other index-included issues trading in excess of 10,000 shares.

2009 Jackson Hole Symposium

Tuesday, August 25th, 2009

The Kansas City Fed has released the proceedings of the 2009 Jackson Hole Symposium on Financial Stability and Macroeconomic Policy.

Ricardo J. Caballero, last mentioned on PrefBlog in connection with tail-risk insurance, presented a paper titled The “Surprising” Origin of Financial Crises: A Macroeconomic Policy Proposal, which, rather oddly, has been encrypted. He argues that three elements are necessary to produce a financial crisis:

  • Negative Surprise (not that sub-prime blew up, but that linkages were so strong and that transmission was so virulent)
  • Excessive Aggregation of Risk in systemically important leveraged institutions
  • Slow Policy Response

Dr. Caballero proposes the establishment of Tradable Insurance Credits, issued and backed by the Central Bank. In normal times, these would carry no pay-off; in times of crisis, the Central Bank would make them convertible and holders would have the option of, essentially, converting them into Credit Default Swaps. This addresses the risk of Knightian uncertainty that was addressed in Dr. Caballero’s prior proposals.

Stephen Cecchetti, Marion Kohler & Christian Upper presented a paper titled Financial Crises and Economic Activity, also encrypted. Pretty gloomy stuff – he suggests that even in a best-case scenario, it will take years to make up for the current loss of output. Dr. Cecchetti was last mentioned on PrefBlog on April 10, 2008.

Carl Walsh presented a paper titled Using Monetary Policy to Stabilize Economic Activity, in which he suggests that, overall, Price Level Targetting is superior to Inflation Targetting, due to its automatic stabilizing influence. He cautions, however, that changing horses in mid-stream (mid-raging-torrent might be a better metaphor in this economy) is not advisable. Price Level Targetting was the subject of the BoC Spring 2009 Review and the paper’s respondant was BoC Governor Mark Carney.

Auerbach & Gale presented Activist Fiscal Policy to Stabilize Economic Activity. They explicity exclude “automatic stabilizers” (e.g., Unemployment Insurance, Welfare) from the discussion, focussing more on discretionary fiscal stimulus.

Update, 2009-8-26: Mark Carney’s response to the Walsh paper have been published by BIS.

A kind soul has sent me an unencrypted version of the Caballero paper:

Coval et. al. (2008) argue that the correlation between economic catastrophe and default by highly rated structured products went largely unappreciated by investors, who seemed to treat ratings as a sufficient statistic for pricing. Highly rated single–name CDSs and structured product tranches traded at very similar spreads (their data is for September 2004 to September 20 2007), despite the fact that on average the structured product tranche would likely default in a much worse macroeconomic state.

Regardless of whether this correlation was underappreciated or not, the systemic consequence of this risk was that highly leveraged institutions were bearing more aggregate risk than would have been thought from simply observing the ratings of their assets. Having the highly leveraged financial sector of the economy holding the risk with respect to an aggregate surprise proved to be a recipe for disaster.

A standard advice stemming from the moral hazard camp is to subject shareholders to exemplary punishment (the words used by Secretary Paulson during the Bear Stearns intervention). This is sound advice in the absence of a time dimension within crises. With no time dimension, all shareholders were part of the boom that preceded the crisis and as soon as the bailout takes place the crisis is over; the next concern is not to repeat the excesses that led to the crisis. Punishing shareholders means punishing those that led to the current crisis, and it is better that they learn the lesson sooner rather than later, the righteous speech goes.

However, this advice can backfire when we add back the time dimension. Now, the expectation that shareholders will be exemplarily punished if the crisis worsens delays investors’ decision to inject much needed capital. As a concrete example, sovereign wealth funds were much less eager to inject equity into the U.S. financial system after the Bear Stearns exemplary punishment policy (March 2008) than they were before the policy, as illustrated in Figure 6. Some of the capital injections that did take place after this, such as UFJ Mitsubishi’s $9 billion investment in Morgan Stanley in October 2008, only took place after the U.S. Treasury assured them that the investment would not be wiped out in a future government intervention. Conversely, destabilizing speculators and shortsellers saw the value of their strategy reinforced by the policy of exemplary punishment.23 Moreover, from the point of view of future crises, memories of this intervention may also hamper any chance of a private sector resolution as new equity will be less likely to attempt to arbitrage the initial fire sales. In other words, once the within-crisis time dimension is considered, the anti-moral hazard strategy may morph into a current and future crisis enzyme.

New Issue: DC FixedReset 6.75%+410

Tuesday, August 25th, 2009

Issue: Dundee Corporation Cumulative 5-Year Rate Reset First Preference Shares Series 2

Size: $100-million (=4-million shares) plus greenshoe $15-million (=600,000 shares)

Dividends: 6.75% on par value to first Exchange Date, then resets to 5-Year Canada +410bp. Dividends are cumulative. First dividend $0.49469 payable 2009-12-31.

Exchange Dates: 2014-9-30 and every five years thereafter.

Convertible: Every Exchange Date to and from Series 3, which pay 3-month Bills + 410, reset quarterly.

Redeemable: Every Exchange Date at 25.00. There is also a Special Redemption Right. The Series 3 Floaters are redeemable every Exchange Date at 25.00, at all other times 25.50, and also have a Special Redemption Right.

Special Redemption Right: If anything comes up that would allow the preferred shareholders to vote (e.g., an amalgamation) then the company has a redemption right: $26.25 if redeemed before 2010-9-30; redemption price declines by $0.25 annually until 2014-9-30; redeemable at $25.00 thereafter. Series 3 Floaters are redeemable at 25.00 in such an instance.

Credit Ratings: S&P: P-3; DBRS: Pfd-3(low)

Closing: 2009-9-15

Update: It is my understanding that due to strong demand the deal has been increased to 4.6-million shares (=$115-million) plus a 0.6-million share greenshoe (=$15-million).