PrefBlog

CIT Group has slightly amended its bankruptcy terms.

Willem Buiter is frequently quoted on PrefBlog … and now he’s got a new job!:

Citigroup Inc. hired former Bank of England policy maker Willem Buiter as its chief economist to fill the position left vacant by Lewis Alexander’s move to the U.S. Treasury eight months ago.

The appointment by the bank, which is 34 percent owned by the U.S. government, puts an academic known for his outspokenness in its most senior economics position. In 2008, Buiter told the Federal Reserve’s annual symposium in Jackson Hole, Wyoming, that the central bank pays too much heed to the concerns of Wall Street.

The Tobin Tax idea seems to be getting some press attention:

U.K. Prime Minister Gordon Brown said on Nov. 7 that a transaction tax might compensate for the billions of dollars that the public has spent on bank bailouts. Government officials in France, Germany and Austria have voiced their backing. U.S. Treasury Secretary Timothy Geithner answered Brown a day later, saying the tax was not something the U.S. would support. House Speaker Nancy Pelosi, on the other hand, says the idea has “substantial currency” among congressional Democrats.

As noted on November 11, Gordon Brown mentioned the idea, but not in a manner to indicate either support or opposition.

Canadian Bond Indices is now offering live quotes on selected bonds. The link has been added to the “Canadian Fixed Income Data” category on the right hand panel of PrefBlog.

The Canadian preferred share market closed the month on a high note, with PerpetualDiscounts up 9bp and FixedResets gaining 5bp, on moderate volume. PerpetualDiscounts now yield 5.82%, equivalent to 8.15% interest at the standard equivalency factor of 1.4x. Long Corporates now yield about 5.9%, so the pre-tax interest-equivalent spread (also called the Seniority Spread, around here, anyway) is now about 225bp, a 10bp tightening from the 235bp reported on November 25.

Credit Default Swaps are proving to be less predictable than hoped:

Thomson provided the first test of the procedures for settling contracts triggered by a restructuring in Europe when it said in August it was deferring payments on $72.5 million of 6.05 percent private notes due this year.

The system for restructurings uses multiple auctions that set different payouts based on swap expiration dates. Dealers couldn’t settle the Thomson contracts with simpler failure-to- pay procedures that produce one recovery value because they were unable to prove the electronics company defaulted.

Asked in a July conference call with investors whether Thomson still owed the money, Chief Executive Officer Frederic Rose responded, “Since I am not a qualified lawyer, I prefer not to answer that question.” Marine Boulot, a Thomson spokeswoman in Paris, declined to comment.

To determine the size of the payouts on contracts covering $2 billion in debt, bonds and loans were split by maturity date ranges into three so-called buckets and sold at auction.

Contracts that expired on June 20, 2012 — the first bucket’s latest date — sold for 96.25 percent of the face amount, meaning swap holders received 3.75 percent of the amount covered. Swaps expiring a day later paid 34.875 percent because the debt in that bucket went for 65.125 percent.

Holders of June 20 swaps covering 10 million euros in debt got 375,000 euros, while those with June 21 contracts received almost 3.5 million euros. Swaps that terminated after Oct. 24, 2014, paid the most, 36.75 percent.

The disparity was a result of too few securities in the first bucket to settle swaps, according to Matthew Leeming, a London-based strategist at Barclays. “An imbalance of supply and demand for the deliverables can affect the recovery rate,” he said in a note.

Because they were part of industry indexes, swaps referencing the company “dwarfed the amount of Thomson debt,” said Teo Lasarte, an analyst at Bank of America-Merrill Lynch in London.

Canadian preferred shares had a good day, with PerpetualDiscounts gaining 9bp and FixedResets up 7bp. Volume was moderate.

Apparently, having the world’s most intrusive bonus rules is a Good Thing:

U.K. banks face the toughest bonus regime in the world if proposals outlined in a government- commissioned report are accepted, according to its author, Morgan Stanley Senior Adviser David Walker.

Banks should delay bonus payments for as much as five years and have the power to “claw back” awards, Walker, 69, said in his final report on improvements to U.K. corporate governance released today. The government strongly supports Walker’s recommendations “and will take steps to implement them as soon as possible,” according to a statement from Chancellor of the Exchequer Alistair Darling.

Meanwhile, Andrew Willis of The Globe and Mail speculates that the nudge-and-wink Canadian version might lead to new independent dealers:

As this bonus season begins, there are enormous tensions within the ranks of the six largest and most profitable houses. The bank-owned firms had great years. Yet it’s not at all clear the wealth will be shared with employees the way it was in the past. Bonus cheques may be trimmed, even chopped.

Bank executives, and the folks in HR departments, are taking a New England Patriots approach to talent: They are concluding it’s the franchise, the massive machine, that earns the profits, not any one individual. This attitude does not sit well with the more self-assured of bankers and traders.

To a large extent this is true; investment banking is simply the latest area of investment activities to get hit. The banks can, if they wish, create good products run by superb staff, but it doesn’t matter. Since moving into brokerage and wealth management, they have found that they can make just as much money with barely acceptable products run by high school students, such is their franchise.

I’m not sure where this will end – and it might not end. An internal contradiction can last a long time and either degrade slowly or spectacularly. It’s interesting to speculate just what might trigger a spectacular paradigm shift, but I haven’t got any answers for that one. Bre-X didn’t do it. Nortel didn’t do it. And small shops sell out to big shops when the proprietors retire, which takes care of the slow pathway.

Ultimately, a reversal of the process will occur only when performance actually becomes a selling feature – which isn’t going to happen any time soon. Avner Mandelman had a good piece in Saturday’s Globe regarding what is actually being sold. One thing that would be good would be increased regulatory emphasis on performance: investment managers are required to state their experience in prospectuses, but not performance. Many trading rules in UMIR are designed to protect morons – simply rescinding those would be a great leap forward. But guess which segment of the industry has captured the regulators – nothing will happen.

Some might argue that the consequences of an incompetent culture have already been felt, in the shape of the Credit Crunch. Maybe. It is very hard to read the SEC Inspector-General’s report on Bear Stearns and not get the feeling that the smiley-boys had taken over management completely and that they deserved to fail.

Not much action in the preferred share market on American Thanksgiving, but up-days are always welcome! PerpetualDiscounts gained 4bp and FixedResets were up 6bp.

Connecticut is claiming that its pension fund portfolio managers are a pack of incompetent time-servers:

Connecticut plans to join Ohio in suing Standard & Poor’s, Moody’s Corp. and Fitch Ratings for their “negligent, reckless and incompetent work” in grading investments made by state pension funds, according to Attorney General Richard Blumenthal.

Connecticut and “a number of other states” are preparing legal action against the credit-rating companies, Blumenthal said today in a Bloomberg Television interview. Ohio Attorney General Richard Cordray sued the debt raters this month on behalf of five Ohio public employee retirement and pension funds, saying “improper” ratings cost the funds more than $457 million.

Geez, you know, sometimes I think I’d like to be a portfolio manager at a big firm. Nothing to do all day but suck arse and pass the blame …

The PerpetualDiscount winning streak came to an end today, albeit just barely. Its last down day was October 28, as it then rose for nineteen consecutive days, gaining 2.99% as yields fell from 6.05% to 5.88% (quick check: 299bp total return with 6.05% yield for 27 days including weekends implies price change of 299-45 = 254bp, on 17bp yield change, implies Modified Duration of 14.94 years, which in turn implies a yield of 6.69%. Well … close enough. I’m ignoring convexity and discussing an index, after all).

Anyway, PerpetualDiscounts now yield 5.90%, equivalent to 8.26% interest at the standard equivalency factor of 1.4x. Long Corporates now yield about 5.9%, so the pre-tax interest-equivalent spread (also called the seniority spread, around here, anyway) is now about 235bp, a modest but welcome tightening from the 240bp reported on November 19.