PrefBlog

OSFI published its Report on Plans and Priorities today. I continue to be amused by their performance targets: under the programme target “Accurate risk assessments”, they set a target of 70% for “Percentage of knowledgeable observers who agree that their institution’s Composite Risk Rating is appropriate.”. “Knowledgeable observers” are defined as “Senior Executives and professionals who act on behalf of federally regulated financial institutions.” Sounds pretty cosy! Don’t hold your breath waiting for a politician to ask any questions – that would screw up their chances of post-public-servant employment.

Heavy volume AGAIN, PerpetualDiscounts down AGAIN (this time 20bp) and FixedResets up AGAIN – this time by 11bp, taking the median average weighted YTW down to a new low of 3.31%. Good volatility.

The Ontario Securities Commission has released the new edition of Perspectives, which provides information on regulatory initiatives.

We have a new poster-boy for the banks’ pursuit of mediocrity, rivalling Canada’s David Berry. Ladies & Gentlemen, let’s hear it for Raphael Geys!

Raphael Geys, former managing director of European fixed income sales for French bank Societe Generale, claims he was summarily dismissed without cause in November 2007.

He said that during his three years at the bank he was responsible for more than doubling the gross revenue of his division, from 205 million euros to 440 million euros.

Deputy Judge George Leggatt QC was told at a hearing earlier this month: “He was dismissed for being too successful in that role because the provisions in his contract were considered by the bank to be too generous.”

It was claimed that the bank’s termination of the contract “raised issues about the claimant’s entitlement to termination and other payments due under the contract. Very substantial sums are at stake”.

These have been reported as being 12.5 million euros (£11.3 million).

The bank claims he is not entitled to any “termination payment” under the contract because he has taken legal action.

And now, he’s passed the first milestone:

Societe Generale SA, France’s second-largest bank, lost a U.K. court decision over whether an 8 million-euro ($10.6 million) severance package it offered a former employee was less than what he was owed.

Raphael Geys, a former managing director of European fixed income sales at Societe Generale, sued and claimed at a trial that began last week in a London court that under his contract’s terms he was owed more severance than the bank offered.

If a severance value can’t be negotiated, a trial will be held to determine the amount, Judge George Leggatt said in the ruling today. Geys, who was fired in November 2007, said he was entitled to more than 12.5 million euros under his contract. Societe Generale argued it no longer owes Geys any severance because suing breached his contract.

“I reject the bank’s arguments that the claimant has lost any right to receive a termination payment, or any other payment, as a result of making or pursuing any claims,” Leggatt said.

The bank may have saved itself about 2.5 million euros had it “appropriately” worded a November 2007 letter firing Geys, according to the judge. Leggatt said the company didn’t properly end Geys’s contract until months later, meaning Societe Generale owed him a year-end bonus.

Sarah Butcher of eFinancial News reports It’s not unusual for banks to fire over-performers:

Bizarrely, lawyers say it’s not at all unusual for banks to eject high performers with large pay claims, even if they’re making a profit for the firm.

“You’d think that banks would recognise that it’s sensible to keep these people onboard,” says Charles Ferguson, a solicitor who specialises in the representation of traders. “However, there are some banks where there’s a limit to what they’re willing to pay. If someone takes them above that, they’ll look for an excuse to back out.”

Most banks include clauses in their contracts specifying that you need to be in employment and not under notice at the bonus date in order to be eligible for a payment. As a result, redundancies in the run up to bonuses are abnormally common.

Equally, Ferguson says some contracts specify that profit sharing entitlements will disappear if salespeople or traders are sacked for gross incompetence. He says this is also a favourite reason for dismissal.

Hah! Us proud Canadians can teach them a thing or two about justification for firing, eh?

The Ontario 2010-11 Budget was introduced today. Not a word about dividends – probably a good thing! More worrisomely, they proudly announce that the current deficit will be eliminated in a mere eight years – which stands a good chance of being the next completely unexpected and totally unforecasted recession. In that time, a mere $88.9-billion will be added to the provincial debt … and debt charges will rise from 9.35% of revenue to 11.3%.

In the Canadian preferred share market, volume was heavy AGAIN, Perpetual Discounts were down AGAIN (losing 21bp) and FixedResets were up AGAIN (gaining 5bp). Yields on FixedResets are now at 3.38%.

Covered bonds are recovering:

Europe’s banks are selling covered bonds at the fastest pace in four years in a sign that debt investors are betting Europe’s economy is strong enough to weather the budget crisis in Greece.

Caja Ahorros Barcelona, Spain’s largest savings bank, and Westdeutsche Immobilienbank AG, a unit of Germany’s third- biggest state-owned lender, are among the mainly European financial companies that issued 87.5 billion euros ($118 billion) of the notes this year, according to data compiled by Bloomberg. That’s the most since 95.4 billion euros of the bonds were sold in the same period of 2006.
…
Covered bond spreads have tightened at a slower pace than those on other senior corporate debt. Typically carrying top ratings, they also widened less at the onset of the deepest financial crisis since the Great Depression.

The extra yield on the mortgage- and public sector-backed securities is still more than double the 36 basis-point average for the past 12 years, according to Bank of America Merrill Lynch’s EMU Covered Bonds Index. Investment-grade corporate bond spreads narrowed to 148 basis points as of March 22, compared with an average 92 basis points since 1997, index data show.

Covered bond sales fell as the credit market seized up, when investors shunned hard-to-value securities such as those backed by real estate. Issuance tumbled to 228.4 billion euros in 2008, from a record-high 347.8 billion euros in 2007, according to data compiled by Bloomberg.

It’s hard to interpret shifts in covered bonds in isolation, or with highly aggregated data such as the above. If it means more investor interest – good! If it means the banks are locked out of the unsecured market – bad!

It is possible to have your CFA Charter pulled for pornography.

Volume continued heavy in the Canadian preferred share market today as the ACO.PR.A redemption took effect. PerpetualDiscounts lost 1bp and FixedResets gained 9bp – which did not affect the median weighted average yield, which remains at 3.40%. That’s the trouble with using medians – sometimes things simply don’t move in-line!

PerpetualDiscounts now yield 6.01%, equivalent to 8.41% interest at the standard 1.4x equivalency factor. Long Corporates now yield about 5.7% (showing a total return of 0.35% on the month-to-date, +4.46% YTD), so the pre-tax interest-equivalent spread (also called the seniority spread) is now about 270bp, a slight widening from the 265bp reported March 17 and edging closer to their one year high in the low 290s.

After skirmishing over the Greek bail-out, France has surrendered to Germany:

Germany and France have agreed to back International Monetary Fund aid for Greece, a German Finance Ministry official said, signaling a joint position after weeks of dispute over how to resolve the Greek crisis.

Germany and France, the euro region’s two biggest economies, are now pulling together before a two-day EU summit in Brussels beginning March 25, the official said on condition of anonymity. Greece has pressed the EU to make specific commitments on aid to help lower its borrowing costs.

Apparently, the IMF money will be spent on armanents:

In a bizarre twist to the Greek debt crisis, France and Germany are pressing Greece to buy their gunboats and warplanes, even as they urge it to cut public spending and curb its deficit.

Indeed, some Greek officials privately say Paris and Berlin are using the crisis as leverage to advance arms contracts or settle payment disputes, just when the Greeks are trying to reduce defense spending.

“No one is saying ‘Buy our warships or we won’t bail you out’, but the clear implication is that they will be more supportive if we do what they want on the armaments front,” said an adviser to Prime Minister George Papandreou, speaking on condition of anonymity because of the diplomatic sensitivity.

Ten-Year swap spreads are negative:

The 10-year U.S. swap spread turned negative for the first time on record amid rising demand for higher-yielding assets such as corporate and emerging market securities.

The gap between the rate to exchange floating- for fixed- interest payments and comparable maturity Treasury yields for 10 years, known as the swap spread, narrowed to as low as negative 2.5 basis points, the lowest since at least 1988, when Bloomberg began collecting the data. The spread narrowed 5.38 basis points to negative 2.38 basis point at 3:12 p.m. in New York.

A negative swap spread means the Treasury yield is higher than the swap rate, which typically is greater given the floating payments are based on interest rates that contain credit risk, such as the London interbank offered rate, or Libor. The 30-year swap spread turned negative for the first time in August 2008, after the collapse of Lehman Brothers Holdings Inc. triggered a surge of hedging in swaps. The difference narrowed to negative 20.5 basis points today.

“It’s hedge-related activity related to new corporate issuance,” said Christian Cooper, an interest-rate strategist at Royal Bank of Canada in New York, one of 18 primary dealers that trade with the Federal Reserve. “As more and more institutions receive, then swap rates will go lower.”

PerpetualDiscounts slid again on a day of elevated volume, losing 10bp, while FixedResets roared ahead, gaining 12bp and taking weighted median average yield down to 3.40%.