PrefBlog

Mr Thomas C Baxter, Jr, Executive Vice President and General Counsel of the Federal Reserve Bank of New York, testified to the Financial Crisis Inquiry Commission regarding the Lehman bankruptcy:

As of that Friday, there were two prospective Lehman acquirers: Bank of America and Barclays. On Saturday, September 13, Bank of America abandoned the potential acquisition of Lehman and reached an agreement to acquire Merrill Lynch. Barclays was the only remaining suitor. On Sunday, September 14, with the consortium financing committed, we learned for the first time that Barclays would not be able to deliver a key document to carry the merger to conclusion: a guarantee of Lehman’s trading obligations between the signing of the merger agreement and its closing.

The Bear Stearns transaction taught us the importance of the guarantee to a successful rescue. A guarantee maintains the ability of the troubled company to operate as a going concern and, thus, preserves value. It does this by providing protection to counterparties during an especially vulnerable period – the period between merger contract and merger closing. Without such a guarantee, the creditors and counterparties of the firm would be at risk in the event that the merger fell apart because of a failed shareholder vote or some other contingency. Consequently, as a market matter, the guarantee is an indispensable part of any such rescue operation.

On Sunday, September 14, we learned that Barclays could not proffer the needed guarantee without a shareholder vote. This vote would take days, if not weeks or months, and there was no way to predict if the shareholders would even vote for the transaction to proceed. I explored with counsel whether the U.K. government, or one of its instrumentalities like the FSA, might waive this U.K. requirement, such that the guarantee could be delivered and the rescue effected. I learned that the U.K. authorities were not amenable to a waiver. Thus, Barclays ceased to be available as the willing buyer that we needed to rescue Lehman, and there was no other interest from any firm of sufficient size and capability that could acquire Lehman, a company with consolidated assets of about $600 billion.

I’m suspicious of any portfolio management model that includes the word “regression”, but there’s occasionally a good idea in there. Econbrowser‘s James Hamilton highlights his recent paper in a post Policy tools that could lower interest rates further:

Our starting point was a framework developed by Vayanos and Vila (2009), who interpret the term structure of interest rates as arising from the behavior of risk-averse arbitrageurs. This model is one way to capture formally the portfolio balance channel that Fed Chairman Bernanke indicated is central to the Fed’s understanding of how nonstandard monetary operations might affect the economy. Vayanos and Vila’s framework has previously been applied to our question by Greenwood and Vayanos (2010) and Doh (2010). One of our contributions is to develop specific measures of how the available supplies of Treasury securities of different maturities might be expected to influence the pricing of level, slope, and curvature risk of the term structure. Although I began as a skeptic of the claim that bond supplies would make much difference, we found pretty strong evidence that historically they have. For example, we found that over the 1990-2007 period, we could predict the excess return from holding a 2-year bond over a 1-year bond with an R² of 71% on the basis of the level, slope, and curvature of the yield curve along with our 3 Treasury supply factors.

The full research paper is The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment.

Just when you thought that nothing good could be said about Russian politicians, they prove you wrong:

Speaking as the Russian government announces plan to raise duty on alcohol and cigarettes, [Russian Finance Minister] Alexei Kudrin said that by smoking a pack, “you are giving more to help solve social problems such as boosting demographics, developing other social services and upholding birth rates”.

“People should understand: Those who drink, those who smoke are doing more to help the state,” he told the Interfax news agency.

He’s got my vote.

It was a solid day on the Canadian preferred share market, with PerpetualDiscounts up 5bp and FixedResets gaining 3bp on average volume. There has been a lot of volume in MFC lately, presumably due to continued rebalancing after the downgrade.

Nothing happened in the financial markets today, so today the entire market update will be devoted to Canadian politics. Ain’t you lucky? But the integrity of the judicial system is important, as minority shareholders in Mascan Corp. can testify.

There’s a kerfuffle about a judge whose husband posted risque pictures of her on the Internet that has come to light because some little twerp has seen a chance for some legalized blackmail. There’s no indication the judge herself did anything wrong; unless you believe that allowing your spouse to take risque pictures of you is wrong. The whole story is no big deal, except for one incredible quote:

“If pictures of you naked end up on an internet site, it’s quite difficult to say you have the credibility to be a judge,” said Sébastien Grammond, dean of civil law at the University of Ottawa.

On the basis of what has been disclosed, I have no qualms about the credibility or ability of Associate Chief Justice Lori Douglas. However, I have deep qualms about the ability of Sébastien Grammond to think things through and to be responsible for the education of the next generation of lawyers. He should be removed from his post immediately.

Similarly:

“I think that no judge who has a cloud of scandal hanging over their heads is able to … act effectively as a member of the judiciary,” said Annalise Acorn, a law professor at the University of Alberta who specializes in ethics.

“I simply think it’s not consistent with the image of dignity and authority that the judiciary needs to have.”

Prof. Acorn said she would be “flabbergasted” if Judge Douglas stays on as a judge, and expects she might resign in the coming days.

It’s easy to tell member of a profession who are completely unable to do the work – they specialize in ethics. After all, how can you ever actually prove they’re wrong? It’s very convenient. The only surprising thing is that some authorities are actually willing to pay these people.

Alice Woolley claims that:

The problem is that her knowledge of those pictures prior to her appointment undermines the already fragile legitimacy of our appointments process. Applicants for judgeships are asked, “is there anything in your past or present which could reflect negatively on yourself or the judiciary, and which should be disclosed?” The question asks applicants to provide the committee with the information necessary to make a fair and appropriate assessment of the applicant’s qualifications to be a judge.

In this instance Douglas had to answer “yes” to that question.
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It is not even about whether she would be a good judge. It is about whether people appearing before her could feel confident that their cases were being heard fairly and dispassionately. If those people included a black man, or a white woman divorcing a black man, or a Mexican family dealing with a child apprehension case, those people could reasonably wonder whether the racial stereotyping that the website reflects is one that Douglas shares, and that will impact her judgment.

The last sentence is pure bullshit. These people could wonder, complain and appeal, but not reasonably. If they wanted, they could always demand that the judge recuse herself. It’s just another legal manoevre.

But wait! We have not yet finished plumbing the depths of Alice Woolley’s ignorance. Clearly, Douglas’ behaviour is not, in and of itself, a factor. So what if … what if she’d be sunbathing topless and her husband had posted those pictures? What if it wasn’t her husband, but a voyeur posted pictures of her on the internet? What if he had identified her? What if he had claimed he could arrange sexual liasons with her? What if he claimed she liked Mexicans, wink-wink nudge-nudge? What if it wasn’t even a topless picture, it was her official picture taken during her investiture?

Alice Woolley’s series of assertions – they are far too childish to be honoured with the sobriquet of “argument” – work equally well in any of these situations.

We can go further. What if a tireless research finds that, while in high school, Douglas answered a Teen Queen Magazeen quiz by circling the “tall dark and handsome” choice for ‘Guy you want’. When we consider this situation, we’re at least looking at something she did herself, not something done by a third party without her knowledge or consent. Does this expression of preference make her forever unfit to be a judge? What if she hears a case involving some short, fair, average-looking guy? In Alice Woolley’s anarchic dream world, in which assertion of bias is deemed equivalent to proof of bias, such a thing would bar her – and, basically, every living, breathing human on the planet – from the judiciary.

Alice Woolley is a fool – and a dangerous fool at that, for urging standards that will accomplish nothing but making judges easier to blackmail.

Honestly, the howls for Douglas’ head are so shockingly removed from any semblence of intellectual rigour that one has to wonder if the real story is being told – when smart people say dumb things, it’s often because they don’t want to say the sleazy thing, as when doctors claim they won’t give terminal patients sufficient painkillers ‘because there is the chance of addiction’, when the real story is that they don’t want to get a call from the ministry and fill out the painkiller forms. Are the critics going after her for some other, less publicly expressible reason? Was she appointed by the wrong party? In Harper’s Canada, did she find the wrong person liable?

It was another good day on the Canadian preferred share market, with PerpetualDiscounts gaining 11bp and FixedResets winning 2bp. Volume and volatility were enough to make the day interesting.

Donald C. Langevoort made a good point about trade-throughs in his paper U.S. SECURITIES REGULATION AND GLOBAL COMPETITION:

Gadinis points out that U.S. and European regulation is similar in one strategy—trying to force trading interest into public view in the form of limit order quotes so that the price can reflect available supply and demand at increments a little higher or lower than the last sale. Reg NMS goes one step further, however, by forcing the trade-through of orders to the market with the best displayed price, so long as that market has fast (that is, fully automated) execution capacity. This is required for two reasons: first, to give protection to and thereby encourage the display of quotations and limit orders; second, as a mechanism to try to ensure that brokers offer their customers best execution. In contrast, European market regulation does not have a trade-through regime, and leaves best execution to negotiation between broker and customer. For obvious reasons, many institutional investors feel hampered by Reg NMS, and many investors, brokers, and trading sites have taken advantage of exceptions in the regulation to accommodate so-called “dark pools”—undisclosed trading interest—and trading that is based on non-price preferences.

The differences in approach are not hard to understand. The national market system in the United States is a legacy of public markets wherein retail investors are protected not only from the abuses of monopolistic trading sites but also from being elbowed aside by large traders in an increasingly institutional marketplace. Europe has little direct retail participation, and so that legacy is not present. What Gadinis describes there is precisely what one would expect from markets that have been built in recent years almost entirely for the benefit of the institutional trade.
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U.S. institutional investors have ways of moving trading abroad when the domestic regulatory burdens are too much. As a result, Reg NMS is probably quite unstable. To date, the SEC has conditioned the cross-border mergers of exchanges (for example, New York Stock Exchange and Euronext) on keeping them separate for purposes of compliance with domestic market regulation. But that is inefficient, and probably hopeless in the long run. The right vision is no longer of a national market system but a global market system, and there is simply no way the SEC can impose its retail investor legacy extraterritorially. One suspects that it is simply a matter of time before the SEC does in this area what it did with IFRS: abandon exceptionalism in an effort to gain greater influence over market structure evolution around the world.

The issue of trade-throughs was discussed on August 27.

BIS has released preliminary results from its survey of FX and OTC derivatives:

•Activity in OTC interest rate derivatives grew by 24%, with average daily turnover of $2.1 trillion in April 2010. Almost all of the increase relative to the last survey was due to the growth of forward rate agreements (FRAs), which increased by 132% to reach $601 billion

The Bank of Canada has published its specific contribution, with the nugget:

Similarly, as an approximation, the three execution methods—(i) customer direct (over the telephone), (ii) multi-bank dealing systems, and (iii) single bank proprietary platforms—can be viewed as being execution methods primarily for customers. On that basis, 77 per cent of all customer trades in Canada are undertaken directly with the customer over the telephone, and 23 per cent are executed through either multi-bank or single-bank electronic trading systems.

In possibly the most amazing news story in the history of the universe, Bloomberg advises that Hong Kong i-bankers are competing on fees:

Hong Kong bankers are charging the lowest fees on record to arrange initial public offerings as firms vie for deals in a market where IPOs are raising more than in the U.S. and U.K. combined.

Initial sales by 37 companies in Hong Kong have paid average fees of 2.2 percent in 2010, the lowest level since Bloomberg began tracking the data in 1999. While companies going public raised $18.7 billion, 64 percent more than American IPOs, banks earned about 43 percent less underwriting in the territory, the data show.

Goldman Sachs Group Inc., JPMorgan Chase & Co. and Deutsche Bank AG are leading Wall Street in reducing fees and winning sales where Chinese companies go public to help finance the fastest growth among the world’s biggest economies. The firms are facing more competition from mainland banks that have boosted their share by 50 percent since the start of the financial crisis.

We won’t be seeing that here in hurry!

It looks like there’s a bit of capital flight from Greece:

Withdrawals by cash-strapped customers such as Efthymiou, as well as by Greeks moving money out of the country, helped push deposits at the nation’s banks down by 9 percent since the end of 2009.
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Business and household deposits in June fell for a sixth straight month to 216.5 billion euros ($277.3 billion) from 238 billion euros at the end of 2009, according to figures from the Bank of Greece.

The reporter, the politicians and the banks are emphasizing the ‘draw-down of savings to offset government payment reduction’ idea, but Greece’s GDP is USD 356-billion. So that’s about 6% of GDP in reduced bank deposits. I vote for capital flight and eagerly await compelling evidence and incisive arguments proving me wrong.

PrefBlog’s Strange Funds Department has come up with another exhibit:

Connor, Clark & Lunn Capital Markets Inc. (the “Manager”) is pleased to announce that a preliminary prospectus for HBanc Capital Securities Trust (the “Fund”) has been filed
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The Fund was established to provide investors with high levels of stable, tax-advantaged distributions through exposure to Capital Securities issued by HSBC Holdings plc, a conservatively positioned and strongly capitalized global bank.

CC&L is best known for packaging multi-name Credit Default Swaps as preferred shares and thereby vaporizing a lot of client money. More than once. However, I am confident that the time spent developing and managing these products will be properly accounted for as “experience” in the prospectus for the new fund.

Mayoral candidate Joe Pantalone has presented his vision of doing business in the city:

“I have no problem with people finding loopholes, if they’re good people,” says councillor Joe Pantalone, who spearheaded the moratorium.

“I know Albino well and I can’t say enough about what a good Torontonian he is.”

I have no idea how one gets to be a “good Torontonian”, but presumably it involves cash and being a friend of Joe Pantalone.

The Canadian preferred share market continued to gain today, with both PerpetualDiscounts and FixedResets up 9bp. Volume was good, but volatility was subdued, with the performance highlights table being empty.

PerpetualDiscounts now yield 5.78%, equivalent to 8.09% interest at the standard equivalency factor of 1.4x. Long Corporates now yield 5.3%, so the pre-tax interest equivalent spread is now 280bp, a significant rebound from the 265bp reported at August 31; however, note that in the interim there has been a migration of high-coupon, high-yield issues from PerpetualDiscounts to PerpetualPremiums, which has artificially reduced the yield on the PerpetualDiscount index.