PrefBlog

Torys securities lawyer Joel Wiesenfeld says Securities officials should defend deals:

A principal rationale by a financial institution for settlement in the first place is to limit the reputational harm caused by long-term media exposure, such as is common if there is a contested hearing, no matter which party wins the hearing.

It is far more difficult to understand why securities regulators do not mount spirited defences of the settlements they enter into, including the purpose of the investigation, the decision to settle, and the terms of the settlement. Inasmuch as that analysis will likely not be forthcoming from the media, it is imperative that securities regulators learn that their job is not complete following the approval of a settlement, for it is in the public interest for the regulator to explain how and why its regulatory imperative in investigating and settling has been achieved. Until that begins to occur, all we will be left with is the usual rant.

I’ve got a better idea: no deals. If they’re guilty, nail ’em to the wall. If they’re not guilty, eschew extortion.

Meanwhile the SEC’s war on competition continues:

The SEC, the top U.S. securities regulator, must address the use of algorithms, the computer codes that power high-frequency trading and disrupt the marketplace, SEC Chairman Mary Schapiro told the Securities Industry and Financial Markets Association annual conference on Monday.

“We hope this will lead to a more stable marketplace,” she said.
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“Some high-frequency traders are not registered or regulated at all,” Schapiro told reporters on the sidelines of the conference. “There’s an issue about the use of disruptive algorithms in the marketplace, that contribute dramatically to volatility and instability.”

The SEC is considering “certain throttles” that would govern the way algorithms impact the marketplace, possibly slowing them down, she said.
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Other SEC steps since the crash included adding circuit breakers that pause trading when stocks plunge or soar. Schapiro on Monday said one algorithm recently triggered a breaker when it “tried to sell 10 percent of the daily volume of a stock in two seconds.

“That’s a huge volume disruption,” she said.

Golly! Can you imagine? Somebody trading stocks without being regulated! It’s a scandal!

It strikes me that the new circuit breakers are very prone to moral hazard … even if they’re not already written and in place, I bet a lot of programmers and developers are having a good think about how automatic circuit breakers and automatic trade busts can be used to their advantage. Moral hazard is profitable!

Allied Irish Bank was able to sell senior bonds earlier this year by making them retractible. Guess what’s happening?:

Ireland’s second-largest lender, which has a market capitalization of 418 million euros ($569 million), was able to raise debt this year by giving buyers the right to sell the notes back at face value at set dates prior to final maturity, according to data compiled by Bloomberg. Today the bank said an investor requested repayment of 120 million euros of its floating-rate bonds due in February at the Nov. 30 put date.

And the Europeans are bickering:

Greek 10-year bond yields surged 20 basis points to 11.62 percent amid concern that the nation, which received a 110 billion-euro bailout in May, won’t be able to cut its budget deficit fast enough. Austria is threatening to block its next transfer of funds to Greece unless the government gets back on track a deficit-cutting plan agreed just six months ago with the European Union and International Monetary Fund.

“We are getting indications that the Greeks can’t stick to their plan in a sufficient manner, in particular on the revenue side,” Finance Minister Josef Proell said according to a government e-mail that confirmed remarks made after a cabinet meeting today. “The data we have at the moment doesn’t give any reason to approve the December tranche from the Austrian point of view.”

Greece led a surge in the cost of insuring European government debt. Credit-default swaps on Greece soared 86 basis points to 944, the highest since June 29, according to data provider CMA. Contracts on Ireland rose 22 basis points to 515, Portugal climbed 13 to 426, Italy increased 7 to 188 and Spain was up 8 at 259.

The competitive position of European hedge funds vs. the banks is getting better:

Funds may have the option to explain to the Financial Services Authority why they are unable to comply with rules that require half of bonuses to be paid in shares, said the people, some of whom declined to be identified because negotiations are private. The regulator is reviewing whether the largest hedge funds must fully comply with the rules, according to the people.

The FSA in July proposed expanding the companies covered by its bonus rules from 27 banks to 2,500 firms, including building societies and hedge funds, to comply with European Union legislation on bank capital. The regulator proposed the possibility of giving firms a “comply or explain” exception and the Committee of European Banking Supervisors supported that position last month, said Darren Fox, a partner at Simmons & Simmons, who represents hedge funds.

This may be a good thing. It may be bad. I don’t think anybody’s really thought about it.

The Cleveland Fed has published the November, 2010 edition of Economic Trends:

This, in effect, is like the CPI asking the question, “What does it cost to maintain this fixed basket of goods and services?” while the PCE asks, “What does it cost to maintain this given level of satisfaction?” Because the CPI updates the expenditure weightings only every few years, it doesn’t allow for substitution effects. For example, if the price of coffee suddenly doubles, people may start to drink more tea. Thus, the CPI may tend to overstate the aggregate price level during periods of volatile relative price swings.

The last diff erence between the two series is called the “weight” effect. Due to the differences in the scope of the measures and in the source data for some items, the PCE and CPI have different weights on similar items. The largest difference comes from the shelter (housing) components, which in the CPI carry a relative importance value of roughly 32 percent, while in the PCE it is a little less than half of that. Such a huge difference in weights means that housing prices exert much more of an influence over the trajectory of the CPI than that of the PCE, leading to differences in their growth rates over time.

It was clobberin’ time on the Canadian preferred share market today, with PerpetualDiscounts losing 80bp and FixedResets down 43bp – taking the median weighted average yield on the latter index back above 3%. Volume continued at very high levels. This is great, just like the old days of two years ago! Still, on the theory that misery loves company, have a look at …

Click for Big

Government Motors will be profitable, provided subsidies are increased:

The Electrification Coalition, a Washington-based group of 21 company executives that formed a year ago to advocate for electric vehicles, released a report requesting the tax credits for corporations that make purchases for fleets, and to extend assistance through 2018 for building charging stations.

Coalition members are promoting their agenda ahead of a new Congress that will take office in January, with Republicans replacing Democrats in control of the House. General Electric Co. announced Nov. 11 that it plans to buy as many as 25,000 rechargeable cars, almost half from General Motors Co.

“I would almost guarantee you we will be successful in the next two years” in advancing the electric-vehicle agenda, Representative Edward Markey, a Massachusetts Democrat, said at the news conference.

DBRS had some good commentary on the G-20:

DBRS continues to believe the Canadian banks are well positioned to comply with the new minimum capital ratios given their existing tangible common equity ratios, expectation of internal capital generation, extended implementation period of adjustments and the lengthy phase-in period.

Going forward, DBRS believes the identification of systemically important financial institutions (SIFI) and globally SIFI (G-SIFI) will be an issue that could negatively impact one or more of the largest Canadian Banks as SIFIs and G-SIFI will be required to have higher loss absorbency capacity to reflect the greater risk that the failure of these firms poses to the global financial system. Currently, based on DBRS’s global bank rating methodology, the five largest Canadian Banks (Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada, and Toronto-Dominion Bank) are all deemed systemically important in Canada, which positively impacts DBRS’s senior and subordinated debt ratings of these banks.

Given that the comment period for Basel’s consultative paper “Proposal to ensure the loss absorbency of regulatory capital at the point of non-viability,” which includes the issue of contingent capital, ended on October 1, 2010, DBRS did not expect any significant announcements to be made surrounding this topic in the G-20 meeting in South Korea. The timeline for an announcement on contingent capital looks to be in or after 2011 as the Financial Stability Board and BCBS continue their work. Notwithstanding, DBRS believes the uncertainty surrounding contingent capital has been a contributing factor to spur significant subordinated debt issuances over the last month by several large Canadian banks.

Threats of easy sovereign default are having an effect in Europe:

Greece’s Prime Minister George Papandreou, speaking in Paris at a meeting of the Socialist International group, said Germany’s plan to force private bond investors to share the cost of sovereign bailouts with taxpayers was responsible for creating “a spiral of higher interest rates for countries that seemed to be in a difficult position, such as Ireland and Portugal … It could force economies toward bankruptcy.”
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On Monday, Portuguese Finance Minister Fernando Teixeira dos Santos said Portugal might have to seek a bailout package if only to prevent other euro zone countries from getting infected.
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The economic outlook for Portugal is so bleak that Foreign Affairs Minister Luis Amado said his country “faces a scenario of exit from the euro zone” – the 16 EU countries that share the euro – if it doesn’t get its financial house in order.

Gee … it’s not too long ago we were told such a thing couldn’t possibly happen!

The Canadian preferred share market took a hit today on very heavy volume, with PerpetualDiscounts down 37bp and FixedResets losing 17bp.

The Europeans have been distracted from the G-20:

Finance ministers from Germany, France and the U.K. met in Seoul to discuss Ireland’s debt crisis after bond yields soared on concern the European Union will need to step in with a bailout.

Ministers are monitoring developments and will probably issue a joint statement later today, said Steffen Seibert, a spokesman for German Chancellor Angela Merkel.

The premium investors charge to hold Irish debt over German bunds climbed to a record yesterday and the euro fell to the lowest level against the dollar since September. Yields on 10- year Irish bonds added 31 basis points to 9.07 percent. Bailing out Ireland’s financial system could cost as much as 50 billion euros ($68 billion) under a “stress case” scenario compiled by the finance ministry and central bank.

Germany is the biggest contributor to this year’s 860 billion euros in loans and pledges to stem Europe’s debt crisis. Bonds of the euro area’s so-called peripheral nations have tumbled since EU leaders on Oct. 29 backed Merkel’s demand to set up a permanent rescue system by 2013 that makes bondholders foot part of the cost of any future debt crisis.

Wow! Higher chance of default has brought with it higher yield demands! Who woulda thunk it? It must be those nasty hedge funds and short sellers at the bottom of this.

Charges have been laid in a tipping scandal. What I find most interesting is that the alpha-tipper (ground-zero tipper? primary tipper?), Mitchell Finkelstein, got his information in three of the four transactions by simply poking around in the Davies Ward Phillips Vineberg LLP document management system – I would have thought that material of this nature would be password protected with access logs maintained and reviewed. Who knows? It might have been; the OSC Statement of Allegations doesn’t go into much detail about it, but it’s an interesting question.

The Canadian preferred share market took a loss today on average volume, with PerpetualDiscounts down 18bp and FixedResets losing 2bp.

France has joined Germany in urging easy sovereign defaults:

French Finance Minister Christine Lagarde said investors must share the cost of sovereign debt restructurings, backing a German call that helped send yields on Irish and Portuguese bonds to record highs.

“All stakeholders must participate in the gains and losses of any particular situation,” Lagarde said during an interview yesterday in Paris for Bloomberg Television’s “On the Move” with Francine Lacqua. “There are many, many ways to address this point of principle.”
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Lagarde’s comments mark France’s most explicit backing of German proposals to make bondholders contribute in bailouts, which deepened the slump in bonds of the so-called euro peripherals. Risk premiums that investors demand to buy their debt have risen since an Oct. 29 European Union summit when German Chancellor Angela Merkel sparred with European Central Bank President Jean-Claude Trichet over her demand “to see that it’s not just taxpayers who are on the hook, but also private investors.”

Merkel’s views on sovereign default were reported on November 2.

The EU stands vigilant with a policy of quantitative wheezing:

The European Union said Thursday it is prepared to financially help Ireland as investors continued dumping bonds issued by the Irish government and other fiscally weak countries in the euro zone.

“We have all the necessary instruments,” European Commission President Jose Manuel Barroso told reporters in South Korea, where he was attending the summit of the Group of 20 industrialized and emerging nations. “The EU is ready to support Ireland.” He declined to speculate on whether the EU’s new €440 billion sovereign rescue fund would be needed.
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“With three countries in the euro area now having virtually lost access to capital markets, the implications for the region as a whole could easily become systemic again,” market analysts at the Royal Bank of Scotland said in a note.

RBS said the ECB’s government bond-purchasing program will “be scaled up meaningfully” by another €100 billion by early next year. “The more it waits the bigger the purchase program will have to be,” it said.

Econbrowser‘s Jim Hamilton highlights a paper by Ke Tang and Wei Xiong titled Index Investment and Financialization of Commodities:

This paper finds that concurrent with the rapid growing index investment in commodities markets since early 2000s, futures prices of different commodities in the US became increasingly correlated with each other and this trend was significantly more pronounced for commodities in the two popular GSCI and DJUBS commodity indices. This finding reflects a financialization process of commodities markets and helps explain the synchronized price boom and bust of a broad set of seemingly unrelated commodities in the US in 2006-2008. In contrast, such commodity price comovements were absent in China, which refutes growing commodity demands from emerging economies as the driver.

In his post Commodity inflation, Prof. Hamilton highlights the correlations against the USD.

My view has been that the Fed needs to prevent a repeat of Japan’s deflationary experience of the 1990s, but that it also needs to watch commodity prices as an early indicator that it’s gone far enough in that objective. In terms of concrete advice, I would worry about the potential for the policy to do more harm than good if it results in the price of oil moving above $90 a barrel.

And we’re uncomfortably close to that point already.

It was a restful, slightly negative day for the Canadian preferred share market, as PerpetualDiscounts were down 2bp on the day, while FixedResets lost 6bp. Volume was relatively low.