PrefBlog

The David Berry Saga keeps grinding on:

David Berry has lost another bid to toss out disciplinary action taken against him by IIROC (Investment Industry Regulators of Canada).

The Divisional Court of the Ontario Court of Justice dismissed Berry’s attempt to block an action commenced against him by market regulation services, a forerunner of IIROC. Berry had previously asked the Ontario Securities Commission to block the disciplinary action, but the OSC dismissed the matter in September 2009. That’s why Berry took the matter to Ontario’s Divisional Court, which is often the venue for appeals of administrative decisions.

A news release from IIROC says Berry’s challenge was dismissed on Nov. 26, but it refers you to the court’s written decision for more details. As of this moment, those reasons aren’t on CanLII.

It has been so long since any news on this matter that I was beginning to think it had been quietly settled! Long time Assiduous Readers will remember that David Berry was Scotia’s pref trader for several years and made them literally hundreds of millions of dollars, of which he got a percentage. Scotia’s executives then demonstrated their levels of personal integrity by putting a rather large team of accountants and lawyers on the case to dig up any picayune regulatory infractions he might have committed in order to gain negotiating power over a new contract, a process in which IIROC was pleased to participate.

The Europeans think they’ve done enough:

European finance ministers ruled out immediate aid for Portugal and Spain or an increase in the 750 billion-euro ($1 trillion) crisis fund, counting on European Central Bank bond purchases to calm debt-spooked markets.

A week after handing Ireland an 85 billion-euro lifeline, the finance chiefs voiced confidence that Spain and Portugal will tame their budget deficits and said the existing credit line is enough to defend them in an emergency.
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A 22-week high in ECB bond-buying brought a respite from speculative attacks, masking divisions between the 16 euro-area governments over the next steps to fight the explosion of debt that threatens the currency.

Meanwhile, the US sold its Citigroup stake, bringing the North American situation closer to a common or garden (albeit very nasty) recession.

There is still another three weeks odd to go, but the following effort from a major bank/dealer has a lock on the covetted PrefBlog “Most Asinine Investment Advice of 2010” Award:

Click for Big

The Canadian preferred share market got hit today on very heavy volume, with PerpetualDiscounts down 17bp and FixedResets losing 21bp.

Germany is convinced that European investments are a risky proposition:

European officials voiced divisions over the steps needed to stop the sovereign debt crisis as Germany opposes increasing the 750 billion-euro ($1 trillion) bailout fund and the introduction of joint European bonds.

Belgian Finance Minister Didier Reynders told reporters on Dec. 4 that the fund might be expanded if ministers decide to introduce a larger permanent facility when the current temporary one expires, breaking ranks with German Chancellor Angela Merkel and France’s Nicolas Sarkozy. Luxembourg and Italy today called for the creation of joint European bonds, a move rebuffed by Germany Finance Minister Wolfgang Schaeuble.
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Today’s meeting comes after Luxembourg Finance Minister Jean-Claude Juncker and Italian counterpart Giulio Tremonti wrote a letter to the FT calling for the introduction of a joint European government bond.

“E-Bonds” would be sold by a European Debt Agency, which could be created as early as this month and finance as much as 50 percent of the issuances by EU members to create a deep market, they said. A switch would also be offered between E- Bonds and current government bonds.

German Deputy Finance Minister Joerg Asmussen on Dec. 3 rejected such a move because it wouldn’t encourage countries to fix their finances.

It was a muted day overall on the Canadian preferred share market, with PerpetualDiscounts up 6bp and FixedResets losing 5bp. There was some decent volatility, as shown on the performance highlights, and volume remained high.

The inherent contradictions of the brokerage business continue to cause problems:

Social media sites such as LinkedIn and Twitter are redefining the way businesses reach their customers. Securities firms are largely absent from the revolution.
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The U.S. Securities and Exchange Commission, which regulates the securities industry, says all broker stock recommendations must be ‘‘suitable” for individual clients by measuring their risk tolerance, security holdings, income, net worth and investment objectives, according to the agency’s website. Tweeting a stock pick or posting it on Facebook generally breaks this rule, said David Sobel, executive vice president and compliance officer at New York-based Abel/Noser Corp., which helps clients lower trading costs and does allow its employees to use LinkedIn for networking.

Stockbrokers are salesmen; the “suitability” rule is nonsense. One step forward would be to change their registration title to “Salesman” and prohibit their use of any other title. Anybody who wants to think about “suitability” or “advice” should be a fiduciary and be required to publish their track record.

As suggested yesterday, the debt panel’s recommendations did not win enough of a supermajority:

The seven votes against the plan were enough to sink it, even though 11 of the 18 members voted in favor, because 14 were needed to forward the proposal to Congress for consideration. Five of the six senators on the panel backed the plan, as did five of the six unelected officials. Five of six House members opposed it, with the sole support coming from South Carolina Democrat John Spratt, who was defeated in the Nov. 2 election.

I continue to believe the US will not take its fiscal problems seriously until the President gets a call from the Treasury secretary asking him to play bond salesman. The Hot Air blog which, as far as I can tell, is a mouthpiece for the Republican party, claims to want to reduce the deficit but only if it’s done through spending cuts. That would be nice, folks, and it may even be the best solution, but nothing will last until there is a bipartisan consensus.

Meanwhile, Baucus (who was on the committee and voted no) has been busy:

U.S. Senate Finance Committee Chairman Max Baucus, a Montana Democrat, omitted a provision to boost tax rates on so- called carried interest from a bill to extend Bush-era tax cuts for middle-income Americans that is set for a Senate vote tomorrow. The bill also would renew dozens of expired business tax breaks to which the carried interest proposal had been attached as a budget-balancing measure.
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Since winning control of Congress in 2006, Democrats have made taxing such income at ordinary rates a priority. The House voted in May to tax three quarters of carried interest as wages. While the Senate trimmed it back further to a 50-50 split in June, objections from Republicans and some Democrats blocked the proposal from being considered on the floor.

The Obama administration has proposed taxing carried interest as ordinary income in each of its annual budget proposals.

Can’t be too smug about all this, though, because there’s no plan for balancing the books in Canada either – although, with Spend-Every-Penny in charge, that’s scarcely a surprise.

But Spain is getting serious:

Spain’s Cabinet yesterday raised tax on tobacco and set a date for a pension overhaul, two days after saying it plans to raise about 14 billion euros ($18.4 billion) from selling stakes in the airport operator and lottery company.

“Time has run out; we have been talking for months,” Deputy Prime Minister Alfredo Perez Rubalcaba told reporters, referring to the pension plan. “We are going to work even harder to reach agreements.”

The Basel Committee has announced that it:

agreed on the details of the Basel III rules text, which includes global regulatory standards on capital adequacy and liquidity. The liquidity coverage ratio and the net stable funding ratio will be subject to an observation period and will include a review clause to address any unintended consequences.
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The Committee expects to publish the Basel III rules text by the end of this year.
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In addition, the Committee reviewed issues related to globally systemic banking institutions. Such banks should have loss-absorbing capacity beyond the Basel III standards and work on this topic continues in the Committee and the Financial Stability Board (FSB). The Committee reviewed a provisional methodology comprising both quantitative and qualitative indicators to assist national authorities in assessing the systemic importance of financial institutions at the global level. It will send a paper on these topics to the FSB by the end of this year for its review. The Committee will complete by mid-2011 a study of the magnitude of additional loss absorbency that global systemically important banks should have. It is also assessing the extent of going-concern loss absorbency that could be provided by different instruments. This review will be completed by mid-2011.

Taking account of comments received during a recent public consultation, the Committee agreed on key elements of the proposal to ensure the loss absorbency of regulatory capital at the point of non-viability and will elaborate the rules concerning transitional arrangements and grandfathering.

Mention of a leverage cap is conspicuous by its absence. DBRS has concluded there will be no credit effect on Canadian banks.

BIS has also published a working paper by Ilhyock Shim and Haibin Zhu titled The impact of CDS trading on the bond market: evidence from Asia:

This paper investigates the impact of CDS trading on the development of the bond market in Asia. In general, CDS trading has lowered the cost of issuing bonds and enhanced the liquidity in the bond market. The positive impact is stronger for smaller firms, non-financial firms and those firms with higher liquidity in the CDS market. These empirical findings support the diversification and information hypotheses in the literature. Nevertheless, CDS trading has also introduced a new source of risk. There is strong evidence that, at the peak of the recent global financial crisis, those firms included in CDS indices faced higher bond yield spreads than those not included.

Very soon trading will become a cooperative game and everybody will win without risk – if only the CFTC enforces enough rules:

The CFTC in October said it was seeking public comment on whether and how to regulate potentially disruptive practices including algorithmic trading and “spoofing,” in which someone enters a bid or offer with the intent of canceling it before the trade is carried out.
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Though the Dodd-Frank law expressly prohibits spoofing, Joel Hasbrouck, a professor at New York University, said that a rule tailored to that practice would likely be too narrow. “I think it is going to be based on intent,” he said. “And I would not be in the position of wanting to have to define it.”

The CFTC request for comments takes particular aim at algorithms:

15. Should the Commission consider promulgating rules to regulate the use of algorithmic or automated trading systems to prevent disruptive trading practices? If so, what kinds of rules should the Commission consider?

16. Should the Commission consider promulgating rules to regulate the design of algorithmic or automated trading systems to prevent disruptive trading practices? If so, what kinds of rules should the Commission consider?

17. Should the Commission consider promulgating rules to regulate the supervision and monitoring of algorithmic or automated trading systems to prevent disruptive trading practices? If so, what kinds of rules should the Commission consider?

18. Should the Commission promulgate additional rules specifically applicable to the use of algorithmic trading methodologies and programs that are reasonably necessary to prevent algorithmic trading systems from disrupting fair and equitable markets? If so, what kinds of rules should the Commission consider?

19. Should algorithmic traders be held accountable if they disrupt fair and equitable trading? If so, how?

Last I heard, there needed to be two parties to a trade. If they have agreed on the price, what’s unfair?

Themis Trading notes approvingly:

A new front has been opened up by the CFTC on the battle against HFT.

Police Chief Blair has admitted that his remarks on the arrest of Adam Nobody were completely devoid of factual basis:

Toronto Police Chief Bill Blair publicly apologized Friday to G20 protester Adam Nobody for suggesting he was armed and violent when arrested by police.

Chief Blair said there is no evidence Mr. Nobody was armed at the time of his arrest.

He also said he regretted that his comments in a radio interview created a false impression that the video of Mr. Nobody’s takedown, captured in two segments by bank employee John Bridge, had been doctored in an attempt to mislead.

So that’s how seriously the Toronto Police Force takes well-supported allegations of excessive force: automatic denial, blaming of the victim and making no effort whatsoever to ascertain the facts. We are poorly served and protected.

And, as long as I’m updating that story (discussed December 1, I’ll also update the Emil Cohen story:

The principal’s decision to suspend Cohen, 17, was one Northern’s principal made with a “heavy heart,” said Supt. Ian Allison.

“The issue here is not the speech itself,” he said. “The issue is there was a process and he didn’t follow through.”
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The school has countered that the speech he read wasn’t an approved version and he disobeyed his teacher.

I love the contradiction there. ‘The issue isn’t censorship, the issue is that we think he didn’t submit to the censorship process to our satisfaction.’ Never mind, Emil – even if you aren’t on the way to university, most of your classmates are, and there you will all be able to criticize your professors and the administration to your heart’s content – generally speaking, they feel secure enough in their competence to avoid hysterical responses to criticism (informed and otherwise; respectful and otherwise). It’s just too bad Toronto’s secondary school system hasn’t done anything to help you learn to deal with that freedom.

The Canadian preferred share market bounced today and recovered a portion of yesterday’s losses, with PerpetualDiscounts gaining 12 bp (down 38bp yesterday) and Fixed Resets up 13bp (down 58bp yesterday). However, the FixedReset index would have lost today if it hadn’t been for the reinstatement of a reasonable quote for GWO.PR.J, so don’t break out the champagne just yet. Volume was down from yesterday’s peak, but still quite heavy.

The European emergency measures is being extended:

Under pressure from investors to lead the charge against the spreading sovereign debt crisis, Trichet said the ECB will keep offering banks as much cash as they want through the first quarter over periods of up to three months at a fixed interest rate. As he spoke, ECB staff embarked upon a new wave of purchases, triggering a surge in Irish and Portuguese bonds.
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While the ECB chose not to deploy new crisis-fighting tools, Trichet managed to avoid sparking another market selloff four days after traders gave a vote of no-confidence to a bailout of Ireland. He kept up pressure on governments to fight the crisis by saying that “benign neglect” is not enough and indicated they could expand Europe’s rescue fund amid concern it’s not large enough to finance any bailout of Spain.
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The yield on Portuguese 10-year bonds dropped 50 basis points to 6.13 percent and Irish yields fell 37 basis points to 8.76 percent. The Spanish 10-year yield declined 22 basis points to 5.07 percent. The euro traded at $1.3228 at 5:41 p.m. in London compared with $1.3152 before Trichet started talking.
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Signaling disagreement within the 22-member council, Trichet said an “overwhelming majority” of officials backed the ECB’s Securities Market Program and that a “consensus” supported maintaining the status quo on providing liquidity. Bond purchases will continue to be offset to keep the money supply unchanged, in contrast to the Federal Reserve and the Bank of England, he said.

“It’s not quantitative easing, we’re withdrawing all the liquidity,” he said.

The future seniority of ESM debt to public sovereign debt is cited as a potential trigger for a Greek downgrade:

Greece’s ‘BB+’ long-term sovereign rating was placed on “CreditWatch” with negative implications, Standard & Poor’s Ratings Services said in a statement today from Madrid. S&P said it is assessing credit implications of the so-called European Stability Mechanism that may govern European Union sovereign bonds beginning in July 2013.

“Assigning ‘preferred creditor’ status to future official lending via the ESM could be detrimental to the ability of non- official holders of sovereign debt to be repaid,” S&P said.
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The EU in October agreed on the need to set up the ESM as a permanent crisis mechanism to safeguard the financial stability of the euro area as a whole. The Eurogroup, comprising the finance ministers of the 16 nations sharing the euro, said in a statement on Nov. 28 that “an ESM loan will enjoy preferred creditor status, junior only” to the loan from the International Monetary Fund.

Greece in May got a three-year aid package of 110 billion euros ($145 billion) from the euro area and the IMF to prevent a debt default.

The Icelandic model is being touted:

While analysts expect Iceland’s recession to extend into next year, the nation’s exporters are benefiting from a 28 percent drop in the krona against the dollar since September 2008. The decline may help the nation of 320,000 people rebalance its economy faster than Ireland, whose euro membership rules out a currency devaluation. With Iceland’s OMX share index up 17 percent this year, the third-biggest gain in Europe after Denmark and Sweden, Nobel Prize-winning economist Paul Krugman says Iceland may be an example of “bankrupting yourself to recovery.”

“The difference is that in Iceland we allowed the banks to fail,” Iceland President Olafur R. Grimsson said in a Nov. 26 interview with Bloomberg Television’s Mark Barton. “These were private banks and we didn’t pump money into them in order to keep them going; the state did not shoulder the responsibility of the failed private banks.”

The insolvency was highly unpopular at the time – but a lot better for the world than the pretend sort-of insolvencies being touted by politicians.

In the meantime, it appears that the US still isn’t taking its fiscal deficit seriously enough:

Senate Finance Committee Chairman Max Baucus, a Democrat, and incoming House Ways and Means Committee Chairman Dave Camp, a Republican, said today they will vote against the plan tomorrow. They join Representatives Paul Ryan, a Wisconsin Republican, and Jan Schakowsky, an Illinois Democrat, in opposition.

The plan requires approval from 14 of the panel’s 18 members to forward it to Congress, meaning five “no” votes would kill it. Texas Republican Jeb Hensarling said today he is leaning against the proposal.

The recommendations are “wrong for Montana and wrong for rural communities across the country,” Baucus of Montana said in a statement. While reducing the deficit is “imperative,” he said, “we cannot cut the deficit at the expense of veterans, seniors, ranchers, farmers and hard-working families.”

Ideally, of course, Baucus will be dead, retired, or gainfully employed by the time the shit hits the fan. ABC News reports that it:

has learned Andrew Stern will vote no on the deficit commission’s plan to reduce the national deficit by nearly $4 trillion. Mr. Stern, the former president of the SEIU, has informed co-chairmen Erskine Bowles and Alan Simpson that he will be the fifth member voting no, ending the commission’s hopes of officially passing the plan to Congress.

Two recent products to hit the Toronto market FFL / FFL.U and SST / SST.U are either craziness or genius. One or the other. The latter is the iPath® US Treasury Flattener Exchange Traded Note, which:

is linked inversely to the performance of the Barclays Capital US Treasury 2Y/10Y Yield Curve Index™. The index employs a strategy that seeks to capture returns that are potentially available from a “steepening” or “flattening”, as applicable, of the U.S. Treasury yield curve through a notional rolling investment in U.S. Treasury note futures contracts. The level of the index is designed to increase in response to a “steepening” of the yield curve and to decrease in response to a “flattening” of the yield curve. To accomplish this objective, the performance of the index tracks the returns of a notional investment in a weighted “long” position in relation to 2-year Treasury futures contracts and a weighted “short” position in relation to 10-year Treasury futures contracts, as traded on the Chicago Board of Trade.

The iPath® US Treasury Flattener ETN employs an index multiplier that provides the investor at maturity or upon redemption a participation rate of $0.10 gain or loss per each 1.00 point decrease or increase, respectively, in the level of the index. For purposes of calculating the closing indicative note value on a given day, the index multiplier is multiplied by the daily index performance, which is added to the daily interest that accrued from a notional investment of the value of the ETN at the 28-day U.S. Treasury Bill rate, from which all applicable costs and fees are deducted.

On the one hand, this is a way for retail and small institutions to adjust their exposures without entering into costly trades. On the other hand, trading Treasuries is about the cheapest thing you can do in the capital markets. And retail’s lucky if it understands duration, let alone steepeners, flatteners and convexity. And there’s no related product to handle the 10-30 spread. On the other hand, I guess, if it sells, it sells.

CIBC debt capital markets division is doing well:

Canadian Imperial Bank of Commerce ranks among the top three banks managing corporate bond sales in Canada for the first time since 2004, displacing Toronto- Dominion Bank as company issuance surges to a three-year high.

The bank’s CIBC World Markets unit ranks second this year after leading debt sales for companies such as Telus Corp. and BCE Inc. Royal Bank of Canada’s RBC Capital Markets is first, extending its streak of more than a decade as the top arranger, according to data compiled by Bloomberg. Bank of Nova Scotia’s Scotia Capital unit ranks third among Canada’s six major banks.
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Companies have raised C$69.4 billion ($68.2 billion) in bond sales this year, up from C$57.2 billion in all of 2009 and the highest since 2007, according to Bloomberg data.
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The Toronto-based firm also raised about C$6.2 billion for its parent, Canadian Imperial Bank of Commerce, the country’s fifth-biggest bank.

By comparison, TD Securities had one C$1 billion debt sale this year for its parent, Toronto-Dominion Bank, Canada’s second-biggest bank.

“When we look at things, excluding self-led deals, we see ourselves solidly in second place,” Brad Saunders, vice president of debt syndication at TD Securities, said in an interview.

It was clobberin’ time in the Canadian preferred share market today, with PerpetualDiscounts losing 38bp and FixedResets being hammered for an unbelievable (semi-believable, at best) loss of 58bp. Volume was extremely heavy; so heavy that the market maker for GWO.PR.J had to take the afternoon off – which cost the FixedReset index about a third of its apparent loss.