PrefBlog

Spain got downgraded:

The downgrade of Spain’s debt only one day after Portuguese bond yields hit record highs is putting extra pressure on euro zone leaders to find a solution to the resurgent euro zone debt crisis.

Moody’s, the credit ratings agency, downgraded Spain’s sovereign debt by one notch, to Aa2. While the move was expected – Moody’s signalled in December that it would probably lower Spain’s rating – the Spanish government and some economists said it was unwarranted because of the progress the country has made in reducing its deficit and recapitalizing its banks.

There is some kind of push going on to increase regulation:

In a report issued Thursday, the Mutual Fund Dealers Association of Canada (MFDA) recommended securities commissions expand protection for investors because the two key funds – the Investor Protection Corp. for mutual fund clients, and the Canadian Investor Protection Fund for brokerage industry clients – have significant gaps.

Both funds protect investors’ assets up to coverage limits in the event that financial firms go bankrupt.

But failed investment firms such as Portus Alternative Asset Management Inc. and Norshield Asset Management (Canada) Ltd. were not licensed as mutual fund dealers, which are covered by the IPF. Rather, they were licensed as portfolio and mutual fund managers, which are not covered at all, the report notes.

The MFDA recommends that both the fund manager and portfolio manager categories of firms be required to join either the IPC or the CIPF to ensure seamless coverage.
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A spokeswoman for the Ontario Securities Commission said its staff do not agree that there are gaps in the regulation and oversight of fund managers and portfolio managers. “While mutual fund assets are not held at mutual fund dealers, these assets are held at qualified custodians which are IIROC members or Canadian financial institutions, such as banks,” Susan Silma said in an e-mail statement.

Last month, the Canadian Foundation for Advancement of Investor Rights issued a report looking at the country’s worst financial frauds. It called for all regulated firms – including portfolio managers and fund managers – to become members of a self-regulatory organization so they would be subject to more oversight and their clients would be covered by investor protection funds.

The MFDA report was written in 2008 at the request of the Canadian Securities Administrators (CSA), an umbrella organization of provincial securities commissions, but was not released publicly until now. It was prepared as part of a project to examine regulatory gaps in Canada.

I haven’t looked into this much – it sounds like just another way for the big players to ensure the cost of entry into the business is increased as much as possible.

Spanish banks need money:

Spanish banks that together need as much as 15.2 billion euros ($21 billion) to meet minimum capital levels now must persuade investors that their battered balance sheets offer the potential return to match the risk.

Twelve lenders, including eight savings banks and the Spanish units of Deutsche Bank AG (DBK) and Barclays Plc (BARC), are among the lenders that fell short of government-set capital requirements, the Bank of Spain said yesterday. The institutions whose levels are furthest from the required minimums include Bankia, which needs 5.8 billion euros, Novacaixagalicia, which requires 2.6 billion euros, CatalunyaCaixa and Unnim.

Yesterday’s announcement sets in motion a timetable that gives lenders as long as a year to raise funds or risk being taken over by a government bailout fund. Investors may be skeptical that the Bank of Spain’s estimates of how much capital the banks need fully reflect losses hidden on balance sheets, putting the onus on them find investors quickly, said Inigo Lecubarri, a fund manager at Abaco Financials Fund in London.

BIS has released a working paper by Ugo Albertazzi, Ginette Eramo, Leonardo Gambacorta and Carmelo Salleo titled Securitization is not that evil after all:

A growing number of studies on the US subprime market indicate that, due to asymmetric information, credit risk transfer activities have perverse effects on banks’ lending standards. We investigate a large part of the market for securitized assets (“prime mortgages”) in Italy, a country with a regulatory framework analogous to the one prevalent in Europe. Information on over a million mortgages consists of loan-level variables, characteristics of the originating bank and, most importantly, contractual features of the securitization deal, including the seniority structure of the ABSs issued by the Special Purpose Vehicle and the amount retained by the originator. We borrow a robust way to test for the effects of asymmetric information from the empirical contract theory literature (Chiappori and Salanié, 2000). Overall, our evidence suggests that banks can effectively counter the negative effects of asymmetric information in the securitization market by selling less opaque loans, using signaling devices (i.e. retaining a share of the equity tranche of the ABSs issued by the SPV) and building up a reputation for not undermining their own lending standards.

OSFI has released its newsletter Pillar, Winter 2011. Nothing new or interesting.

A gloomy day for the Canadian preferred share market, with PerpetualDiscounts down 25bp, FixedResets losing 19bp and DeemedRetractibles getting off lightly with a loss of 7bp. Volume was high.

More kerfuffle over the TMX / LSE merger:

Speaking to provincial legislators on Thursday, Howard Wetston, chairman of the Ontario Securities Commission, said the final decision will hinge on whether the controversial $3.1-billion deal is in the public interest.

Mr. Wetston said the OSC would “resist any watering down or diminution” of its responsibility over the Toronto Stock Exchange and that concerns around the impact of the merger on corporate governance are also “very relevant.”
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In a two-page open letter, [TMX CEO] Mr. [Tom] Kloet restated his position that the merger would occur at the holding company level, and the TSX would continue to exist as a stand-alone operation with regulatory oversight remaining intact.

“It really is that simple — no foreign regulator, including the U.K. Financial Services Authority, will have any regulatory powers or influence over any of our Canadian exchanges, entities or issuers,” he wrote in the statement.

The Financial Post has published the full letter. It also excerpted remarks by Barbara Stymiest that I didn’t consider too impressive.

As for me … well, first off, I think the question that’s being asked is upside down. Government should only consider interfering if the transaction can be shown to be a net negative for Canada – if then – rather than the onus being on the transactors to show a net benefit. Whose business is it, anyway?

Secondly, I think that an underlying question is the power of the banks in the Canadian financial marketplace, which is basically total. A bigger institution with an international will be less likely to kowtow to the banks when push comes to shove. And that wil be a Good Thing.

And thirdly, I would like to see less government influence on internal operations: I am very concerned about OSFI’s attempts to debase the bond indices and would have greater faith in bond indices prepared by a trans-national corporation.

Another day of mixed results for the Canadian preferred share market, with PerpetualDiscounts gaining 1bp, FixedResets up 3bp and DeemeRetractibles getting smacked for a loss of 16bp. Volume was high.

The day started with rumours that some of the owners of Alpha Trading Systems don’t want big brother to get married:

Four of the country’s six largest banks are lining up to raise red flags about the planned merger of the parent companies of the Toronto Stock Exchange and the London Stock Exchange, saying the country risks losing clout as a financial centre.
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The banks plan to lay out their concerns this week in a public letter. The wording of the letter, tentatively titled “Let’s build on a Canadian success story,” has not been finalized, nor has the list of signatories, but sources said Tuesday that the banks that were on side as of then included Toronto-Dominion Bank, which is co-ordinating the effort, as well as Bank of Nova Scotia, Canadian Imperial Bank of Commerce and National Bank of Canada.

Hey, if you can’t compete, run home crying to mommy, that’s what I always say! Boyd Erman comments:

There’s no doubt that on some level, Alpha may be factoring into the calculations, but the web of conflicting behaviour suggests that Alpha is not the driving factor behind whether banks support or oppose the TMX-LSE deal.

The last argument is the old small-town one, that the banks would like to remain the big fish in a small pond. It may be that the banks are being parochial, and want to keep control of the TMX within walking distance of their own head offices. This one probably has the most weight.

How are you going to keep the boys on the farm, once they’ve seen the City? And the furrinners might not have the proper reverence for Canadian banks, or might send in their resumes once their regulatory stint is over. Another mouth to feed!

As it turns out the Financial Post has published the letter. It’s vagueness, incoherence and prediliction for sweeping fearmongery make it clear to me that whatever they’re talking about, it’s not the merits of the deal.

Bloomberg reports on today’s testimony to a parliamentry committee. Caldwell has a number of fish to fry with respect to exchange mergers, but had the right idea:

“Of course they’re against it because it provides real competition for Alpha,” said Brendan Caldwell, Chief Executive Officer of Caldwell Investment Management Ltd., a money manager that owns shares in TMX. “They banks don’t like real competition, they like the little oligopoly where they divvy up the financial pie of Canada amongst themselves. It’s quite incestuous.”

The Globe plays up support for the deal from the Toronto Financial Services Alliance. I confess I don’t know much about this group, but they repeat that hoary canard about the WEF ranking of banks around the world on the front page of their website, so their opinions can’t be worth much.

The Kansas City Financial Stress Index is at its lowest level since June 2007:

Click for big

Another mixed day in the Canadian preferred share market, with PerpetualDiscounts up 22bp, FixedResets gaining 3bp and DeemedRetractibles slipping 4bp. Only one entry – which barely made it – in the Performance Highlights table. Volume remained high.

PerpetualDiscounts now yield 5.64%, equivalent to 7.33% interest at the new standard equivalency factor of 1.3x. Long corporates now yield about 5.6% (ok, maybe a tiny bit less) so the pre-tax interest-equivalent spread is now about 175bp, a slight (and perhaps spurious) decline from the 180bp reported on March 2.