PrefBlog

Alarms are sounding about a possible Chinese bank crisis:

China faces a 60 percent risk of a banking crisis by mid-2013 in the aftermath of record lending and surging property prices, according to a Fitch Ratings gauge.

The assessment is from a macro-prudential monitor used by the ratings company, Richard Fox, a London-based senior director, said in a phone interview on March 4.
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The indicator signaled crises in Iceland and Ireland and has been tested back to the 1980s, Fox said.
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The indicator’s failures have included not sounding an alarm about the banking system in Spain, he added.
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Banking systems in emerging markets are vulnerable to systemic stress when credit growth exceeds 15 percent annually over two years with real property prices rising more than 5 percent, according to Fitch. Credit growth in China averaged 18.6 percent annually over 2008 and 2009 as house prices jumped, according to the ratings company.

The fallout from China’s lending spree may be bad loans totaling $400 billion, according to Hong Kong-based advisory firm Asianomics Ltd.

Gloominess on Europe:

Some countries in the euro region may have their credit ratings cut further while a Greece debt default is a “possibility,” said Moritz Kraemer, managing director of European sovereign ratings at Standard & Poor’s.

Asked if the worst was over for the region’s sovereign credit-rating outlook, Kraemer said: “I wish I could say yes, but the answer is no.”

“We still have a number of countries with a negative outlook or CreditWatch negative, indicating their credit ratings may be going down further,” Kraemer said in an interview in London. “Trigger points for that could be slippage in fiscal consolidation and structural reforms, but also decisions that will be taken at the European level later this month.”

S&P said on March 1 it kept Portugal’s A-long-term, A2 short-term and Greece’s BB+ long-term ratings on CreditWatch with a negative outlook. It cited Portugal’s “high external financing need and limited funding sources.” Moody’s Investors Service downgraded Greece’s government bond ratings yesterday to B1 from Ba1 , and assigned a negative outlook to the rating.

And more gloom on US mortgages:

Bank of America Corp. (BAC), the biggest U.S. lender by assets, is segregating almost half its 13.9 million mortgages into a “bad” bank comprised of its riskiest and worst-performing “legacy” loans, said Terry Laughlin, who is running the new unit.
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The legacy portfolio will hold 6.7 million of loans with outstanding principal balance of about $1 trillion, according to a presentation to investors today. The split leaves home loan President Barbara Desoer with about half her previous portfolio, as well as new lending going forward.

Laughlin’s portfolio will include loans that are currently 60 or more days delinquent as well as riskier types of loans the bank no longer originates, such as subprime, Alt-A, interest- only and option adjustable-rate mortgages, he said. He said the portfolios will be completely split by March 31 and that his will be liquidated over time. Of the 13.9 million loans Bank of America services, about 3.5 million are held by the company on its balance sheet. The rest are owned by other investors.

There’s a rather odd perspective on the Charlie Sheen spectacle:

Second, he’s the talent. A hedge fund wouldn’t fire the star trader if he was a drug user or an alcoholic. It would have to get rid of half the staff if it did.

Which is why hedge funds blow up with such amazing regularity. I think it’s just sad: we have a guy who has achieved enormous success and can’t handle it. After pondering whether he was lucky or smart, he’s not just chosen “smart”, but gone beyond, into “completely irreplacable and personally indestructible.” It happens all the time, not just in Hollywood and Wall Street, but everywhere, sometimes with a definitions of “enormouse success” that most of us would consider “a good start”, causing an immense amount of pain and waste of talent.

If any employee of mine were ever to be found doing coke, he’d be out on his ass instantly, lawsuits and employer accomodation of addictions be damned. It’s cheaper in the end, as the Bishop said to the choir-boy.

Here’s some sense:

A top jurist has condemned plea bargaining as a form of coercion that tempts an intolerable number of innocent people into pleading guilty to avoid a harsh sentence.

Mr. Justice Marc Rosenberg of the Ontario Court of Appeal urged a thorough review of plea bargaining – a system that has become so entrenched in the past three decades that 90 per cent of criminal cases result in a guilty plea.

We can get rid of negotiated settlements in the securities industry while we’re at it.

Hats off to the Proceeds of Crime Act! Another way to build up slush funds like Brampton’s:

The Peel Police Services Board has bought tens of thousands of dollars worth of tickets to private mayoral galas in Brampton and Mississauga, using “proceeds of crime” that in Ontario typically go to victim and crime prevention programs.

The tickets were purchased over the years while Brampton Mayor Susan Fennell and a fundraising organizer of Mississauga Mayor Hazel McCallion sat on the board — and with the approval of Peel Region chair Emil Kolb, who also heads the police board.

Minutes show, for example, that the board approved buying a $4,000 table at Fennell’s gala on Feb. 20 last year, on Fennell’s invitation. A month before the gala took place, then-board member Jim Murray put forward a motion to buy a second table. It was approved.
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[Peel Region chair Emil] Kolb, who has chaired the police board since 1996, acknowledged that the board routinely approves such purchases, but points out that it’s not tax-generated dollars being spent.

“It’s funds that come from crime funds. Not one red cent is taxpayer dollars.”

Kolb should be fired – not just for reckless misuse of funds, but for general stupidity. Once it’s in the coffers, pal, it’s taxpayer’s money. Every goddam penny, regardless of whether it’s taxes, fees, fines, gifts or proceeds of crime. It’s not yours to do political favours for your buddies. Asshole.

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts losing 10bp, FixedResets flat and DeemedRetractibles gaining 16bp. Volatility was subdued with only one entry in the Performance Highlights table. Volume was heavy.

There are threats of inflation in Asia:

The Bank of Thailand and Bank of Korea will each raise key interest rates this week by a quarter percentage point, median estimates in Bloomberg News surveys of economists show. Malaysia may also be approaching the end of its pause in boosting borrowing costs, as four of 12 analysts polled see a March 11 move, the highest such share since the last increase, in July.
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The region’s economies are strong enough to withstand the impact of faster inflation, the Asian Development Bank said last week.

“The region is particularly prone to food and oil price shocks as a greater percentage of household income is spent on food and transportation,” said Vishnu Varathan, an economist in Singapore at Capital Economics (Asia) Pte.
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Diminished resistance to currency gains in China may have a knock-on effect throughout Asia as the continent’s biggest economy also seeks to contain price pressures. People’s Bank of China Governor Zhou Xiaochuan said last month in Paris that his nation may use means “including rates and currency” to curb increases in food and home prices.

WordPress.org was attacked by hackers in China recently. I wondered how one defends against this and found a paper by S S Nagamuthu Krishnan and Dr. V. Saravanan titled DDoS Defense Mechanism by applying stamps. Precious in places (‘Oh, do be a good netizen while munching your granola’) and, naturally enough, veering occasionally into jargon, but they do achieve one of their major objectives in the paper addressing a major problem:

This was a major event, covered in the major news media. They have done an excellent job in their coverage; as far as it has gone, their coverage has been accurate. The problem is, their coverage hasn’t been sufficiently detailed to explain why we cannot track down the people committing these attacks, and why we can’t defend against them. There’s a good reason for these omissions: the attack is subtle, and understanding how it works well enough to understand why we can’t cope today, and what will have to change before we can, requires a more detailed explanation of how the Internet is constructed than the mass media are prepared to deliver to their audiences.

It was a mixed day on the Canadian preferred share market, as PerpetualDiscounts gained 6bp, FixedResets lost 8bp and DeemedRetractibles were down 11bp. Volume was average, but there were some nice blocks changing hands – all courtesy of Nesbitt, which shut out the rest of the street on the Volume Highlights table.

The IMF has released the March 2011 edition of Finance and Development. There’s an article by André Meier titled Up or Down:

Some have predicted postcrisis deflation in advanced economies, others high inflation. Worries about either are probably exaggerated.
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Historical episodes of persistent large output gaps in advanced economies show a clear pattern of disinflation, supported by weak labor markets and low wage growth. However, declines in inflation appear to become more modest when the initial rate of inflation is already quite low, suggesting some combination of better-anchored inflation expectations and downward nominal rigidities, such as resistance to outright wage cuts. Moreover, fluctuations in oil prices and exchange rates can introduce significant shortterm volatility in inflation outturns.

Developments since the beginning of the global financial crisis are consistent with this pattern. Despite large swings in headline rates, underlying inflation in advanced economies has generally declined, with many core measures reaching the very low rates at which disinflation typically petered out during past [persistent large output gap] episodes. Thus, while upside inflation risks should be limited in countries facing continued economic slack, a slide into outright deflation does not seem very likely either.

There’s also a very hopeful article titled Healing Health Care Finances by Benedict Clements, David Coady, Baoping Shang, and Justin Tyson. Hey, here in Canada, no problem! You see, what we’re going to do is keep standards high but costs low through the use of a well-respected technique that has just been approved by an expert group of 23-year-old B.Comms with clipboards: Doing a shitty job. Whenever something goes wrong and this becomes public knowledge, just fire whoever was standing nearest. Works every time. How many voters really have any insights into the public health system, anyway?

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts down 21bp, FixedResets gaining 17bp and DeemedRetractibles losing 16bp. For all that, the market was relatively well behaved, with only one entry on the Performance Highlights table. Volume remained high.

The migration of traders continues:

Guggenheim Partners LLC, the closely held investment bank and asset manager, plans to hire as many as 150 staff being pushed out of banks’ proprietary-trading units because of U.S. financial rules enacted last year.

Loren M. Katzovitz and Patrick Hughes, 49-year-old managing partners who have worked together since 1993, are launching Guggenheim Global Trading LLC in Purchase, New York, with an initial investment of $500 million as soon as June 1, they said yesterday in an interview. The firm plans to hire 100 to 150 traders and manage as much as $2 billion, they said.

Much the same thing is happening in Canada:

The cultural gulf between Canada’s independent securities firms – with their eat-what-you-kill pay structures – and the more staid bank-owned investment dealers is steadily widening. Some of the people who recruit bankers and traders say that the result of a move to more deferred pay and smaller cash bonuses at bank-owned firms means they are attracting a more risk-averse type of person, which is what regulators were seeking.

The pay system at independent firms like GMP Securities remains simple. Bankers and traders get paid for the business they bring in. Base salaries are rare, but bonus payments are regular and in cash. Bonuses are big when business is good, and they can dry up in fallow times.

It will be interesting to see how this plays out. I can tell you that the quality of institutional bond desk personnel has declined over the past 15 years. There’s still lots of the old guys around, but as they retire and move on, they’re being replaced by order-takers.

General Growth, the object of Brookfield’s affections, is taking advantage of better tone in the CMBS market:

General Growth Properties Inc. (GGP), the U.S. mall owner planning to refinance $5 billion of mortgage debt, tapped UBS AG and Morgan Stanley (MS) to fund loans as banks rebuild inventory to back bonds tied to commercial real estate.

UBS agreed to provide a $375 million loan on the 977,000- square-foot Providence Place Mall in Rhode Island, according to a person with direct knowledge of the deal who declined to be identified because the talks are private. Morgan Stanley will lend about $150 million for a Humble, Texas property, according to a person familiar with those negotiations. The banks plan to package the loans for sale as securities, the people said.

General Growth, which emerged from the largest real estate bankruptcy in U.S. history in November after piling up $27 billion in debt, plans to refinance $5 billion in mortgages in 2011, Chief Executive Officer Sandeep Mathrani said during a March 1 conference call with analysts. Property owners nationwide are benefiting as the Federal Reserve keeps its benchmark interest rates near-zero to stimulate economic growth.
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General Growth buckled under its debt load when the market for commercial-mortgage backed bonds shut down in 2008 and the company was unable to refinance properties. The real estate investment trust has $18.2 billion in outstanding mortgage debt, Mathrani said.

A mixed, relatively quiet day on the Canadian preferred share market, as PerpetualDiscounts lost 5bp, FixedResets were down 7bp, and DeemedRetractibles gained 4bp. There are only two entries on the Performance Highlights table – and neither would have made had their closing bids been a penny lower. Volume remained at elevated levels.