PrefBlog

S&P revised the outlook on RON from stable to negative:

• We are revising our outlook on RONA Inc. to negative from stable because weak earnings amid difficult market conditions have contributed to higher debt leverage.
• At the same time, we are affirming our ‘BBB-‘ long-term corporate credit rating on the company.
• Fully adjusted last 12 months debt to EBITDA has jumped to 3.8x, which we consider very high for the rating, although reported debt to EBITDA is low at 1.5x and liquidity is strong.
• The negative outlook stems from our view that weak market conditions will make it difficult for RONA to return leverage to below our key 3x threshold in the near term.
• We could lower the rating on RONA if the company’s profitability remains weak enough to keep leverage at about 3.5x through the critical second and third quarters of 2012.

The European Central Bank is taking on a lot of credit risk:

The European Central Bank spent a record amount on government bonds last week as it began buying Italian and Spanish securities to contain the debt crisis.

The Frankfurt-based ECB said today it settled purchases worth 22 billion euros ($31.7 billion) in the week through Aug. 12, more than the 15 billion-euro median estimate in a Bloomberg News survey of 19 economists and strategists. That also surpasses the 16.5 billion euros the ECB spent during the first week of its initial foray into Greek markets in May last year.

Giulio Tremonti has the best line on the crisis so far:

After unveiling tougher austerity plans in return for ECB help, Italian Economy Minister Giulio Tremonti said a common euro zone bond would stop markets forcing high-debt economies in the bloc to the brink. “We would not have arrived where we are if we had had the euro bond,” he said at the weekend.

Think about it. OK, so there wouldn’t be a crisis now, so you wouldn’t have to commence austerity now. Great! Then what happens?

The explanations for the SocGen share price collapse are starting to get silly:

But did a British malentendu over another French summer staple — a fictional series of articles in Le Monde — contribute to a mysterious sell-off in French bank stocks last week?
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The series, “End of the Line for the Euro,” looked at how a collapse of the single currency might play out, against the backdrop of French presidential elections next year. While the 12-part story was clearly labeled as fiction, it named real banks, like Société Générale, whose shares plunged 15 percent last Wednesday, prompting the bank to deny speculation that it was in financial trouble.

As market participants and journalists searched for possible reasons, the trail seemed to lead to London. There, The Mail on Sunday, a tabloid newspaper, had published an article in which it said Société Générale was “on the brink of disaster.” Société Générale and an Italian bank, UniCredit, were in a “perilous” state, the paper added, citing “a senior government source.”

The Sino-Forest saga will continue for a few more chapters:

Sino-Forest Corp. (TRE), the tree- plantation operator accused by short-seller Carson Block of overstating its timberland holdings, said an independent investigation into the allegations will take longer than previously expected.

The independent committee set up by the company to conduct the probe presented an interim report to the board on Aug. 11 and expects to complete its review by the year-end, Hong Kong- and Mississauga, Ontario-based Sino-Forest said yesterday in a statement. Sino-Forest, which has denied the allegations, hired PricewaterhouseCoopers LLP to assist the review and said June 14 the process would take two to three months.

It was a mixed day in the Canadian preferred share market, with PerpetualDiscounts down 5bp, FixedResets gaining 10bp and DeemedRetractibles winning 40bp. There was plenty of volatility, but not much volume.

There’s more information about the attack on the Hong Kong Exchange website:

Hong Kong Exchanges & Clearing Ltd. said it will find new ways of publicizing earnings and other corporate events after hackers jammed its public news website.

The bourse, acting to safeguard communications from listed companies, will use e-mails and newspaper advertisements to back up its central online system, Chief Executive Officer Charles Li said at a press briefing. Trading in HSBC Holdings Plc (HSBA), Cathay Pacific Airways Ltd. (293) and five other stocks was halted on Aug. 10 and access to filings was disrupted again yesterday amid a “sustained and systematic” attack, Li said.
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The assault was a so-called distributed denial of service attack aimed at preventing access to the exchange’s public news feed by overwhelming its capacity to handle website traffic, Li said. Should the hackers change strategies, Li said the bourse may not be able to defend the website and its backup online bulletin board.

I mentioned a paper regarding defense against DDOS attacks on March 7.

The sudden cessation of US MMF fund lending to European banks after the Lehman bankruptcy caused a crisis in itself. This time the process is more selective and graceful, but will the result be the same?

The six largest U.S. money market funds have eliminated their lending to Italian and Spanish banks, reduced investments in French banks and are favoring Swiss securities for their $511 billion of assets.

Holdings of European bank certificates of deposit, repurchase agreements and commercial paper reported by the six largest funds managed by JPMorgan Chase & Co. (JPM), Fidelity Investments, Federated Investors Inc. (FII), Blackrock Inc. (BLK) and the Vanguard Group Inc. show they are shunning euro-region banks, according to data compiled by Bloomberg.

European bank shares tumbled to the lowest since March 2009 on Aug. 10, led by Paris-based Societe Generale SA, amid concern that France’s creditworthiness was in doubt. U.S. prime money funds have reduced European debt holdings by $38 billion to $340 billion in July, according to an Aug. 9 report by JPMorgan.

Dealbreaker has a good piece on the semi-European short selling ban.

Regulators gone wild! An agency of the US Government is investigating as to whether the downgrade of US Government was done properly:

The Securities and Exchange Commission is reviewing the method Standard & Poor’s used to cut the U.S.’s credit rating and whether the firm properly protected the confidential decision, according to a person with direct knowledge of the matter.

SEC inspectors are examining S&P’s policies for conducting such analyses and whether those procedures were followed when the New York-based firm downgraded the U.S.’s credit rating Aug. 5, said the person, who declined to be identified because the inquiry isn’t public.

Free speech? Of course there’s free speech! Just fill out these forms and sit here for a while we check out what you said.

Not to be outdone, French are checking out whether trading in SocGen was done properly:

France’s stock market regulator opened an investigation into speculation that affected trading in shares of Societe Generale (GLE) SA, said the agency’s president, Jean-Pierre Jouyet.

Societe Generale, France’s second-largest bank, on Aug. 10 denied “all market rumors” and asked France’s Autorite des Marches Financiers to open a probe. Speculation that France’s creditworthiness was in doubt sent the shares tumbling 15 percent that day.

“We’re investigating the unfounded rumors that hit specific stocks this week,” Jouyet said in an interview on RTL Radio today. “I can tell you that the secretary general of the AMF, Thierry Francq, has opened an investigation into the rumors that affected Societe Generale.”

It was a very strong day for the Canadian preferred share market, with PerpetualDiscounts up 46bp, FixedResets gaining 32bp and DeemedRetractibles winning 58bp. Volatility was impressive on low volume.

Turkey is deciding whether shorting a stock is like insulting Turkishness:

Turkey is increasing scrutiny of short sales, joining countries from Greece to South Korea that have sought to prevent bearish bets from fueling declines in stocks after the worst global tumble since 2008.

Turkish regulators are investigating whether short sellers manipulated stock trading during the retreat that sent the ISE National 100 Index down 19 percent this month, Huseyin Erkan, chairman of the Istanbul Stock Exchange, said on Bloomberg HT television yesterday, the same day South Korea began a three- month ban on short sales. Greece started a two-month ban Aug. 9, while Italy increased disclosure rules for short sales in July.

Populist idiocy regarding short-sales is gaining ground:

A European market regulator is considering recommending a temporary ban on negative bets against stocks across the Continent in an effort to stop the tailspin in the markets.

The European Securities and Markets Authority, a body that coordinates the European Union’s market policies, has been requesting information from member states about such bets against stocks, known as short-sales.

Reuters says no:

European Union states are unlikely to impose a blanket ban on short-selling of stocks in response to volatile trading in bank stocks, a regulatory source familiar with the situation told Reuters.

… and others say ‘a little bit’:

Senior government sources tell Class CNBC, CNBC’s Italian partner, that a short-selling ban will be imposed in France and Italy after Thursday’s market close.

The report conflicts with what CNBC has been told by the European Securities and Markets Authority (ESMA). The independent European Union body, which provides a forum to national financial European regulators, told CNBC on Thursday that it is increasing its market surveillance following the rumor-led drop in French banks’ shares that took place on Wednesday and then again Thursday.

And, after all all the speculation above, it turned out to be FIBS:

The following countries have today announced or will shortly announce new bans on short-selling or on short positions: Belgium, France, Italy and Spain3. Information on these measures can be retrieved from the websites of the relevant competent authorities. The measures will take effect as of 12 August 2011.

The ESMA notice linked above also took care to deprecate that favoured whipping dog of arbitrary rulers everywhere, “spreading false news”.

A margin hike on gold contracts seems to have taken a bit of froth out of the market … for now:

Gold futures fell the most in seven weeks after CME Group Inc. (CME) boosted margins on Comex contracts, prompting investor sales after a three-day rally to a record topping $1,800 an ounce and as equities rebounded.

CME Group, owner of the world’s largest futures market, raised margins on gold contracts by 22 percent. The minimum amount of cash that speculators must keep on deposit for an initial account increased to $7,425 on a 100-ounce contract from $6,075. The Standard & Poor’s 500 Index rose as much as 3.2 percent after a drop in U.S. jobless claims.
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Gold futures for December delivery declined $27.80, or 1.6 percent, to $1,756.50 at 11:35 a.m. on the Comex in New York. A close at the price would mark the biggest drop for a most-active contract since June 23. Earlier, the metal climbed as much as 1.9 percent to a record $1,817.60.

There has been a sharp decline in US house foreclosures, but that’s not as good a sign as one might think:

U.S. foreclosure filings dropped 35 percent last month to the lowest level in almost four years as lenders and state and federal agencies increased efforts to keep delinquent borrowers in their homes, RealtyTrac Inc. said.

A total of 212,764 properties received default, auction or repossession notices, the fewest in 44 months, the Irvine, California-based data seller said today. Filings fell on a year- over-year basis for the 10th straight month, and were down 4 percent from June. One in 611 households got a notice.

“The downward trend in foreclosure activity has now taken on a life of its own,” RealtyTrac Chief Executive Officer James J. Saccacio said in a statement. “Unfortunately, the falloff in foreclosures is not based on a robust recovery in the housing market but on short-term interventions and delays that will extend the current housing market woes into 2012 and beyond.”

The decline in foreclosure notices began last year when attorneys general across the country began probing a practice known as “robo-signing,” in which lenders and servicers pushed through default documents without verifying their accuracy. Now federal and state officials are also contributing to the slowdown with payment assistance and loan modifications, RealtyTrac said.

There has been a revision to the chatter about SocGen – not French credit at all, never mind:

Societe Generale (GLE) SA, which yesterday plunged 15 percent, is among banks being targeted by investors because of its perceived dependence on short-term funding, according to analysts at Royal Bank of Scotland Group Plc.

“The primary culprit for the share price decline is funding concerns for European banks in general and French banks in particular,” analysts including Stefan Stalmann said in note to clients today. “The mix of euro doubts and rating fears in recent days and weeks may have dented the confidence of funding counterparties, which has then fed back into equity markets.”

… although some beg to differ:

“People are shorting banks as a way of shorting sovereign debt,” Tom Vosa, head of markets economics, Europe at National Australia Bank, told CNBC Thursday. “What we are really seeing is the markets deciding they don’t like the fiscal position in Europe.”

“The best way to get leverage and express that opinion is through shorting the banking system, because they know that the governments have to bail out the banks,” he added.

POW has made a major investment in a Chinese asset manager:

Power Corporation announced today that its bid to purchase 10% of China Asset Management Co. Ltd. (China AMC) from its current owner, CITIC Securities Co. Ltd. (CITIC Securities), has been accepted for an amount equivalent to approximately CDN $276 million. This purchase is the result of a competitive process.

China AMC was established in 1998 and was one of the first asset management companies approved by the China Securities Regulatory Commission. It is recognized as the leading company in the Chinese asset management sector, with approximately US$35 billion in assets under management (excluding annuity and separate accounts) at December 31, 2010.

The Canadian preferred share market had a good strong day, although rather uneven. PerpetualDiscounts gained 24bp, FixedResets were up 1bp and DeemedRetractibles won 76bp. There was a high degree of volatility, with BNA having the honour of having one of its issues ranked second-worst on the day, with another ranked best. Volume was above average.

The Kansas City Fed Stress Index for July was below its long term average … but whether that holds up in August is another matter!

It’s beginning to look as if European prudence is veering into panic:

Societe Generale SA, France’s second-largest bank, issued a blanket denial of “all market rumors” after speculation that France’s creditworthiness was in doubt sent the shares down the most in more than 2 1/2 years.

The bank “categorically denies all market rumors,” Emmanuelle Renaudat, a spokeswoman for the Paris-based lender, said in an interview today. She declined to be more specific. Societe Generale led European bank stocks to the lowest since the aftermath of the credit crisis, tumbling 15 percent to 22.18 euros in Paris, the biggest drop since Oct. 27, 2008.

France’s top credit rating was affirmed by all three major rating companies as speculation Europe’s debt crisis would spread to the region’s second-biggest economy pushed the cost of insuring its government debt against default to a record.

A defense attorney, fresh from defending a little guy accused of mortgage-fraud, makes an interesting point on justice (and, I would say, regulation in general):

In the 1980s, Operation Greylord exposed rampant corruption and bribery in Chicago’s state criminal courts. One side effect of this corruption was that criminal defendants who didn’t pay bribes were given maximum prison time so that the corrupt judges could appear to be tough on crime. A similar thing is happening now in the cleanup of the mortgage mess. The politically powerless are getting clobbered to make it appear that the government is serious about cracking down on fraud.

It’s easy for prosecutors to win convictions by going after the little guys. But this strategy does nothing to punish those most responsible for bad mortgages; nor will it deter future incidents of fraud.

The Hong Kong Exchange was hacked:

Hong Kong Exchanges & Clearing Ltd., the world’s biggest bourse operator by market value, said it suspended trading for companies including HSBC Holdings Plc (HSBA) after its website was hacked.

Europe’s largest bank by market capitalization, Cathay Pacific Airways Ltd. (293) and five other stocks were halted after a “malicious attack” on the exchange’s website for corporate filings, Chief Executive Officer Charles Li said yesterday. The website was partially disabled as companies including Hong Kong Exchanges reported earnings.

This is why it’s good to have central clearing: it makes it easier to take down the entire system.

US equities did not have a jolly time:

Stocks slid, dragging the Dow Jones Industrial Average to the lowest level since September 2010, and Treasuries rose for a third day amid concern the European sovereign debt crisis is worsening. The dollar climbed versus 13 of 16 major peers, with the euro losing 1.3 percent to $1.4190. Gold futures surged to a record above $1,800 an ounce.

The Dow sank 519.83 points, or 4.6 percent, to 10,719.94 at the 4 p.m. close in New York. The Standard & Poor’s 500 Index sank 4.4 percent to 1,120.76 following its biggest jump in more than two years yesterday, when it rebounded from its worst loss since 2008. The Stoxx Europe 600 Index plunged 3.8 percent as Societe Generale SA sank 15 percent. Ten-year Treasury yields, which touched an all-time low yesterday, fell 16 basis points to 2.09 percent after an auction drew a record-low yield. Costs to protect French debt reached a record.

Canadas also did well:

A rally in Canadian government 10-year bonds pushed the yield to 2.31 percent, the lowest level since at least 1989.
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Government 10-year note yields dropped 12 basis points, or 0.12 percentage point, to 2.33 percent after touching the record low. The price of the 3.25 percent security due in June 2021 increased C$1.11 to C$108.05.

Canada sold C$3 billion ($3 billion) of three-year debt, drawing an average yield of 0.965 percent. The government received bids of C$6.55 billion for the 2.25 percent securities maturing in August 2014, according to a statement today on the Bank of Canada’s website.

Toronto did all right, on the back of greasy rocks:

The S&P/TSX composite index gained 89.63 points, or 0.74%, to 12,198.89. Only four of the 10 sub-indexes advanced but among those were two of the three heavyweights — materials, which rose 3.41%, and energy, up 1.02%. Bank stocks, which led the previous day’s advance, fell on Wednesday, dragging the financials sector down 1.05%.

A US$3.59 jump in the price of oil, to US$82.89 a barrel, combined with another new record price for gold, which closed at US$1,784.30 an ounce, a gain of $41.30, drove the TSX increases on a day when U.S. markets continued to decline.

Gold producers saw significant gains on Wednesday — Barrick Gold Corp. rose 6.15% to $49.72, Goldcorp advanced 6.99% to $50.54, and Kinross Gold saw its share price gain 4.55%, to $16.31.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 16bp, FixedResets up 6bp and DeemedRetractibles down 15bp. Volatility was quite good; volume was average.

PerpetualDiscounts now yield 5.55%, equivalent to 7.22% interest at the standard equivalency factor of 1.3x. Long Corporates now yield a little over 4.8% (!) so the pre-tax interest-equivalent spread is now about 240bp, a sharp increase from the 215bp reported on August 4. Yields have gone in opposite directions over the week … go figure!

The FOMC statment was gloomy:

Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed.
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The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased.
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To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

Stock markets responded:

Financial stocks in the S&P 500, which paced a slide that erased $1 trillion in market value yesterday, rallied 8.2 percent. Bank of America Corp. (BAC) and Citigroup Inc. (C) jumped at least 13 percent. Freeport-McMoRan Copper & Gold Inc. (FCX) gained 7.5 percent as gold advanced to a record.

The S&P 500 jumped 4.7 percent to 1,172.53 at 4 p.m. in New York, after falling as much as 1.6 percent. The Dow Jones Industrial Average rose 429.92 points, or 4 percent, to 11,239.77 today. Both gauges had the biggest gain since March 23, 2009. About 16.8 billion shares changed hands at 4:56 p.m., more than twice the three-month average, Bloomberg data show.

And so did bonds:

Treasuries rose, pushing 10 and two- year note yields to a all-time lows, after Federal Reserve officials promised to keep benchmark interest rates at record lows through mid-2013 in a bid to revive economic growth.

U.S. debt rallied as central bank policy makers said economic growth is “considerably slower.” The Treasury’s sale of $32 billion in three-year notes drew stronger-than-average demand in the first note sale since Standard & Poor’s cut the U.S. debt rating Aug. 5.
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Yields on 10-year notes fell seven basis points, or 0.07 percentage point, to 2.24 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices
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Two-year note yields fell six basis points to 0.20 percent. The yield touched 0.1568 percent, lower than the previous record of 0.2283 percent yesterday. Thirty-year bond yields fell one basis point to 3.646 percent.

Korea has banned market efficiency:

South Korea banned equity short sales for three months while the two biggest state-run funds said they may boost investments as the government seeks to shore up a market that’s had its biggest six-day drop in three years.

The Financial Services Commission said it will ban short selling on all shares until Nov. 9 from today. The National Pension Service, the country’s biggest investor, said yesterday it plans to buy more stocks this month than it originally targeted. Korea Teachers Pension said it purchased about 70 billion won of stocks amid the sell-off and may buy more.

South Korea joins Greece this week in banning short selling after the Kospi Index (KOSPI) slumped 17 percent in six days. The gauge reached an intraday level yesterday that was 24 percent below its May 2 record close. Domestic institutions should play a bigger role to contain volatility that is often caused by sell- offs by overseas investors, the FSC’s Chairman Kim Seok Dong told lawmakers in parliament yesterday.

TransAlta, proud issuer of TA.PR.D, was put on outlook negative by S&P:

• We are revising our outlook on TransAlta Corp. to negative from stable.
• We are also affirming our ratings, including our ‘BBB’ long-term corporate credit rating, on the company.
• We base the outlook revision on ongoing weaker-than-expected credit metrics and our view that there is a one in three chance that they will not improve in line with our targets of 4x adjusted funds from operations (FFO)-to-interest and 20% FFO-to-debt within the next two years.
• Factors contributing to increased business risk include exposure to current weaker prices in the Pacific Northwest, the possibility of material penalties resulting from arbitration, and fleet renewal requirements that could lead to increasing capital spending.

DBRS has commented on proposed credit rating agency rules:

The first contradiction relates to the mandated rules’ effect on competition. Although fostering competition among rating agencies was a primary goal of both the 2006 Act and the Dodd-Frank Act, the proposed rules will be so costly to implement that additional credit rating agencies are unlikely to register as NRSROs and the existing pool of registrants may contract. According to the Commission’s estimates, the projected initial expense attributable to the Dodd-Frank NRSRO rules for a firm of DBRS’s size would exceed $1.8 million, with annual expenses thereafter of roughly $1.3 million. The cost of complying with the new regulations, when added to the substantial cost of complying with the existing NRSRO regulations, threatens to overwhelm all but the largest rating agencies.

The second contradiction is the fact that although NRSRO registration is voluntary, the rating agency regime created under the Dodd-Frank Act in many respects is more onerous than the mandatory regimes imposed on broker-dealers and investment advisers. For example, under the new rules, an NRSRO will have to disclose up to two dozen specific items of information each time it issues a credit rating. On the other hand, a broker-dealer who publishes a research report on an equity security must disclose only basic information about conflicts of interest and its rating system; while an investment adviser publishing an opinion about a security has only a general fiduciary duty to reveal conflicts of interest. Furthermore, while the chief compliance officers of broker-dealers, investment advisers and NRSROs all must annually review the sufficiency and effectiveness of their compliance programs, only NRSROs must file reports of such reviews with the SEC.

After all this, it is not surprising that the Canadian preferred share market seemed a little confused today, with PerpetualDiscounts winning 43bp, FixedResets up 5bp and DeemedRetractlbles losing 8bp. At least the hammering of Floaters makes sense, with the Fed announcing a two year hold on US policy rates! Volatility was quite good, volume was above average.

It didn’t take long for the Americans to start blaming the messenger:

On one hand, there is a case to be made that the madness of the right has made America a fundamentally unsound nation. And yes, it is the madness of the right: if not for the extremism of anti-tax Republicans, we would have no trouble reaching an agreement that would ensure long-run solvency.

On the other hand, it’s hard to think of anyone less qualified to pass judgment on America than the rating agencies. The people who rated subprime-backed securities are now declaring that they are the judges of fiscal policy? Really?

Just to make it perfect, it turns out that S&P got the math wrong by $2 trillion, and after much discussion conceded the point — then went ahead with the downgrade.

More than that, everything I’ve heard about S&P’s demands suggests that it’s talking nonsense about the US fiscal situation.

I have a question for Mr. Krugman: If S&P had taken this action 10 years ago, would you have gotten this angry? Or would you have laughed?

When you howl, you’re hit!

As always, I will emphasize that I have no faith in the infallibility of credit rating agencies. But I will also point out that they have a track record that is a damn sight better than their vociferous critics (those who have actually done credit analysis, those who have actually plunked money or reputation down on the table due to their own credit analysis, will often criticize – but not so vociferously. Why not? Because once you do the work and see how it turned out, you get a better understanding of how damn hard it is).

The greatest value of credit rating agencies is that they are highly visible and form a touchstone for investors and issuers alike. Lots of people have been decrying US fiscal policies for some time. It took a downgrade from S&P to attract a decent amount of interest.

I continue to believe that the US will not get serious about its fiscal problems until the day when the President gets a call from Treasury saying they’re not sure if they can sell the bonds. Hopefully, it will be a Democrat president who takes the call – he’ll have more political room to cut spending. That’s what it took in Canada … that’s what it took in Greece … that’s what it took in Ireland … Portugal … Italy …

Here’s a more sensible idea:

There is a lot of anger at the moment in the US over the embarrassment of the downgrade, as well as shock. I’m most amused by the shock, to tell the truth. S&P didn’t say anything yesterday that was not common knowledge and common sense.
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But that fiscal structure far predates Barack Obama, both as President and as human being, and Congresses and White Houses of both parties have done little to address the real problems in Medicare, Medicaid, and Social Security.
Why? Because as soon as people try to do so, demagogues accuse them of wanting to push Grandma over a cliff. Voters respond by punishing the reformers and rewarding the demagogues. If we collectively want to blame someone, we collectively should be looking in a mirror.

But the politicians and their minions are, as I predicted on Friday, focussing on the arithmetical error as the basis for their arguments. Here’s what John Bellows, Acting Assistant Secretary for Economic Policy, wrote in a post titled Just the Facts: S&P’s $2 Trillion Mistake:

In a document provided to Treasury on Friday afternoon, Standard and Poor’s (S&P) presented a judgment about the credit rating of the U.S. that was based on a $2 trillion mistake. After Treasury pointed out this error – a basic math error of significant consequence – S&P still chose to proceed with their flawed judgment by simply changing their principal rationale for their credit rating decision from an economic one to a political one.
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In fact, S&P’s $2 trillion mistake led to a very misleading picture of debt sustainability – the foundation for their initial judgment. This mistake undermined the economic justification for S&P’s credit rating decision. Yet after acknowledging their mistake, S&P simply removed a prominent discussion of the economic justification from their document.
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S&P acknowledged this error – in private conversations with Treasury on Friday afternoon and then publicly early Saturday morning. In the interim, they chose to issue a downgrade of the US credit rating.

Independent of this error, there is no justifiable rationale for downgrading the debt of the United States. There are millions of investors around the globe that trade Treasury securities. They assess our creditworthiness every minute of every day, and their collective judgment is that the U.S. has the means and political will to make good on its obligations. The magnitude of this mistake – and the haste with which S&P changed its principal rationale for action when presented with this error – raise fundamental questions about the credibility and integrity of S&P’s ratings action.

I remain true to my conviction that the most sensible words ever spoken by a Canadian politician – or any politician, anywhere, confronted with a debt crisis – were spoken by Jean Chretien. Someday I’ll find the reference and the exact phrase, but it was something like … “We aren’t doing this because this is what the bond market thinks we should do! We are doing it because we don’t want to care what the bond market thinks!”

Dealbreaker comments on one of the interesting knock-on effects of the downgrade:

In other words if you own Microsoft bonds (1) you don’t own Microsoft bonds, DTC does – you just have a certificate from DTC saying that they own those bonds on your behalf, and (2) Microsoft takes no responsibility for DTC paying you any of the interest or principal that it pays DTC. So if DTC decides not to pass the money along to you, you’re out of luck.

This is not a real problem of course as there are a whole lot of systemic/legal/etc. safeguards in place to make sure that DTC doesn’t take its $34 billion in assets to Vegas. But according to S&P, DTC is now more likely to default than Microsoft is – which means that your likelihood of getting paid back on a Microsoft bond is lower than the likelihood that Microsoft will pay you back. (I know!)

Ah, the joys of a world where AA+ is the new AAA …

I am often criticized for not doing on-line banking. But there’s a reason:

When she learned TD Bank was to hold a fraud-prevention seminar on May 13, 2010, in Burlington, Vermont, she hopped on a plane and slipped into the meeting. During the morning presentation, when an expert in wire transactions was talking about ways that small businesses could protect themselves from the dangers posed by cybercriminals, McCarthy raised her hand.

Why wasn’t TD Bank doing a better job protecting its small- business clients, she asked. How had TD Bank allowed $164,000 to be wired out of her account even though she hardly every made wire transfers? As the speaker tried to respond, McCarthy kept peppering him with questions about his bank’s responsibilities to its clients.

Two bank representatives, including TD Bank’s head of corporate security and investigations, walked over to McCarthy’s table and suggested they continue the subject outside. McCarthy told the head of security it was good to meet him finally, since she’d been calling him for weeks following the robbery and had never gotten through.

Jennifer Morneau, a spokeswoman for TD Bank, confirmed that there was such an incident involving a “woman from Long Island” at one of its anti-fraud seminars, and didn’t have any further information.

Looks like Europe will start buying Spanish and Italian bonds:

The European Central Bank said it will “actively implement” its bond-purchase program, signaling it is ready to start buying Italian and Spanish securities to counter the sovereign debt crisis.

In a statement issued in the name of President Jean-Claude Trichet after an emergency teleconference meeting of policy makers, the Frankfurt-based ECB welcomed Italy and Spain’s efforts to reduce their budget deficits. It also called on all euro-area governments to follow through on the measures agreed at a July 21 summit, including allowing the European Financial Stability Facility to purchase bonds on the secondary market.

“It is on the basis of the above assessments that the ECB will actively implement its Securities Markets Program,” the central bank said. “This program has been designed to help restoring a better transmission of our monetary policy decisions — taking account of dysfunctional market segments — and therefore to ensure price stability in the euro area.”

There, you see? The reason Spanish and Italian bond yields are so high isn’t because they’re risky credits – it’s because the markets are dysfunctional.

The European crisis is causing a certain amount of capital flight, with bank depositors looking for the security of US Banks. There’s only one problem – the banks don’t want it:

Cash held by U.S. banks surged 8.4 percent to a record $981 billion during the week ending July 27, the Federal Reserve said in an Aug. 5 report. That’s more than triple the amount firms had in July 2008, before the collapse of Lehman Brothers Holdings Inc. almost froze bank-to-bank lending.

Even more money may be deposited with U.S. lenders if investors pull away from European banks amid concern the Greek debt crisis may spread to Italy or beyond, said Brian Smedley, a strategist at Bank of America Merrill Lynch in New York. Those funds may not be so welcome: With few opportunities to lend them out profitably, U.S. firms may have to slap fees on depositors to keep returns from eroding.
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Since late 2008, the Fed has been paying interest on deposits placed with the central bank, known as interest on excess reserves, or IOER. That rate is currently set at 25 basis points, or 0.25 percent.

At that rate, banks may struggle to profit from even non- interest-paying deposits, because the companies must pay premiums to the Federal Deposit Insurance Corp. when they route the money to the Fed. On April 1, the FDIC changed its methodology for assessing premiums, resulting in an increased cost for most large banks. Because a deposit at the Fed is technically an asset, taking the money may stretch banks’ capital-to-asset ratios, which are watched by regulators, Joseph Abate, a money-market analyst at Barclays Capital in New York, wrote in an Aug. 5 report.

“The higher deposit cost, the potential need for additional capital and the flight-prone nature of these balances clearly outweigh the 25-basis-point return from IOER that they would earn depositing the money at the Fed,” Abate wrote. Any reduction in IOER — a move Fed Chairman Ben S. Bernanke told Congress in July might be possible — may create a “serial round of deposit fees” since banks would try to “push cash from their balance sheets” like a game of “hot potato.”

It was an interesting day today:

The S&P 500 retreated 6.7 percent to 1,119.51 at 4 p.m. in New York. The gauge slumped 11 percent in three days, the most since November 2008, and fell to the lowest since September 2010. The Dow Jones Industrial Average slid 634.76 points, or 5.6 percent, to 10,809.85. The Russell 2000 Index of small companies slumped 8.9 percent, entering a so-called bear market, down 25 percent from its April 29 high.
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The downgrade extended a rout that had wiped out $1.94 trillion in market value from the country’s stocks amid concern the economic recovery is at risk. Global equities tumbled and European shares entered a bear market. The Stoxx Europe 600 Index has now fallen 21 percent from this year’s high on Feb. 17. The S&P 500 is down 18 percent since April 29.
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The Chicago Board Options Exchange Volatility Index, which measures the cost of using options as insurance against declines in the S&P 500, soared 46 percent to 46.80, the highest since March 2009.
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The KBW Bank Index of 24 stocks slumped 11 percent. Bank of America dropped 20 percent, the most in the S&P 500, to $6.53. American International Group Inc. (AIG), the bailed-out insurer, sued the largest U.S. lender by assets over $10 billion in losses on mortgage-bond investments.
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Equity indexes extended losses after S&P changed the outlook for Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) to “negative” from “stable.” Berkshire Hathaway Class B shares slumped 6.4 percent to $66.66.

“Our view of these companies’ fundamental credit characteristics has not changed,” S&P said in a statement today as it cut the outlook on Omaha, Nebraska-based Berkshire. “Rather, the rating actions reflect the application of criteria and our view that the link between the ratings on these entities and the sovereign credit ratings on the U.S. could lead to a decline in the insurers’ financial strength.”

Not surprisingly, it was clobberin’ time for the Canadian preferred share market, with PerpetualDiscounts losing 1.94%, FixedResets off 1.30% and DeemedRetractibles down 1.74%. There was not a single winner in the lengthy volatility list – and when each of the three major indices is down more than the threshold for inclusion in the volatility list, you get a very extensive volatility list indeed! Volume was quite high, but block traders were, if anything, less active than usual.