PrefBlog

The FRB-Boston has released Public Policy Discussion Paper that will be of interest to the “Occupy” mob – Quantifying the Role of Federal and State Taxes in Mitigating Income Inequality:

Income inequality has risen dramatically in the United States since at least 1980. This paper quantifies the role that the tax policies of the federal and state governments have played in mitigating this income inequality. The analysis, which isolates the contribution of federal taxes and state taxes separately, employs two approaches. First, cross-sectional estimates compare before-tax and after-tax inequality across the 50 states and the District of Columbia. Second, inequality estimates across time are calculated to assess the evolution of the effects of tax policies. The results from the first approach indicate that the tax code reduces income inequality substantially in all states, with most of the compression of the income distribution attributable to federal taxes. Nevertheless, there is substantial cross-state variation in the extent to which state tax policies compress the income distribution attributable to federal taxes. Cross-state differences in gasoline taxes have a surprisingly large impact on income compression, as do sales tax exemptions for food and clothing. The results of the second approach indicate that there has been little change since the early 1980s in the impact of tax policy on income inequality across almost all states.

Here’s a big surprise! Even bigger writedowns on Greek debt are being discussed:

European finance ministers grappled with an assessment that Greece’s economy is deteriorating as they began a six-day battle to stave off a default and shield banks from the fallout.

A review by European and International Monetary Fund experts showed Greek bond writedowns of 60 percent and more official aid would still leave the country with a debt load bigger than its annual economic output by 2020.
…
Europe’s international image is “disastrous,” Luxembourg Prime Minister Jean-Claude Juncker told reporters before the Brussels meeting. “We’re not really giving a great example of a high standing of state governance.”

It will be remembered that Jean-Claude Juncker is a liar with lying staff.

Yellen is talking about QE3:

Federal Reserve Vice Chairman Janet Yellen said a third round of large-scale securities purchases might become warranted if necessary to boost a U.S. economy challenged by unemployment and financial turmoil.

The central bank should also give “careful consideration” to Chicago Fed President Charles Evans’s proposal to tie the near-zero interest-rate pledge to specific levels of unemployment and inflation, Yellen said today in a speech in Denver.

The remarks signal Fed officials may be prepared to delve further into unprecedented monetary territory and take criticism inside and outside the central bank for expanding the balance sheet. Fed policy makers are struggling to lower unemployment that’s been stuck near 9 percent or higher for 30 months without boosting inflation that’s already close to the central bank’s long-run goal.

See? The Republicans may be on to something

Interesting competition for retail deposits in Europe:

The rate paid on new bank deposits for up to a year has climbed in Portugal to 4 percent from 2.56 percent in December and in Italy to 2.41 percent from 1.40 percent, according to data from the European Central Bank. Banco Espirito Santo SA (BES), Portugal’s biggest publicly traded bank, is offering a 4.83 percent average annual return on three-year deposits of more than 1,000 euros.

In September, Intesa Sanpaolo SpA (ISP), Italy’s second-largest bank, sold two-year bonds yielding 4.5 percent to customers transferring cash from competitors.

In Spain, the government acted in May to penalize banks that offered what it deemed to be overly aggressive deposit rates by requiring them to make extra contributions to deposit guarantee funds. Average rates for new bank deposits have held steady this year in Spain at about 2.6 percent.

That hasn’t stopped banks from competing to lure savings with products such as the commercial paper that Bankia is selling to retail clients to raise 1 billion euros. Governments, both national and regional, are in on the act after states including Catalonia and Andalusia offered bonds for sale.
…
Banco Espirito said in August that it trimmed lending by 3.1 percent from a year earlier and boosted customer funds by 23 percent to bring its loan-to-deposit ratio down to 155 percent from 198 percent a year earlier. A lower loan-to-deposit ratio is a sign the bank is less reliant on sources of funding such as bond sales to fund its business.

Santander expects lending at its Spanish branch network to shrink 3 percent a year through 2013 after it brought down the loan-to-deposit ratio at the unit to 134 percent from 159 percent in 2009.

Capital Power Corporation, proud issuer of CPX.PR.A has been confirmed at Pfd-3 by DBRS:

DBRS has historically assessed CPLP’s financial profile on a stand-alone basis and, as such, deconsolidated the results of its 29.2% ownership interest in Capital Power Income LP (CPILP; rated BBB (high), Under Review with Negative Implications). The strategic review process initiated by CPILP in the fall of 2010 resulted in an agreement (the Agreement) in which Atlantic Power Corporation (ATP) will acquire all the outstanding units of CPILP. Upon closing of the transaction in early November 2011, CPLP is expected to receive total consideration of approximately $320 million for its ownership interest in CPILP, in a mix of cash, ATP shares and assets. As part of the Agreement, CPILP will sell its Roxboro and Southport facilities, located in North Carolina, to CPLP for a purchase price of $121 million (forming a portion of combined consideration received).

The PPAs for CPILP’s North Carolina plants were finalized with Progress Energy Resources Corp. in June 2011 and DBRS expects their contribution to CPLP’s earnings to be modest, although they should also reduce uncertainty. Closing of the transaction is not expected to have any impact on the ratings of CPLP or CPC, given the modest cash contribution of CPILP to CPLP, and the consideration to be received.

It was a fairly uneventful day on the Canadian preferred share market, with PerpetualDiscounts down 3bp, FixedResets up 1bp and DeemedRetractibles gaining 4bp. There was a surprising amount of volatility for such a quiet day overall, with the majority of major changes in bid price being downwards. Volume was good.

The heroes of the SEC were able to extort $280-million from Citigroup:

The SEC alleges that Citigroup Global Markets structured and marketed a CDO called Class V Funding III and exercised significant influence over the selection of $500 million of the assets included in the CDO portfolio. Citigroup then took a proprietary short position against those mortgage-related assets from which it would profit if the assets declined in value. Citigroup did not disclose to investors its role in the asset selection process or that it took a short position against the assets it helped select.

The Basel Committee on Banking Supervision has released a Progress report on Basel III implementation. With respect to Basel III implementation, Canada reports:

Draft regulation expected in May 2012 and final guidance before the end of 2012 for implementation in Q1 2013. OSFI has issued a number of public communications concerning the implementation of Basel III.

Europe remains mired in wrangling:

German Chancellor Angela Merkel has canceled a planned speech to parliament in Berlin tomorrow because of a deadlock over proposals to leverage the European Financial Stability Facility to give it more firepower, three German lawmakers said.

“It’s a disappointing development but without any concrete proposal for increasing the efficiency of the fund the chancellor can’t present a complete set of proposals tomorrow,” Norbert Barthle the ranking member of Merkel’s Christian Democratic Union party on parliament’s budget committee, told reporters. Other lawmakers confirming cancelation of Merkel’s speech were opposition members Carsten Schneider and Priska Hinz.

“The French want more money from Germany than we are prepared to shoulder,” Otto Fricke, the budget spokesman for Merkel’s Free Democratic Party ally in parliament, told reporters today.

What’s on the table? Enormous credit lines:

Europe’s bailout fund may be authorized to provide credit lines of as much as 10 percent of a country’s economy, a draft document shows.

The enhanced fund, called the European Financial Stability Facility, may be able to offer loans to countries “before they face difficulties raising funds,” the draft guidelines obtained by Bloomberg News show. Credit lines for Spain and Italy, which required European Central Bank support, could reach 270 billion euros ($371 billion).

The guidelines prompted criticism from some German lawmakers who have opposed bailout aid as France and Germany wrangled over the role of the ECB in tackling Europe’s debt crisis. Finance ministers gather in Brussels tomorrow to set a common strategy, with leaders scheduled to meet Oct. 23.
…
France favors creating a bank out of the EFSF, boosting its financial clout with backing from the ECB, a proposal that Germany rejects, Finance Minister Wolfgang Schaeuble told lawmakers in Berlin this week. French Prime Minister Francois Fillon said today that the euro region should agree to use leverage to make the region’s financial support fund “massive.”

Monetizing the debt through the ECB would certainly be the easiest solution. Too bad it would also be the worst.

There’s a little bit more detail regarding Kweku Adoboli / UBS, but not much:

Prosecutors amended two of the four charges against Adoboli to indicate that records he allegedly falsified were on ETF trades. A London magistrates court today transferred the case against the 31-year-old to a criminal court where he will be expected to enter a plea on the accusations at a Nov. 22 hearing.
…
UBS questioned one of Adoboli’s trades in August this year, and he “provided a good and plausible explanation,” Williams said. The bank then asked him on Sept. 13 about further trades he’d made that could expose the bank to large losses, and whether he’d told the credit-risk department. He said he hadn’t.

The following day, UBS asked him to confirm “the exact identities of the counterparties” on the trades and he didn’t respond, Williams said at the hearing today. Adoboli left the office at lunchtime and went to his apartment in east London, where he e-mailed the bank about the positions.

“The bank was anxious to have him explain,” and he returned at 3:45 p.m. and cooperated with UBS managers, the prosecutor said. The bank called the police late that night and Adoboli was taken to Bishopsgate precinct, the closest one to UBS’s London headquarters. He was cautioned about his rights and interviewed and “made no admissions,” Williams said.
…
In addition to the departure of Gruebel and the co-heads of global equities, Francois Gouws and Yassine Bouhara, the bank has suspended “a number of front office staff” pending further disciplinary action, Carsten Kengeter, head of the investment bank, said in a memo to staff.

Sounds like just another case of shitty management at an investment bank keeping sloppy records. Yawn.

I hadn’t realized this before but OMERS is in the mutual fund business. Many municipal employees – particularly the 75% (?) of the populace whose objective is to think about financial planning as little as possible – would be well advised to participate.

DBRS confirmed PFR.UN at STA-2:

The main constraints to the rating are the interest rate risk of the Portfolio and the potential for capital losses and reductions in income resulting from underlying securities being called for redemption by their respective issuers.

Seems to me to be a virtual certainty that one or the other of those risks will be realized.

DBRS confirmed NA at Pfd-2:

While strong market shares in the home province remain a key strength of the Bank, the rating reflects the Bank’s regional concentration in Québec, which accounted for 68% of its revenues in 2010, up from an average of 64% over the previous four years. National’s revenue is diversified by business line: the Bank generated 48% of earnings for the first three quarters of 2011 (excluding the Other segment) from the personal and commercial banking unit, 39% of earnings from the financial markets business and 13% from its wealth management operations.

Dan Hallett writes an entertaining piece in the Globe titled BMO income fund sets yield bar unreachably high:

In his recent article, Mr. Heinzl points out that the fund’s hefty monthly cash payout – now equal to more than 9.5 per cent annualized net of fees – has been well above the fund’s longer-term returns.
…
Earlier this year, I tested the BMO Monthly Income’s distribution for sustainability. I found that since the managers would have to generate more than 17 per cent annually from its stock picks that the distribution would either need to be cut or risk further eating into the fund’s principal.
…
BMO insists the payout is sustainable, an assertion they base on the fund’s net inflows.

I love that last paragraph quoted – Madoff was saying the same thing.

When I think of all the agonizing that has gone into my estimates of sustainable income for MAPF, this kind of stuff drives me wild … but BMO can afford to hire more ex-regulators than I can, so I suppose it’s OK.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts winning 14bp, FixedResets up 1bp and DeemedRetractibles losing 7bp. Volatility was average, as was volume.

BAM levered up a little more:

Brookfield-family companies are hot commodities in new-issue markets.

After launching a bought deal late on Tuesday, Brookfield Infrastructure (BIP.UN-T25.63-0.22-0.85%) announced on Wednesday that its offering has been upsized to a total of $588-million. About 70 per cent of that comes from public investors, and the remainder comes from parent company Brookfield Asset Management Inc., which bought more shares to keep its 30 per interest in the subsidiary.

I’m not sure I’m too happy about this. More assets means more fees, but more investment means more leverage.

DBRS confirmed L.PR.A at Pfd-3:

DBRS has today confirmed Loblaw Companies Limited’s (Loblaw or the Company) Medium-Term Notes and Debentures ratings at BBB, its Cumulative Redeemable Second Preferred Shares, Series A rating at Pfd-3, and its Commercial Paper rating at R-2 (middle). All trends remain Stable. The ratings reflect Loblaw’s strong market position, large scale and national diversification, balanced by the mature nature of the core business.

The WN.PR.A, WN.PR.C, WN.PR.D & WN.PR.E issues of Weston were confirmed at Pfd-3 by DBRS:

DBRS has today confirmed the ratings of the Notes & Debentures of George Weston Limited (Weston or the Company) at BBB, the Preferred Shares at Pfd-3 and the Commercial Paper at R-2 (high), all with Stable trends. Weston’s business risk profile remains well placed in the BBB rating category based on the Company’s strong brands and above-average operating efficiency. The Stable trend reflects DBRS’s expectation that Weston will continue to achieve growth in EBITDA from further brand development, operational efficiency gains and new investments. Weston has been successful at maintaining its market position while passing on price increases, at least partially offsetting the effects of a rising input cost environment. The significant increase in the Company’s pro forma adjusted EBITDA in 2010 (approximately $280 million versus approximately $225 million in 2009) was primarily the result of improved operational efficiencies as well as acquisitions (e.g., Ace Bakery Ltd. and Keystone Bakery Holdings, LLC). Weston used approximately $300 million of its cash on hand to finance the acquisition of the aforementioned EBITDA generating businesses. In addition, the Company used $1 billion of cash to fund a special dividend to shareholders in January 2011.

The Assistant Croupier went to BMO:

The mystery of what happened to Mark White, who had been one of the top three individuals in command at Canada’s banking and insurance regulator, has been solved.

Bank of Montreal chief financial officer Tom Flynn sent a note to the bank’s employees Wednesday announcing that Mr. White is joining BMO effective Nov. 1 as senior vice-president of capital management and optimization. The rumour since this summer had been that Mr. White was going to BMO (BMO-T58.49-0.32-0.54%) , but all parties involved had remained mum.

After screwing up the preferred share market, now he can work on more general projects, as revolving door regulation continues to be the norm.

At Ivey School of Business, professors lie to students. For their own good, of course.

It was a quiet day for the Canadian preferred share market, with PerpetualDiscounts up 4bp, FixedResets gaining 6bp and DeemedRetractibles winning 7bp. Volatility was dominated by BAM and related issuers.

PerpetualDiscounts now yield 5.42%, equivalent to 7.05% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 5.0%, so the pre-tax interest-equivalent spread is now 205bp, unchanged from the number reported October 12.

Interesting article about the R&D Tax Credits:

Open Text Corp. chairman Tom Jenkins, who spent the past year investigating Canada’s R&D spending, said he was stunned at how little effort is spent figuring out what works, and what doesn’t.

That’s true of all government programmes – particularly securities regulation, I might say. If it sounds good, do it! is the slogan, and if you go back to something after five years and find out it’s done nothing – or made matters worse – in order to change the programme … well, that would look like you made a mistake, so don’t check.

Europe is having some success in gaining the ability to manipulate sovereign debt markets:

The European Union reached a deal as part of a short-selling law that will pave the way for an optional ban on naked credit-default swaps on sovereign debt.

Poland, which holds the rotating presidency of the EU, and lawmakers from the European Parliament, reached the accord at a meeting in Brussels, EU spokeswoman Chantal Hughes said.

Under today’s deal, traders may be prevented from buying CDS on government bonds unless they either own the sovereign debt or other assets whose price moves in tandem with it. Nations will have the right to opt out of the measure if they detect signs that it may affect their borrowing costs.
…
German Finance Minister Wolfgang Schaeuble and lawmakers in the European Parliament have called for a ban on naked CDS trades on government debt over concerns the practice fueled the euro zone’s debt crisis. Germany already has restrictions on using swaps to bet on sovereign defaults.

Some European governments have also criticized the use of short selling to bet against bank stocks, arguing that the practice has roiled markets. Volatility that sent European bank stocks to two-year lows led France, Spain, Belgium and Italy in August to impose temporary bans on short selling that remain in force.

I’m not sure that this will have any effect – buying protection naked is simply a convenient way to short bonds. Sovereigns are, as a rule, fairly easy to borrow and therefore also fairly easy to short. Forward and Futures contracts are also generally available.

Moody’s cut Spain two notches:

Spain’s credit rating was cut for the third time since June 2010 by Moody’s Investors Service as Europe’s sovereign-debt crisis threatens to engulf the nation.

Moody’s reduced its ranking to its fifth-highest investment grade, cutting it by two levels to A1 from Aa2, with the outlook remaining negative, the rating company said in a statement today. Standard & Poor’s downgraded Spain on Oct. 14 to its fourth-highest investment grade after Fitch Ratings cut it to the same level on Oct. 7, the day it also downgraded Italy.

Spain continues to be vulnerable to market stress and event risk while already moderate growth prospects for the nation have been scaled back further, Moody’s said in the statement.

Tomorrow’s report will be greatly delayed because I’m going to go see Chess again. Yes, I know that when I reviewed it on October 7 I said I didn’t like the production … but six months ago when I heard it was coming to town, I decided that if I was going to wait twenty-five years to see a show, I was damn well going to see it twice.

It was a negative day for the Canadian preferred share market, with PerpetualDiscounts losing 18bp, FixedResets down 11bp and DeemedRetractibles off 6bp. Volatility was mild. Volume was heavy.