PrefBlog

The US has shaken down HSBC & Standard Chartered:

HSBC (HSBA) Holdings Plc will pay at least $1.9 billion in a deferred prosecution agreement that settles U.S. probes of money laundering tied to Europe’s largest bank, a person familiar with the matter said, making it the largest such accord ever.
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Yesterday, Standard Chartered Plc (STAN), Britain’s second-largest bank by market value, agreed to pay $327 million in fines after regulators alleged it violated U.S. sanctions with Iran.

As far as I can tell from the Senate REPORT: U.S. Vulnerabilities to Money Laundering, Drugs, and Terrorist Financing: HSBC Case History, the problem was that they did not create enough paper:

An outside auditor hired by HBUS has so far identified, from 2001 to 2007, more than 28,000 undisclosed, OFAC sensitive transactions that were sent through HBUS involving $19.7 billion. Of those 28,000 transactions, nearly 25,000 involved Iran, while 3,000 involved other prohibited countries or persons. The review has characterized nearly 2,600 of those transactions, including 79 involving Iran, and with total assets of more than $367 million, as “Transactions of Interest” requiring additional analysis to determine whether violations of U.S. law occurred. While the aim in many of those cases may have been to avoid the delays associated with the OFAC filter and individualized reviews, rather than to facilitate prohibited transactions, actions taken by HSBC affiliates to circumvent OFAC safeguards may have facilitated transactions on behalf of terrorists, drug traffickers, or other wrongdoers. While HBUS insisted, when asked, that HSBC affiliates provide fully transparent transaction information, when it obtained evidence that some affiliates were acting to circumvent the OFAC filter, HBUS failed to take decisive action to confront those affiliates and put an end to the conduct. HBUS’ experience demonstrates the strong measures that the U.S. affiliate of a global bank must take to prevent affiliates from circumventing OFAC prohibitions.

It was a directionless day for the Canadian preferred share market, with PerpetualPremiums up 4bp while FixedResets and DeemedRetractibles both gained 1bp. Volatility was low. Volume was average.

When does a recession become a depression? Ask the Greeks:

Greece’s economy shrank by 6.9 per cent in the third quarter of the year, compared with the same period in 2011.

The national statistics agency says that the decrease was less than the 7.2-per-cent drop estimated in November, based on new data that wasn’t available last month.

However, the Greeks have the answer – steal from bank shareholders:

Greece’s three biggest banks said they participated in the government’s 10 billion-euro ($13 billion) buyback of sovereign debt, the second hit to their bond holdings this year as the nation rushes to cut a debt load that threatens further international aid.

National Bank of Greece SA, the largest lender, Alpha Bank SA and Eurobank Ergasias SA said in statements to the Athens bourse today that their boards agreed unanimously to join the offer, which ended at 7 p.m. Athens time. No further details were provided.
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Stung by the biggest sovereign restructuring in history earlier this year, the Greek banks got a promise that they won’t be subject to any legal proceedings from shareholders for participating in the offer. Finance Minister Yannis Stournaras said today the banks would have legal indemnity from potential shareholder lawsuits.

The buyback is aimed at the 62 billion euros of new bonds issued when Greece restructured its privately held debt in March. Greek banks held about 15 billion euros of the bonds, while the country’s pension funds had 8 billion euros, according to a Nov. 27 draft report by the troika of the European Commission, European Central Bank and IMF.
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The prices offered for bonds maturing from 2023 to 2042 averaged 33.1 percent of face value, based on information in a statement from the Athens-based Public Debt Management Agency on Dec. 3.

There was a good, but not great, US Jobs number:

Total nonfarm payroll employment rose by 146,000 in November, and the unemployment rate edged down to 7.7 percent, the U.S. Bureau of Labor Statistics reported today. Employment increased in retail trade, professional and business services, and health care.

However:

The drop in the jobless rate, from 7.9 percent in October, wasn’t great news because of why it happened: More people dropped out of the labor force so they weren’t counted among the unemployed. The labor-force participation rate remains depressed more than three years after the end of the 2007-09 recession. If it were at normal levels, the unemployment rate would be substantially higher.

IIROC has released new rules on electronic trading:

The amendments expand on existing obligations under the Universal Market Integrity Rules (UMIR) by assigning IIROC-regulated dealers clear supervisory and gatekeeper responsibilities to protect against errors related to electronic trading. The changes will ensure that market participants have appropriate automated filters, testing of algorithms, and other risk management tools in place for handling orders before those orders enter the marketplace.

For “gatekeeper”, read “policeman”. Everybody’s a policeman! Yay!

DBRS confirmed BIG.PR.B and BIG.PR.C at Pfd-2:

The Class B Preferred Shares and Class C Preferred Shares yield 7.00% and 5.75% annually, respectively, on their issue price of $12 per Preferred Share and rank pari passu with respect to return of principal and payment of dividends. Holders of the Capital Shares are expected to receive all excess dividend income after Preferred Share distributions and other Company expenses have been paid.

DBRS last confirmed the rating of the Preferred Shares at Pfd-2 on December 7, 2011. Performance has been generally stable since the last rating confirmation, with the NAV of the Company fluctuating between $28 and $32. The current dividend coverage ratio is 1.6 times and the current downside protection (as of November 30, 2012) available to holders of the preferred shares is approximately 62.4%. The confirmation of the rating of the Preferred Shares is based primarily on the level of downside protection and dividend coverage available, as well as on the high credit quality and consistency of dividend distributions of the underlying names in the Portfolio.

DBRS confirmed BSD.PR.A at Pfd-4(low):

As of September 30, 2012, the Portfolio consisted of 68% Canadian common stock, 22% REITs, 6% power generation and pipeline trusts and 3% Canadian preferred stock. Since the rating was last confirmed in December 2011, performance has been slightly negative. Downside protection available to holders of the Preferred Securities has slowly trended lower over the past year, falling from 23.9% on November 30, 2011, to 17.4% as of November 30, 2012. The yield on the Portfolio has also decreased slightly, causing the distribution coverage ratio to drop to 0.8 times (as of November 30, 2012). Despite the reduction, downside protection remains at levels sufficient for a Pfd-4 (low) rating. The rating on the Preferred Securities continues to be constrained by the large percentage of underlying securities in the Portfolio that are not rated by any rating agency and the grind on the Portfolio due to distributions exceeding income.

The redemption date for the Preferred Securities is March 31, 2015.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums down 10bp, FixedResets gaining 3bp and DeemedRetractibles off 1bp. Volatility was minimal. Volume was average.

DBRS confirmed Loblaws at Pfd-3:

Loblaw’s ratings continue to be supported by its strong market position, large scale, national diversification and industry-leading private labels. The ratings also continue to reflect the high level of, and intensifying competition in, Canadian food retailing.

The confirmation also reflects DBRS’s view that Loblaw’s earnings profile should remain in the range acceptable for the current rating category, despite intensifying competition and a difficult consumer environment. DBRS expects top-line revenue will remain relatively flat in the near term, based on a modest increase in square footage and flat-to-negative same-store sales. EBITDA margins should remain under pressure as Loblaw could be forced to increase its use of promotional pricing to help drive traffic as competition intensifies (particularly with new openings of Wal-Mart Supercenters and Target stores) and the Company continues to invest in infrastructure upgrades. As such, DBRS expects EBITDA (on a comparable basis) will decline moderately or, at best, remain flat in the near term.
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DBRS will review all aspects of the [REIT spin-off] transaction upon closing. Should the proposed transaction close on terms and conditions that are not substantially in accordance with those outlined in the proposed plan provided to DBRS and/or Loblaw or the transaction experience material adverse changes, DBRS will consider the actual terms and a rating action could result.

DBRS confirmed Weston at Pfd-3.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 3bp, FixedResets up 4bp and DeemedRetractibles off 9bp. Volatility was average. Volume was average.

It seems that the Financial Stability Oversight Council is getting annoyed at SEC footdragging on the MMF issue and has issued its own discussion paper:

Based on this proposed determination, the Council seeks comment on the proposed recommendations for structural reforms of MMFs that reduce the risk of runs and significant problems spreading through the financial system stemming from the practices and activities described above. The Council is proposing three alternatives for consideration:

• • Alternative One: Floating Net Asset Value. Require MMFs to have a floating net asset value (“NAV”) per share by removing the special exemption that currently allows MMFs to utilize amortized cost accounting and/or penny rounding to maintain a stable NAV. The value of MMFs’ shares would not be fixed at $1.00 and would reflect the actual market value of the underlying portfolio holdings, consistent with the requirements that apply to all other mutual funds.
• • Alternative Two: Stable NAV with NAV Buffer and “Minimum Balance at Risk.” Require MMFs to have an NAV buffer with a tailored amount of assets of up to 1 percent to absorb day-to-day fluctuations in the value of the funds’ portfolio securities and allow the funds to maintain a stable NAV. The NAV buffer would have an appropriate transition period and could be raised through various methods. The NAV buffer would be paired with a requirement that 3 percent of a shareholder’s highest account value in excess of $100,000 during the previous 30 days — a minimum balance at risk (MBR) — be made available for redemption on a delayed basis. Most redemptions would be unaffected by this requirement, but redemptions of an investor’s MBR itself would be delayed for 30 days. In the event that an MMF suffers losses that exceed its NAV buffer, the losses would be borne first by the MBRs of shareholders who have recently redeemed, creating a disincentive to redeem and providing protection for shareholders who remain in the fund. These requirements would not apply to Treasury MMFs, and the MBR requirement would not apply to investors with account balances below $100,000.
• • Alternative Three: Stable NAV with NAV Buffer and Other Measures. Require MMFs to have a risk-based NAV buffer of 3 percent to provide explicit loss-absorption capacity that could be combined with other measures to enhance the effectiveness of the buffer and potentially increase the resiliency of MMFs. Other measures could include more stringent investment diversification requirements, increased minimum liquidity levels, and more robust disclosure requirements. The NAV buffer would have an appropriate transition period and could be raised through various methods. To the extent that it can be adequately demonstrated that more stringent investment diversification requirements, alone or in combination with other measures, complement the NAV buffer and further reduce the vulnerabilities of MMFs, the Council could include these measures in its final recommendation and would reduce the size of the NAV buffer required under this alternative accordingly.

I like #3. SEC Commissioner Luis Aguilar, who has opposed meaningful reform, is hastily covering his ass by focussing on migration to unregulated funds:

The outflow of money fund assets to an unregulated market is a significant systemic risk concern, and can result in harm to our market and investors. As was stated by an SEC spokesperson, this was not a concern shared by the SEC staff.

However, the SEC staff’s recent report has now identified the issue of migration to unregulated products and is, for the first time, offering a more in-depth analysis. Moreover, the new Director of Investment Management, Norm Champ, who has experience with unregulated funds, has indicated to me that the staff is now actively considering this issue.

Additionally, both Secretary Geithner and FSOC have expressly raised the need to address the concern of money fund assets migrating to an opaque, unregulated market as a result of structural changes to money market funds.

The serious consideration by the SEC staff and FSOC of the potential migration of money fund assets to opaque, unregulated funds is also a welcome development.

The FSOC paper used the word “unregulated” exactly once:

The Council recognizes that regulated and unregulated or less-regulated cash management products (such as unregistered private liquidity funds) other than MMFs may pose risks that are similar to those posed by MMFs, and that further MMF reforms could increase demand for non-MMF cash management products. The Council seeks comment on other possible reforms that would address risks that might arise from a migration to non-MMF cash management products. Further, the Council is not considering MMF reform in isolation. The Council and its members intend to use their authorities, where appropriate and within their jurisdictions, to address any risks to financial stability that may arise from various products within the cash management industry in a consistent manner. Such consistency would be designed to reduce or eliminate any regulatory gaps that could result in risks to financial stability if cash management products with similar risks are subject to dissimilar standards.

The extra report Aguilar was whining about has been published: Response to Questions Posed by Commissioners Aguilar, Paredes, and Gallagher:

Third, the Commissioners asked how money market funds would likely have performed during the events of September 2008 had the 2010 reforms been in place at the time. The effect of heightened liquidity standards on fund resiliency, given specific levels of capital losses and redemption activity, is examined using money market fund portfolio holdings in September 2008. The findings indicate that funds are more resilient now to both portfolio losses and investor redemptions than they were in 2008. That being said, no fund would have been able to withstand the losses that The Reserve Primary Fund incurred in 2008 without breaking the buck, and nothing in the 2010 reforms would have prevented The Reserve Primary Fund’s holding of Lehman Brothers debt.

Well, of course. The only thing that’s going to allow a fund to maintain par value in the face of a significant default is capital. Duh!

Special dividends are all the rage:

So far this quarter, U.S. companies have pledged more than $21-billion (U.S.) in one-off dividends – and that’s not including early payment of regular ones. Shareholders receiving them will be able to book the gains at the 15-per-cent tax rate currently in place rather than the worst-case 39.6 per cent scheduled to go into effect next year if President Barack Obama and Congress don’t agree on an alternative rate.
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If this quarter’s special dividends alone were instead paid out next year with the highest feasible tax rates in force, the U.S. government’s coffers would be at least $5-billion heavier in a few months’ time.

Enbridge Inc. was confirmed at Pfd-2(low) by DBRS:

The ratings reflect (1) a relatively strong business risk profile, (2) pressure on the Company’s near-to-medium-term credit metrics and (3) results under the 10-year Competitive Tolling Settlement (CTS) effective July 1, 2011.

RioCan Real Estate Investment Trust was confirmed at Pfd-3(high) by DBRS:

following the Trust’s announcement that that it has entered into a purchase and sale agreement (the Agreement) to acquire a $1.1 million portfolio of Canadian retail properties, including five regional malls and three grocery-anchored unenclosed shopping centres.

The properties are currently owned by Primaris Retail REIT (Primaris). Pursuant to the Agreement, RioCan will acquire a 100% interest in six properties and a 50% interest in two properties. The Agreement is in support (and subject to completion) of the proposed offer to acquire Primaris by a KingSett Capital-led consortium (the Offer), which was announced earlier today.

The confirmation is based on the fact that the potential acquisition, totaling $1.1 billion, would represent only approximately 10% of RioCan’s current total assets. In addition, the target properties are considered to be good quality assets that are well located in major Canadian markets.

In terms of financing, the potential acquisition would be funded with $635 million of new fully-underwritten debt financing commitments from The Toronto-Dominion Bank and the assumption of $499 million of debt. While this would temporarily increase leverage to approximately 49% total debt-to-capital, RioCan has stated its intention to repay a meaningful portion of the incremental debt within six to nine months, primarily with proceeds from asset sales. Despite the increase in leverage, DBRS believes RioCan’s EBITDA coverage ratio (including capitalized interest), with the additional operating income generated from the targeted properties, should stay close to 2.5 times (x), a level well within the range acceptable for the current rating category.

I continue to be fascinated by the concept of converting atmospheric CO₂ into usable energy, preferably by using sunlight as the energy source. Now I learn that there’s a project at my alma mater delving into that very thing. My alma mater wants money from me … I suggest that they simply ask the Ontario government to stop blowing cash on second rate solar technology and plough the money into research that might lead to something that actually works.

I urge all readers to remember that Christmas is a time to give to the less fortunate. And who could be less fortunate than the owner of a telemarketting firm?:

The Cancer Society’s 2010 contract with InfoCision for a telemarketing campaign called Notes to Neighbors estimated the charity would receive 44 percent of the money raised. Solicitors used scripts, approved by the Society, falsely claiming that 70 percent of the money raised would go to the charity.

That year, InfoCision kept 100 percent of the $5.3 million it raised for the charity, according to Cancer Society filings with the IRS and the state of Maine.

The American Diabetes Association approved a script the same year for use by InfoCision telemarketers.

“Overall, 75 percent of every dollar received goes directly to serving people with diabetes and their families,” the script says.

The Association’s fundraising contract for that period estimated the Association would receive just 15 percent, with the rest going to InfoCision.

Other of the nation’s largest health charities, including the American Heart Association, the American Lung Association and the March of Dimes, have hired InfoCision during the past decade. The telemarketer brought in a total of $425.5 million for more than 30 nonprofits from 2007 to 2010, keeping $220.6 million, or 52 percent, according to state-filed records.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums down 8bp, FixedResets off 6bp and DeemedRetractibles gaining 5bp. Volatility was average. Volume was above average, dominated by recent issues.

PerpetualDiscounts now yield 4.87%, equivalent to 6.33% interest at the standard conversion factor of 1.3x. Long corporates now yield about 4.2%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 215bp, unchanged from the November 28 report.

Global banks are moving more into asset management but there are problems:

Global banks, forced by regulators to reduce their dependence on profits from high-risk trading, have rediscovered the appeal of the mundane business of managing money for clients.

Deutsche Bank AG (DBK) is now counting on the fund unit it failed to sell to help boost return on equity, a measure of profitability. UBS AG (UBSN) is paring investment banking as it focuses on overseeing assets for wealthy clients. Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC), three of the five biggest U.S. banks, are considering expanding asset- management divisions as they seek to grab market share from fund companies such as Fidelity Investments.
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Banks will need to overcome the perception that they sometimes push their own funds and improve their middle-of-the- pack performance as money managers if they want to attract assets from investors. Goldman Sachs’s stock and bond mutual funds have trailed about 61 percent of their respective peers on average over the five years ended Sept. 30, and about 52 percent over the past three years, according to data from Morningstar Inc. in Chicago. JPMorgan’s mutual funds have been beaten by 42 percent of rivals over the past five years, while Wells Fargo’s have lagged behind 44 percent, the Morningstar data show.
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As recently as 2000, brokers, banks and insurers dominated the rankings of global asset-management firms, accounting for six of the top 10 spots based on assets, according to data from trade publication Pensions & Investments. Today, they hold four of those positions as the balance shifted to BlackRock Inc. (BLK), Vanguard Group Inc. and Fidelity. The four banks and insurance companies on the list collectively have about $5.5 trillion in assets compared with more than $11 trillion for the rest.

The decline reflects a combination of poor performance, the rise of mutual-fund sales through fee-only independent advisers rather than bank-owned brokerages and the impact of a mutual- fund trading scandal uncovered by then-New York Attorney General Eliot Spitzer in 2003. The inquiries into improper trading led to increased regulation, raised operating costs and resulted in more than $4 billion in penalties to firms including Bank of America Corp. (BAC), Merrill Lynch & Co. and Citigroup Inc. (C).

The Boston Fed has published a discussion paper titled A Psychological Perspective of Financial Panic:

In spite of large number of financial crises, often depicted as episodes of financial panic, the notion of panic in financial markets is not very well understood. Many have argued that in order to understand financial crises, and in particular panic events, we need to go beyond classic economic arguments. This paper is an effort in that direction, in which we attempt to give a psychological account of panic and of panic in financial markets in particular, by discussing uncertainty, the desire for predictability and control, the illusion of control, and confidence. We suggest how one might incorporate these psychological insights into existing economic models.

There’s been a development in the Rochdale Securities scandal:

The FBI on Tuesday arrested David Miller, a former Rochdale Securities trader whose outsized, unauthorized purchases of Apple stock in October nearly sank his firm.

U.S. prosecutors in Connecticut charged Miller with wire fraud, alleging he lied about his trading of Apple shares ahead of the tech giant’s Oct. 25 earnings announcement.

According to a criminal complaint filed in federal court on Monday, Miller bought Apple shares for himself and then reported to Rochdale the trade was for a customer who would bear the risk if it lost money.

Miller would have been able to walk away with a profit for himself had Apple’s share price risen, but it fell. As a result, Rochdale was left unexpectedly owning more than a million and a half shares of Apple and had to sell them for a $5 million loss.

According to the complaint, Miller also pretended to be a representative of a client’s firm and told another broker-dealer to sell Apple shares, supposedly on behalf of the firm.

The Canadian preferred share market had a day of modest gains today, with both PerpetualPremiums and DeemedRetractibles gaining 5bp while FixedResets were up 6bp. Volatility was average. Volume was on the high side of average.