PrefBlog

A bit of good news on the regulatory extortion front – a US judge is questioning the SEC / SAC Capital settlement:

SAC Capital Advisors LP will have to wait to learn if its $602 million insider trading settlement with the Securities and Exchange Commission can go forward, after a Manhattan judge raised questions over a provision that allows SAC to avoid admitting it did anything wrong.

SAC and the agency asked Marrero today to approve the agreement, which is the SEC’s biggest insider trading settlement in history. It would resolve SEC claims that SAC and its CR Intrinsic Investors LLC unit profited from illegal tips about an Alzheimer’s drug received by a former portfolio manager, Mathew Martoma.

U.S. District Judge Victor Marrero today expressed concern about the SEC’s use of the provision, which was questioned by a different judge who rejected an SEC settlement with Citigroup Inc. (C) in 2011. Marrero said today he may condition approval of the SAC deal on a ruling in the Citigroup case by the U.S. appeals court in New York. Marrero also asked what would happen if Martoma, who has pleaded not guilty to related criminal charges, is convicted.

There’s some new progress on atmospheric carbon dioxide extraction:

“What this discovery means is that we can remove plants as the middleman,” said Adams, who is co-author of the study detailing their results published March 25 in the early online edition of the Proceedings of the National Academies of Sciences. “We can take carbon dioxide directly from the atmosphere and turn it into useful products like fuels and chemicals without having to go through the inefficient process of growing plants and extracting sugars from biomass.”

The process is made possible by a unique microorganism called Pyrococcus furiosus, or “rushing fireball,” which thrives by feeding on carbohydrates in the super-heated ocean waters near geothermal vents. By manipulating the organism’s genetic material, Adams and his colleagues created a kind of P. furiosus that is capable of feeding at much lower temperatures on carbon dioxide.

The research team then used hydrogen gas to create a chemical reaction in the microorganism that incorporates carbon dioxide into 3-hydroxypropionic acid, a common industrial chemical used to make acrylics and many other products.

It’s tough to get ahead in the investment business. Talent isn’t enough. Hard work isn’t enough. You’ve got to have that little extra something:

Wells Fargo & Co. (WFC), the most valuable U.S. bank, paid a board member’s son about $1.4 million last year for his work in a unit responsible for investing deposits.

Scott P. Quigley, 44, received the compensation as a manager in the principal investments group, according to the San Francisco-based lender’s most recent proxy filing. His father, Philip J. Quigley, a Wells Fargo director since 1994, is retiring from the board in April. Scott Quigley declined to comment, and his father didn’t respond to messages seeking comment. The bank declined to make them available.

Canadian inflation remains low:

The country’s consumer price index rose 1.2 per cent in February from a year earlier, quickening from a 0.5-per-cent increase in January, Statistics Canada said Wednesday. It also climbed 1.2 per cent from a month earlier, the fastest monthly pace of inflation since 1991.
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Transportation costs led the annual increase, advancing 2 per cent, spurred by higher costs at the pump, and as rebates disappeared at car dealerships. Food prices accelerated to 1.9 per cent after a 1.1-per-cent gain in January as consumers paid more for meat and fresh fruit. The cost of fuel oil also rose.

OSFI has come out with another Planning Report Produced Because It’s Expected Of Us Because Of Some Kind Of Governance Thingy. Of great interest is their targetted depositor recovery on default:

I wonder if anybody’s told the CDIC that OSFI will give itself a pat on the back if depositor recoveries in the event of the failure of a major bank exceed 90%? Hmm … CDIC has about 2.4-billion in cash and investments on the books … the smallest of the Big Six Banks, National Bank, has about 93-billion in deposits on its books … well, let’s just hope that none of the big six fail, that’s all!

Regulatory lawyers are continuing their campaign to destroy the corporate bond market:

Are there steps that can or should be taken to facilitate exchange trading of corporate bonds and other fixed income securities? Were ATSs required to disseminate pre-trade pricing information, would there be an impact on exchange trading of corporate bonds? If so, what would be the impact?

Should the Commission consider regulatory initiatives that would encourage the use of transparent execution venues, such as exchanges or ATSs that publicly disseminate trading interest on their systems? For example, what would be the benefits and drawbacks of requiring brokers to affirmatively offer retail customers the option of exposing their orders on one or more of these transparent execution venues? Are there better ways to foster price transparency in these markets?
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Better Investor Information

Should investors be provided more information about the compensation of broker-dealers trading in a principal capacity? What would be the benefits and burdens of requiring the disclosure of dealer markups to customers? Are certain types of transactions more suited for markup disclosure, such as riskless principal transactions? How should a riskless principal transaction be defined for corporate bond or other fixed income transactions? What would be the most effective way to provide markup disclosures to customers?

Do steps need to be taken to help assure that investors know about the various execution options available to them and the potential advantages and disadvantages of each? What would be the relative merits of requiring broker disclosure of those options at the time of the transaction, as compared with periodic disclosure (e.g., at account opening and annually thereafter), or general investor education efforts?

Do steps need to be taken to help assure that investors have pricing information relevant to their fixed income security transaction?

All the questions assume that corporate bond financing exists in some kind of bubble world, unaffected by competition from other venues and private placements.

Lauren Lambie-Hanson at the Boston Fed asks the question When Does Delinquency Result in Neglect? Mortgage Delinquency and Property Maintenance:

Studies of foreclosure externalities have overwhelmingly focused on the impact of forced sales on the value of nearby properties, typically finding modest evidence of foreclosure spillovers. However, many quality-of-life issues posed by foreclosures may not be reflected in nearby sale prices. This paper uses new data from Boston on constituent complaints and requests for public services made to City government departments, matched with loan-level data, to examine the timing of foreclosure externalities. I find evidence that property conditions suffer most while homes are bank owned, although reduced maintenance is also common earlier in the foreclosure process. Since short sales prevent bank ownership, they should result in fewer neighborhood disamenities than foreclosures.

“Disamenities”?

Nice perspective on Cyprus:

For Cypriot banks, particularly Laiki Bank, at the center of the current storm, however, these conclusions foretold a disaster: Altogether, they lost more than 4-billion euros, a huge amount in a country with a gross domestic product of just 18-billion euros. Laiki, also known as Cyprus Popular Bank, alone took a hit of 2.3 billion euros, according to its 2011 annual report.

[Kikis] Kazamias, the finance minister at the time of the Greek bond write-down, said he had little idea of just how badly the move would hurt his country’s banks.

“We worried but we never received any information that this was a red line” that should not have been crossed, he said. The Cypriot government, he added, initially calculated that “we were in a position to cover the losses,” and it was only later, after depositors began to flee and the Cyprus economy stalled, that “we found out that this was impossible.”

Spend-Every-Penny’s going to start choosing his new lap-dog next week:

Finance Minister Jim Flaherty should receive a short list of candidates to replace Bank of Canada Governor Mark Carney after a meeting of the central bank’s board of directors next week, said two people familiar with the plans.

Flaherty will get the list after the two-day meeting in Ottawa, said the people, who asked not to be identified because the discussions are private. Flaherty, who has said that the announcement could be made in April, will then interview the people on the short list, with the appointment to be approved by Prime Minister Stephen Harper and his cabinet.

The bank’s outside directors have been reviewing candidates after posting the job Jan. 7, following Carney’s surprise November announcement he would leave his job June 1 to take over the Bank of England. Analysts at JPMorgan Chase & Co. have said the most likely replacements are Senior Deputy Governor Tiff Macklem and Export Development Canada Chief Executive Officer Stephen Poloz.

Want the job, boys? Roll over! Beg! Copy the highlights from my next speech into your next speech!

It was a modestly positive day for the Canadian preferred share market, with PerpetualPremiums winning 6bp, FixedResets gaining 2bp and DeemedRetractibles up 5bp. Volatility was reasonably good. Volume was heavy.

And that’s it for another month! Malachite Aggressive Preferred Fund is now 12 years old – Happy Birthday!

Nothing happened today.

It was another positive day for the Canadian preferred share market, with PerpetualPremiums gaining 3bp, FixedResets roaring ahead by 17bp and DeemedRetractibles up 4bp. Volatility was average, but comprised entirely of FixeReset winners. Volume was well above average.

PerpetualDiscounts now yield 4.82%, equivalent to 6.27% 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 205bp, unchanged from the figure reported March 20.

In a move sure to be applauded by crypto-Stalinists everywhere BMO will not advertise its prices:

Bank of Montreal will not extend its 2.99 per cent five-year fixed mortgage rate offer past its expiry on March 28, with the country’s lenders under pressure from Finance Minister Jim Flaherty not to engage in a mortgage price war.

Consumers can still obtain lower rates than this from a variety of mortgage lenders, including other large banks, which routinely offer discounts from their posted or advertised rates. But Bank of Montreal was the only one of the big five banks to cut its posted rate on five-year fixed mortgages below 3 per cent, a move that it advertised heavily.

The bank has long lagged rivals when it comes to market share in the mortgage arena, and has been seeking to get ahead. Mr. Flaherty appeared to be concerned that borrowers would be persuaded to take on more debt than they can chew, potentially heating up the housing market, which he has been seeking to cool.

Some might argue that posted rates affect everybody, including those who are in the twentieth year of their twenty-five year amortization and have loan-to-value ratios of 10% and that seeking to avoid heating up the housing market might best be done through broad-brush monetary, economic and regulatory levers (such as reducing the immense supply of mortgage insurance; such as imposing capital surcharges on bank asset proportions that are widely divergent from historical norms) is preferable to micromanaging; but those people are probably just old poops who don’t appreciate the awesome toughness of our beloved federal finance minister.

The BRICS are going ahead with their own bank:

With just a couple of small gestures at their annual summit, the world’s biggest emerging economies have made the West seem a little less indispensable.

On the summit’s first day, the BRICS bloc of nations has approved a new development bank to compete with Western-dominated institutions such as the World Bank. And on the sidelines, China and Brazil announced a currency-swap agreement worth $30-billion (U.S.) that will allow them to conduct trade in each other’s currencies without needing the U.S. dollar.
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The new BRICS-led bank, designed to lend money for infrastructure projects across the developing world, is the biggest step that BRICS have taken to challenge the global financial system since the bloc’s first formal summit in 2009. Another key step could be an agreement on a currency crisis fund, based on pooled foreign-exchange reserves of up to $240-billion, which the BRICS nations are negotiating.

The new BRICS bank is seen as a potentially crucial source of funds for African infrastructure projects. It is often touted, for example, as a likely financier for a massive expansion of nuclear energy in South Africa, a goal of many politicians here. And it could be useful for cross-border projects, which tend to be neglected by traditional creditors.

This is good news. It is clearly better engineering to have a variety of relatively small points of failure, rather than just one.

Taxing depositors was a novel idea and has given the Egyptians the idea of taxing takeovers:

gypt rattled investors on the Cairo stock market on Tuesday by unexpectedly announcing that a takeover of its second biggest private bank would be subject to a new capital markets tax.

Shares in the bank, National Société Générale Bank, which is being taken over by Qatar National Bank, tumbled by their legal limit of 10 per cent and helped pushed Cairo’s benchmark index down to its lowest level since December.

Is it any wonder that Egypt’s in trouble?

Moody’s Investors Service Inc. cut Egypt’s credit rating on Thursday, citing unsettled political conditions and public finances, which it said raised the chance of a default within five years to nearly 40 per cent.

The Egyptian economy has been in crisis since the overthrow of Hosni Mubarak in 2011, with Islamist President Mohamed Mursi’s cash-strapped government grappling with sliding currency reserves, dwindling tourism, a soaring budget deficit and a wave of often violent street protests.

DBRS commented on the Cypriot deposit tax:

However, the announcement that insured Cypriot depositors would be taxed was new and wholly unexpected. (Senior bondholders were also written down, representing a significant shift in ECB policy.) If the proposal had targeted only uninsured depositors holding accounts of over EUR100,000 – the proposal was to tax them at 9.9% – it may still have led to deposit flight. But targeting both large and small depositors represented the first time that depositors in the Euro zone would take losses to shore up failing banks. The taxation of depositors in a Euro zone country is not a credit event, since Cyprus continues to honor its debt payments. However, the surprise announcement of the imposition of losses on legislation that was considered safe recalls the losses imposed on sovereign bondholders during last year’s Greek restructuring, the first default of a Euro zone country.

The rapid spread of bank runs, bankruptcies and systemic crisis that culminated in the failure of Lehman Brothers in the fall of 2008 led to the introduction of extraordinary deposit insurance in Europe. Insurance provided the protection to small depositors needed to reestablish calm following the panic of 2008 and 2009. The notion that small Cypriot depositors could be taxed implied that Cyprus was viewed by the troika as being not systemic, and therefore that a run on Cypriot deposits was unlikely to spread to other Euro zone countries. Nothing could be further from the truth. During the current period of low to no growth in Europe, it is certainly possible that a run on Cypriot deposits could spread, in spite of existing or future controls on capital.

It was a good day for the Canadian preferred share market, with PerpetualPremiums up 10bp, FixedResets winning 16bp and DeemedRetractibles gaining 7bp. Volatility was minor. Volume was above average.

In the wake of yesterday’s DBRS downgrade to Pfd-4(high), INE.PR.A, a FixedReset, was down 5.56% (total return – it went ex-dividend) and INE.PR.C, a PerpetualDiscount, was down 4.05%.

Cyprus has reached an agreement for an orderly bank default:

Cyprus dodged a disorderly default and unprecedented exit from the euro currency by bowing to demands to shrink its banking system in exchange for a 10 billion-euro ($13 billion) bailout.

Cypriot President Nicos Anastasiades agreed to shut the country’s second-largest bank under pressure from a German-led bloc of creditors in a night-time negotiating melodrama that threatened to rekindle the debt crisis and rattle markets.
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With the ECB threatening to cut off emergency financing for tottering banks as soon as today, Cyprus’s leaders engineered another way of shrinking the Mediterranean island’s financial system.

The revised accord spares bank accounts below the insured limit of 100,000 euros. It imposes losses that two EU officials said would be no more than 40 percent on uninsured depositors at Bank of Cyprus Plc, the island’s largest bank, which will take over the viable assets of Cyprus Popular Bank Pcl (CPB), the second largest.

Cyprus Popular Bank, 84 percent owned by the government, will be wound down. Those who will be largely wiped out include uninsured depositors and bondholders, including senior creditors. Senior bondholders will also contribute to the recapitalization of Bank of Cyprus.

So yet again governments are finding that 500 years of bankruptcy law has become inconvenient and are rewriting it on the back of a napkin.

It is interesting to compare the current plan with past assurances:

Cypriot Finance Minister Vassos Shiarly said senior creditors won’t be forced to take losses in a proposed rescue of the country’s banks.

Only junior bondholders will face losses in the bailout of Cyprus’s lenders, which may need about 10 billion euros ($13.7 billion) of fresh capital, Shiarly said in an interview in The Hague late yesterday. Senior creditors and depositors won’t be touched, he said after meeting with Dutch lawmakers.

An earlier WSJ blog post about the previous deal noted:

The euro zone has to far carefully avoided burning senior bondholders during a bank restructuring. Doing so was seen as too destabilizing for the bloc’s credit-starved financial system. On top of that, in many countries senior bondholders have the same status as bank depositors when it comes to getting repaid.

However, the thinking on senior bondholders has become to change. In July, when the euro zone negotiated a bailout for Spain’s banks, the European Central Bank argued that they should be “bailed in” in cases where a bank is so sick it needs to be closed. At the time, the European Commission insisted senior bondholders would remain protected and the euro zone’s commitment to do so wasn’t tested, since none of the Spanish cajas were ultimately wound down.

With Cyprus, the euro zone once again sidestepped the question. Officials involved in the rescue talks say that “bailing in” senior bondholders wouldn’t have made sense given that, by the end of September, Laiki and Bank of Cyprus had only some €184 million of senior bonds between them—peanuts next to the €10 billion the two banks need in new capital.

With relatively little money to gain, officials decided that breaking two taboos — taxing depositors and burning senior bondholders — in one go, didn’t seems like a good idea.

Over the next few weeks, we’ll start to understand how this will affect investor confidence:

The European Union’s decision to recapitalize Cypriot banks by inflicting losses on depositors and senior bondholders is triggering investor concern that bank funding across the region will be hurt.
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With the exception of Denmark in 2011, senior bank bondholders, like depositors, have avoided losses in the financial crisis. In February 2011, Amagerbanken A/S collapsed and senior creditors initially lost about 40 percent. It was the first time senior bank bondholders in the EU underwent a so-called haircut in an orderly resolution and the event left most Danish lenders shut out of wholesale funding markets.

The cost of insuring against losses on financial debt surged last week amid concern senior bondholders will be included in future bank bailouts. The Markit iTraxx Financial Index of credit-default swaps jumped 34 basis points to 176, the highest in four months. The gauge was at 174.5 basis points at 2:40 p.m. in London.

There’s a lot of concern:

“We’re in an environment where in both North America and Europe we have some serious policy decisions that have to take place,” Ron Florance, the Scottsdale, Arizona-based managing director of investment strategy at Wells Fargo Private Bank, which has $169 billion assets under management, said in a phone interview. “When a policy misstep is bad it’s real bad, and the discussions last week were really bad decisions. That’s been resolved, but it always puts people on edge.”
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Stocks turned lower as Dutch Finance Minister Jeroen Dijsselbloem said troubled lenders in the euro area must now fend for themselves as part of future euro rescues. German advisers cut the nation’s 2013 economic growth forecast to 0.3 percent, from its previous estimate of 0.8 percent, citing “the sharp decline” of gross domestic product in the fourth quarter of 2012.

It’s an ill wind that blows nobody any good:

U.S. hedge funds Pine River Capital Management LP, Millennium Management LLC and SAC Capital Advisors LLC are taking advantage of the struggle of European startup funds to grab their pick of the region’s traders.

The three firms, which manage a combined $46 billion, have over the past year all hired employees from hedge funds started by former European bankers, according to regulatory records and people with knowledge of the matter. They joined from firms including Edoma Partners LLP, Occitan Capital Partners LLP and Portman Square Capital LLP, London hedge funds that have either shut down, posted losses or failed to meet their fundraising goals, said the people, who declined to be identified because the companies are private.

Rather than betting that Europe’s sovereign debt crisis is over, the U.S. funds are selectively hiring top traders, some who quit their jobs at banks last year as their employers cut back on risk-taking and bonuses. The search has been made easier as the crisis forced lenders to cut jobs, pushed funds into losses and prompted investors to pull money from unprofitable managers, recruiters and executives said.

Meanwhile the BRICS are discussing a long-overdue global governance change:

The biggest emerging markets are uniting to tackle under-development and currency volatility with plans to set up institutions that encroach on the roles of the World Bank and International Monetary Fund.

The leaders of the so-called BRICS nations — Brazil, Russia, India, China and South Africa — are set to approve the establishment of a new development bank during an annual summit that starts today in the eastern South African city of Durban, officials from all five nations say. They will also discuss pooling foreign-currency reserves to ward off balance of payments or currency crises.

It was a good solid day for the Canadian preferred share market, with PerpetualPremiums up 6bp, FixedResets gaining 5bp and DeemedRetractibles winning 9bp. Volatility was basically non-existent; volume was average.