PrefBlog

I noted on June 19 that James Bullard of the St. Louis Fed had dissented against the latest decision. He has taken the unusual – but certainly not unknown – step of explaining why:

Federal Reserve Bank of St. Louis President James Bullard dissented with the Federal Open Market Committee decision announced on June 19, 2013. In his view, the Committee should have more strongly signaled its willingness to defend its inflation target of 2 percent in light of recent low inflation readings. Inflation in the U.S. has surprised on the downside during 2013. Measured as the percent change from one year earlier, the personal consumption expenditures (PCE) headline inflation rate is running below 1 percent, and the PCE core inflation rate is close to 1 percent. President Bullard believes that to maintain credibility, the Committee must defend its inflation target when inflation is below target as well as when it is above target.

President Bullard also felt that the Committee’s decision to authorize the Chairman to lay out a more elaborate plan for reducing the pace of asset purchases was inappropriately timed. The Committee was, through the Summary of Economic Projections process, marking down its assessment of both real GDP growth and inflation for 2013, and yet simultaneously announcing that less accommodative policy may be in store. President Bullard felt that a more prudent approach would be to wait for more tangible signs that the economy was strengthening and that inflation was on a path to return toward target before making such an announcement.

In addition, President Bullard felt that the Committee’s decision to authorize the Chairman to make an announcement of an approximate timeline for reducing the pace of asset purchases to zero was a step away from state-contingent monetary policy. President Bullard feels strongly that state-contingent monetary policy is best central bank practice, with clear support both from academic theory and from central bank experience over the last several decades. Policy actions should be undertaken to meet policy objectives, not calendar objectives.

While President Bullard found much to disagree with in this decision, he does feel that the Committee can conduct an appropriate and effective monetary policy going forward, and he looks forward to working with his colleagues to achieve this outcome.

Sun Life Financial’s sale of its US annuities book met a small positive response from the Credit Rating Agencies. Now, SLF has announced:

On December 17, 2012, Sun Life Financial Inc. (TSX: SLF) (NYSE: SLF) entered into a definitive stock purchase agreement to sell its U.S. annuities business and certain of its U.S. life insurance businesses to Delaware Life Holdings, LLC, which was expected to close before the end of the second quarter of 2013, subject to regulatory approvals and other closing conditions. Approvals for the transaction have since been obtained from a number of regulators, including the Delaware Department of Insurance and the Financial Industry Regulatory Authority (FINRA). The approval process is also underway with the New York Department of Financial Services. The Department has recently undertaken a review of private investor groups as owners of annuity businesses, and we anticipate that the review will delay the close of the transaction beyond the end of the second quarter of 2013. We are continuing to work with Delaware Life Holdings, LLC, to obtain approval from the New York Department of Financial Services for the transaction and to close the transaction as soon as possible. Both parties have made substantial progress in preparing for the close and for the transition of employees and operations to support the business going forward.

The NY Dept. of Financial Services has made waves before:

The regulator, led by Superintendent Benjamin Lawsky, has expressed concern over whether the firms will be sufficiently careful with investments that back long-term obligations to retirement savers. Guggenheim, Apollo and Harbinger have announced deals to buy units that sell fixed annuities, which provide streams of payments to retirees and other customers.

“The risk that we’re concerned about at DFS is whether these private-equity firms are more short-term focused, when this is a business that’s all about the long haul,” Lawsky said in an April 18 speech. “Their short-term focus may result in an incentive to increase investment risk and leverage in order to boost short-term returns.”
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Lawsky is seeking e-mails, pitchbooks, memos, and information about investment allocations and return assumptions, the person said. Bloomberg reported last month that Wall Street firms have been acquiring life insurance companies and adding investments such as mortgage-backed securities that have drawn attention from regulators accustomed to simpler portfolios.

The regulator wants to understand the risks the companies are taking on and how they’re presenting the deals to investors, and the information may be used to craft new regulations, the person said. The Wall Street Journal reported on the subpoenas earlier today.

US regulators are considering a DSIB rule that actually means something:

U.S. regulators last year proposed implementing the 3 percent international requirement for what’s known as the simple leverage ratio. Now the Federal Reserve and Federal Deposit Insurance Corp., under pressure from lawmakers, are weighing increasing that figure for some of the biggest banks, according to the people, who asked not to be identified because the discussions are private.

“The 3 percent was clearly inadequate, nothing really,” said Simon Johnson, an economics professor at the Massachusetts Institute of Technology and a former chief economist for the International Monetary Fund. “Going up to five or six will make the rule be worth something. Having a lot of capital is crucial for banks to be sound. The leverage ratio is a good safety tool because risk-weighting can be gamed by banks so easily.”
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By going above the figure adopted in 2010 by the Basel Committee on Banking Supervision, the U.S. also could put pressure on Europe to affirm its commitment to the standard, which is seen as a tool to rein in risk in the financial system. Regulators in the U.K. and Switzerland told banks yesterday to increase their ratios of capital to total assets.

U.S. banks have had to comply with a simple leverage requirement of 4 percent for two decades. The new version, proposed last June, expands the definition of what counts as assets in calculating the ratio, incorporating some commitments such as lines of credit kept off balance sheets under current accounting rules. The draft is an attempt to bridge U.S. and international accounting standards.
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FDIC Vice Chairman Thomas Hoenig has called for scrapping risk-based rules entirely in favor of a 10 percent leverage ratio, calculated to include even more off-balance-sheet assets than allowed under Basel and define capital more narrowly. To reach Hoenig’s requirements, the three largest U.S. banks — JPMorgan, Bank of America and Citigroup (C) — would have to stop distributing dividends for about five years, according to FDIC data and analysts’ earnings expectations compiled by Bloomberg.

The Systemic Risk Council, an advisory group led by former FDIC Chairman Sheila Bair, has called for 8 percent. Bair fought for a global leverage ratio in Basel committee meetings when she led the U.S. agency.

A bipartisan Senate bill introduced in April by David Vitter, a Louisiana Republican, and Ohio Democrat Sherrod Brown would set the leverage ratio at 15 percent. Banks have assailed the proposal. It “would limit an institution’s ability to lend to businesses, hampering economic growth and job creation,” the Securities Industry & Financial Markets Association, a Washington-based lobbying group, said at the time.

A modest upward move in the overall index (TXPR up 10bp) masked a great deal of internal movement for the Canadian preferred share market today, with PerpetualPremiums down 19bp (a lot of these are actually ‘PendingPerpetualDiscounts’ at this time, of course), FixedResets gaining 4bp (despite poor performance from the new issue, which was just a catch-up) and DeemedRetractibles winning 43bp. There is another very lengthy Performance Highlights table as the market readjusts to new levels; there’s no readily discernable pattern in these returns. Volume remained very high, but well off yesterday’s peak.

The OSC has approved a new investment platform. As one might expect when government agencies agree on something really, really good, it’s over-regulated, vomit-inducingly precious and has little to do with either innovation or capital-raising:

The portal is called MaRS VX, and it works like an online dating site, matching as it does investors with companies in Ontario that meet MaRS’s financial, social-impact and governance standards. The platform caters to both for- and non-profit organizations tackling problems such as climate change, persons with disabilities or poverty. Issuers must also have less than $25-million in revenue.
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Joining the program is free to investors once they are verified by MaRS as “patient capitalists” with an interest in having an impact as well as the potential for financial return. Companies pay a fee that covers some of MaRS’s costs.

Once issuers secure investments, they’re required to report biannually to investors on their finances and their impact, said Mr. Spence. “Having that kind of ongoing reporting requirement means these folks are engaged in good governance practices and using their money for the purposes indicated.”

Should a company require more financing for additional projects, they must reapply and undergo another review.

A day of thrills and chills!

Gold futures sank to $1,283.50 an ounce, after tumbling 6.4 percent yesterday. Holdings (GDTRGOLD) in the SPDR Gold Trust, the world’s largest exchange-traded product backed by bullion, fell below 1,000 metric tons for the first time in four years.
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The S&P 500 (SPX) extended June 19’s 1.4 percent slump and fell to the lowest level since May 1 as all 10 of its main industry groups retreated at least 2.2 percent. The benchmark index extended its decline from its last record reached May 21 to 4.9 percent, trimming its 2013 advance to 11 percent and its rally from its bear-market low in 2009 to 135 percent.
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The stock sell off pushed the MSCI all-country gauge down more than 7 percent from a five-year high reached May 21, the day before Bernanke raised the possibility of reducing stimulus should U.S. economic indicators improve. About $2.4 trillion was erased from global equity values over that stretch, with indexes in Hong Kong and Japan sliding more than 20 percent into bear markets.
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Yields on 10-year Treasuries touched 2.47 percent, the highest level since August 2011, before closing six basis points, or 0.06 percentage point, higher at 2.42 percent. Thirty-year U.S. bond yields jumped 11 basis points to 3.52 percent, the highest level since August 2011, and two-year rates increased two basis points to 0.33 percent.
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The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, increased 5.7 basis points to a mid-price of 91.4 basis points in New York, after climbing 3.9 basis points June 19, according to prices compiled by Bloomberg. That’s the biggest two-day jump on a closing basis since the measure rose 8.8 in the period ended May 14, 2012, excluding rolls into new series of the benchmark.

I have the feeling that tomorrow’s going to be a long day.

As for today, there was total carnage on the Canadian preferred share market with PerpetualPremiums down 176bp, FixedResets off 59bp and DeemedRetractibles losing 194bp. As might well be expected, the Performance Highlights table is ridiculously long. Volume was enormous. Super-colossal. Gigantic. Brobdingnagian.

The MMF industry is resisting even the ineffective reforms proposed by the SEC:

The compromise, unanimously approved by SEC commissioners June 5, would harm investors and the economy, and would increase systemic risk, the Investment Company Institute said today. The group supported an alternative option offered by the SEC to limit withdrawals when funds come under stress.

“Our opposition to floating NAV remains as firm as ever,” Paul Schott Stevens, president of the Washington-based ICI, said in the text of a speech he is scheduled to deliver today in Baltimore. “Forcing funds to float their NAVs doesn’t address the problem.”

The plan would exempt funds that buy only U.S. government-backed securities and retail funds, a concession regulators made to address concerns of fund providers.
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The commission’s proposal includes the option of allowing a fund’s board to temporarily halt withdrawals and require it to impose a fee of 2 percent on all redemptions if the fund’s weekly liquid assets fell below 15 percent of total assets. The commission left open the option of adopting either floating NAV or withdrawal restrictions, or both together.

“Liquidity fees and gates precisely address the core problem that regulators express greatest concern about: heavy redemption pressure in periods of market turmoil,” Schott said in his speech at a conference organized by research firm Crane Data LLC.

Of course, they do nothing to address the core problem of default in the underlying portfolio, but who cares?

The Fed released the FOMC statement:

The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall.

The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.
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Voting against the action was James Bullard, who believed that the Committee should signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings, and Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.

Bernanke added a little colour at the press conference (emphasis added because the Globe did):

Federal Reserve Chairman Ben S. Bernanke said the central bank may start reducing bond purchases later this year and end them in the middle of 2014 if the economy continues to improve as the central bank forecasts.

“If the incoming data are broadly consistent with this forecast, the committee currently anticipates that it would be appropriate to moderate the pace of purchases later this year,” Bernanke said today in a press conference in Washington. “If the subsequent data remain broadly aligned with our current expectations for the economy, we will continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year.”

Market reaction was modestly negative:

U.S. stocks retreated, following a two-day rally in the Standard & Poor’s 500 Index, as the Federal Reserve said risks to the economy have decreased, spurring concern the central bank will reduce its stimulus efforts.

Eight of 10 groups in the S&P 500 fell, even as the Fed said it will keep buying bonds at a pace of $85 billion a month. Utility and phone shares fell the most, extending losses to at least 0.5 percent.

Switzerland is resisting US hegemony:

Swiss parliament rejected a bill designed to resolve a dispute over undeclared bank accounts held by U.S. citizens, potentially setting the stage for American prosecution of the country’s banks.

Members of parliament’s lower house voted 123 to 63 against the bill, which would have allowed Swiss banks to cooperate with the U.S. and to settle a long-running dispute over wealthy American tax evaders. The government has said it has no plan B, in the event of the bill failing to pass.

Today’s award for disingenuity is given to David Phillips of First Leaside:

He said he was delighted with the findings of a third-party report prepared by accounting firm Grant Thornton Ltd. in August, 2011, which concluded First Leaside needed to raise money to remain viable. The OSC has asked First Leaside to commission the review because it was concerned about the firm’s health.

Mr. Phillips said he saw the report as an “affirmation” and “vindication” of his strategy and thought it would address the OSC’s worries. He said it was unsurprising to him that Grant Thornton said the firm needed to raise cash to remain viable, because that was always the case for an investment company.
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The report said First Leaside’s viability hinged on its ability to raise new funds from investors because it did not have enough cash to support its operations, and said the company had an “equity deficit” because its real estate assets were worth less than their outstanding mortgages.

It was back to carnage as usual for the Canadian preferred share market, with PerpetualPremiums losing 33bp, FixedResets off 21bp and DeemedRetractibles down 29bp. The Performance Highlights table is suitably gory, with only one winner among many, many losers – many of them Brookfield issues. Volume was quite high.

It’s nice to see someone with a brain making an impact amidst all the SEC lawyers:

Concern that American stock markets have become more susceptible to split-second crashes due to computerization isn’t supported by the data, a Securities and Exchange Commission official said.

Most “mini-flash crashes,” a term sometimes applied when an individual U.S. stock briefly surges or plunges for no obvious reason, are the result of human errors, not broken software, said Gregg Berman, head of the SEC’s Office of Analytics and Research.
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In September, the Senate Subcommittee on Securities, Insurance and Investment held hearings on the impact of computerized trading amid concern algorithmic and high-frequency strategies are contributing to investor uncertainty.

“A popular meme has emerged that, taken collectively, sudden price spikes indicate a broken market” and may be harbingers of another crash like the one in 2010, Berman said in New York today at a conference sponsored by the Securities Industry and Financial Markets Association. Critics who blame everything on electronic trading “may be looking in the wrong place,” he said.

DBRS has downgraded the debt of TCA and TRP but left the preferred share ratings unchanged:

DBRS has today downgraded the Issuer Rating and Unsecured Debentures & Notes rating of TransCanada PipeLines Limited (TCPL) to A (low) from “A”, the Junior Subordinated Notes rating of TCPL to BBB from BBB (high) and the Medium-Term Notes & Unsecured Debentures rating of NOVA Gas Transmission Ltd. (NGTL), a wholly owned subsidiary of TCPL, to A (low) from “A”, all with Stable trends. The NGTL rating action reflects DBRS’s view that continued financial and liquidity support from TCPL is key to NGTL’s long-term debt rating.

DBRS has also confirmed the preferred share ratings of TCPL and of TransCanada Corporation (TCC, TCPL’s parent company) at Pfd-2 (low) with Stable trends, reflecting DBRS’s belief that the existing ratings are already conservative relative to TCPL’s Issuer Rating and that DBRS views it as unlikely that any debt instruments will be issued at TCC. These actions remove all of the above-noted ratings from Under Review with Negative Implications where they were placed on March 28, 2013.DBRS has today downgraded the Issuer Rating and Unsecured Debentures & Notes rating of TransCanada PipeLines Limited (TCPL) to A (low) from “A”, the Junior Subordinated Notes rating of TCPL to BBB from BBB (high) and the Medium-Term Notes & Unsecured Debentures rating of NOVA Gas Transmission Ltd. (NGTL), a wholly owned subsidiary of TCPL, to A (low) from “A”, all with Stable trends. The NGTL rating action reflects DBRS’s view that continued financial and liquidity support from TCPL is key to NGTL’s long-term debt rating. DBRS has also confirmed the preferred share ratings of TCPL and of TransCanada Corporation (TCC, TCPL’s parent company) at Pfd-2 (low) with Stable trends, reflecting DBRS’s belief that the existing ratings are already conservative relative to TCPL’s Issuer Rating and that DBRS views it as unlikely that any debt instruments will be issued at TCC. These actions remove all of the above-noted ratings from Under Review with Negative Implications where they were placed on March 28, 2013.
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Finally, TCC’s financial profile remains reasonable, as capex has been lower than previously anticipated due to the Keystone XL delay, partly offsetting weaker earnings and cash flow in 2012. DBRS believes that the recent weakness in credit metrics, compared with prior periods, was partly due to factors that are not likely to reoccur on an ongoing basis, including the Sundance A power purchase agreement (PPA) force majeure, the increased planned outage days at Bruce Power’s Unit A3 and A4 and the lower-than-expected capacity payments at the Ravenswood natural gas and oil-fired generating facility. DBRS notes that Bruce Power’s Unit 1 and Unit 2 were both placed into commercial service during Q4 2012 following a significant refurbishment program. The Company will likely experience a significant free cash flow deficit once capex on Keystone XL gets underway, if approved, likely resulting in a moderately negative impact on credit metrics prior to improvement in subsequent years as some projects are placed into service and begin to generate cash flow.

It’s not just Standard & Poor’s (see report) that’s pressuring Spectra:

Spectra Energy Corp., which distributes natural gas in Ontario and operates in British Columbia as Westcoast Energy Inc., is facing pressure to spin off its Canadian assets from an activist investor.

In a June 17 letter to Spectra chief executive Greg Ebel, Thomas E. Sandell, chief executive of New York-based Sandell Asset Management, said Spectra should review strategic alternatives for Westcoast, including a potential initial public offering. Spectra should also consider transforming itself into a holding company akin to Kinder Morgan Inc., Williams Companies, Inc. and Oneok, Inc., Sandell said.

Another down day for the Canadian preferred share market – but with a difference! PerpetualPremiums were off 1bp, FixedResets lost 20bp and DeemedRetractibles were down 10bp. FixedResets are prominent in the Performance in the Performance Highlights table, which is comprised entirely of losers. Volume was high.

Overall it was mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 3bp, FixedResets up 5bp and DeemedRetractibles off 1bp. The averages concealed a lot of underlying volatility, however, as the Performance Highlights table is quite lengthy and features a number of BAM FixedReset losers. Volume was quite high.