PrefBlog

Today’s FOMC release was ‘Steady as she goes’:

Taking into account the extent of federal fiscal retrenchment over the past year, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.

Joshua Zumbrun & Jeff Kearns of Bloomberg comment:

The consumer price index increased 0.2 percent after rising 0.1 percent the prior month, a Labor Department report showed today. The Fed’s preferred gauge of inflation, the personal consumption expenditures index, rose 1.2 percent in August and hasn’t breached 2 percent since March 2012.

The Fed removed a sentence from the previous statement that had said tighter financial conditions could slow the improvement in the economy.

Kansas City Fed President Esther George dissented for the seventh meeting in a row, citing the risk the Fed’s stimulus could create financial imbalances and cause long-term inflation expectations to rise.

Richard Vedder of Bloomberg rages against the cost of US universities’ hubris:

I have written before on how the expansion of federal student-loan programs has encouraged colleges to simply raise their costs. Students are left to pile up more debt while colleges indulge in their Edifice Complex — building luxury dorms and gyms and stadiums (all “sustainable,” of course) at the expense of poorer students. There is another, related government subsidy that also has perverse effects and needs reform: the tax-exempt debt binge by universities.

Schools are exuberantly borrowing, in some cases issuing 100-year (century) bonds. Some bond offerings are justified, even wise, as schools are taking advantage of low interest rates to reduce future debt-service obligations. But a lot of this activity is financing construction of high-end student housing, faddish “centers” and stadiums.

These perquisites appeal to the most affluent. For many students, however, the costs of college are rising relative to the perceived benefits, pushing them to consider lower-cost substitutes (online education, nondegree certificate programs).

Many bonds are tax-exempt. The more money borrowed, the more generous the exemption, creating in effect a taxpayer subsidy for rich universities. Should there be no cap on the tax exemptions private colleges can claim on their bond debt, and is it appropriate for the government to subsidize all types of projects at these schools?

And the argument regarding the cost of Too-Big-to-Fail rages on as well:

McCloskey’s confusion about the nature of the too-big-to-fail subsidy leads directly to another misconception: that regulatory compliance costs could somehow offset the subsidy. Compliance may or may not put a greater burden on larger banks (I suspect executives at small banks would disagree). In any case, the costs do nothing to reduce the taxpayer subsidy or the incentive to preserve it by becoming as big and systemically threatening as possible.

In other words, U.S. taxpayers are paying big banks to put the economy in danger, which is crazy. The best solution is to make banks less likely to fail by requiring that they finance themselves with more equity capital, which absorbs losses in bad times.

Regulators have taken a small step in that direction by proposing that bank holding companies have at least $5 in capital for every $100 in assets — a 5 percent leverage ratio that is a bit more than the global minimum of 3 percent. The proposal, to which banks are adamantly opposed, falls far short of the 20 percent that economists have argued would be best for the economy, but at least it’s a start. Let’s hope they stick to it.

Matt Levine writes a more sensible than usual piece about the so-call FX manipulation scandal, which I never-the-less disagree with:

There are two problems with this. One, while the bank is guaranteeing the client the WM/Reuters fix price, nobody’s guaranteeing the bank anything. The bank has to actually go trade and try to hit that price. The way the fix works is that it’s set by sampling trades over a 60-second window, so you have to have a certain amount of skill and luck to trade at (or better than) the official price. It’s risky.

Two — and this is important, too — banks are in the business of making money, and the trade they want is not “buy at WM/Reuters fix and sell at WM/Reuters fix” but rather “buy at less than WM/Reuters fix and sell at WM/Reuters fix.”
If your client tells you at 3:30 that they want to buy francs at the 4 p.m. price, there are fairly straightforward ways to try to ensure a profit. Like: If they’re buying a lot of francs, then you’d expect that to push the market for francs up. So what you could do is start buying francs at 3:30 when they’re trading at $1.1150 or whatever,**** and keep buying steadily until 4 p.m. when they’re trading at $1.1200, for an average price of like $1.1175, and then sell to the client at the 4 p.m. fix of $1.1200. You buy francs for $1.1175, you sell them for $1.1200, you make $0.0025 per franc, you do it a lot, boom, good business.
…
Also some things are right out:

In June, Bloomberg News reported that dealers pooled information about their positions through instant messages, executed their own trades before client orders and sought to manipulate the benchmark WM/Reuters rates by pushing through trades around the 60-second windows when the benchmarks are set.

The sharing client data among dealers seems self-evidently bad. The “executed their own trades before client orders and sought to manipulate the benchmark” is either bad, or just legit hedging that looks bad, or something in between, or some combination thereof, it is hard to know.

This shows a fundamental misconception of the order.

The bank has not agreed to act as agent, with fiduciary responsibility, for the client. What the bank has done is sold a very short-term (intra-day) forward contract to the client. When the dealers talk to each other, they’re not sharing information about client orders, they’re sharing information about their own orders, which they will be placing as principal in order to cover their position.

The big problem with the market is that there are too many fools and charlatans in charge of too much client money. Dealers are not your friends. Dealers are counterparties, just like Loblaws is my counterparty when I buy groceries. Loblaws and I get on well and have a mutually beneficial relationship – but they’re always trying to make it a little more beneficial for them and I’m always trying to make it a little more beneficial for me. Sadly, this fundamental truth escapes the Boo-hoo-hoo brigade.

The industry is staffed with MBAs, which stands for Minimal Brain Activity. There is nothing the dealers do that a large client – large enough to matter, large enough to be asked their intentions – cannot do himself. Trades can be sampled over a given period, whether it’s the period of the fix, or the run-up to it, or the aftermath … but, unfortunately, that involves actual work, which MBAs are fundamentally incapable of doing, or even understanding. Why, one might have to write, or commission, an algorithmic programme to buy your USD 100-million in million dollar chunks! Computer programmes? Those are for geeks! Daddy didn’t pay for a good school so I could write computer programmes! It might take more than one ‘phone call to execute the trade! More than one call? How are you going to discuss the analysis of Warren Buffet’s pronouncement on Yellen’s approach to the Fed if you have to make more than one call. Can’t be done. Call a dealer, just like Daddy calls his stockbroker.

It may be ugly and awful, but US sequestration might be working anyway:

Senator Jeff Sessions of Alabama, the top Republican on the Budget Committee, said today in an interview such an accord could be a way to replace for a year or two the automatic spending cuts, known as sequestration, that both parties decry.

“A great number of entitlement programs, mandatory programs, are not Social Security and Medicare,” Sessions said. “There are a whole bunch of programs that are mandatory in nature and have never been looked at” and weren’t in the law setting up the automatic cuts, he said, citing farm subsidies and food stamps.

Asked if such a deal is a fallback to a broader deal, he said. “I would hope so.”

BAM closed a big deal:

If you have a railroad or a port for sale, there’s a big new buyer as Brookfield Asset Management just closed a massive $7-billion (U.S.) infrastructure fund that will invest in such things as transportation and energy assets. The new money has the potential to bump up Brookfield’s fee income markedly.

Brookfield blew right through the $5-billion target. There are more than 60 investors, including sovereign wealth funds, insurers, and public and private pension plans. Brookfield is putting in $2.8-billion of its own money (through its Brookfield Infrastructure Partners and Brookfield Renewable Energy Partners LP subsidiaries), meaning $4.2-billion is coming from outside investors. Brookfield said half the investors are rookies at putting money into Brookfield funds.

The new fund will surely significantly boost Brookfield’s fee income.

At a 1.5 per cent management fee, which is in the ballpark for funds of that size, the new outside assets would represent about $63-million a year in additional income for Brookfield. That would be before any performance fees.

It’s very encouraging to see business trying to take back control of the Republican party:

The U.S. Chamber of Commerce fired an opening salvo yesterday in the battle for control of the Republican Party, endorsing a self-described “pro-business” candidate in a special U.S. House race whose opponent is backed by Tea Party groups and is vowing to “be like Ted Cruz.”

The endorsement in the Alabama contest is the chamber’s first political move since the 16-day partial U.S. government shutdown and debt-ceiling battle, which exposed a rift between the Republican establishment wing and the smaller-government movement. Cruz, a Republican senator from Texas, was the chief proponent of the ill-fated plan to link defunding Obamacare to lifting the debt ceiling and passing a government spending bill.

In reaction to the shutdown, which Standard & Poor’s estimated cost the U.S. economy $24 billion, the chamber and other business groups said they will engage in elections — including Republican primaries — to help candidates aligned with their economic goals.

It would be nice to see that in Canada, too.

It was a strong day for the Canadian preferred share market, with PerpetualDiscounts up 34bp, FixedResets gaining 10bp and DeemedRetractibles winning 59bp. The Floating Rate sector got whacked, perhaps in response to the FOMC release and those issues figured prominently on the wrong side of the Performance Highlights table. BAM issues were notable on the winning side. Volume was very high.

Nothing happened today.

It was a good strong day for the Canadian preferred share market, with PerpetualDiscounts up 17bp, FixedResets gaining 10bp and DeemedRetractibles winning 39bp. The Performance Highlights table is dominated by winning insurance-sector DeemedRetractibles. Volume was very high.

Singapore is is seeking to encourage HFT:

Singapore Exchange Ltd. (SGX), Southeast Asia’s biggest bourse operator, wants to lure more high-speed traders onto its stock market as it grapples with lower volume.

Computerized trading firms, which execute transactions in fractions of a second, account for a negligible share of volume on Singapore Exchange’s cash equities market, according to bourse spokeswoman Loh Wei Ling, while they contribute 30 percent of revenue from derivatives. Singapore Exchange will seek to change that once it introduces safeguards, Chief Executive Officer Magnus Bocker said at a briefing this month.

“We will pursue high-frequency trading once we have circuit breakers and other policies in place,” he said. “That will enhance the liquidity and quality of the Singapore market.”

It’s nice to know that they’re not beholden to the Old Boys Club.

I understand that the SplitShare new issue, Prime US Banking Sector Split Corp. discussed on October 2, has been withdrawn. However, there is no confirmation of this as yet on the Quadravest website, the fund’s website or SEDAR. It’s a shame – new issues of this nature that get so far can cost the sponsor a great deal of money.

A gushing article about Raymond James brokerage makes a good point about the effects of bank regulation in Canada:

For instance, Raymond is looking to expand its corporate lending arm after acquiring the Canadian assets of Allied Irish Banks in 2011, and lending spreads are much more attractive here because there is less competition for loans. South of the border, everyone from banks to shadow banks to hedge funds are willing to lend money, and that hurts loan margins and covenant quality.

The Bank of Canada is very frightened of shadow banking, as are other regulators who want to work for banks eventually.

Seth Carpenter, Jane Ihrig, Elizabeth Klee, Daniel Quinn, and Alexander Boote of the Federal Reserve have written a paper titled The Federal Reserve’s Balance Sheet and Earnings: A primer and projections:

Over the past few years, the Federal Reserve’s use of unconventional monetary policy tools has received a vast amount of public attention, from discussing how these asset purchases have put downward pressure on longer-term interest rates and thus supported economic activity to evaluating the implications for Federal Reserve remittances to the Treasury and the effect on monetary and fiscal policy. As the economic recovery has gained some momentum of late, the focus has turned to issues associated with the normalization of monetary policy. In this paper, we consider a variety of scenarios consistent with statements by Federal Reserve officials about how the FOMC will normalize policy, including whether to sell mortgage-backed securities and the timing of lifting the federal funds rate off from the zero lower bound. In addition, we analyze the potential costs associated with using reserve-draining tools, which could become an important expense during the years of normalization. In each of these scenarios, we discuss the implications of these normalization policies on the size and composition of Federal Reserve asset holdings, which provides some indicate the length of time unconventional monetary policy will be in place, and on remittances of earnings to the Treasury, which capture the interest rate risk of these normalization policies.

What I find of interest is that Treasury remittances are affected only by realized capital losses on the sales – unrealized capital losses are a mere bagatelle, as higlighted by Joshua Zumbrun of Bloomberg. Mark-to-market is for suckers, losers and the private sector regulated by the Fed.

James Hamilton of Econbrowser comments:

The hot debate among Fed watchers– when will the Fed announce a “tapering” of its large-scale purchases– concerns a change in the stock of Treasuries and mortgage-backed securities that the Fed ends up holding that comes to only a fraction of that $600 B reference point. For example, I noted earlier that if the Fed had (as some market observers once anticipated) announced at its September FOMC meeting that it would begin to reduce its net purchases of Treasury securities by $2.5 B per month beginning in October, the result as of the end of 2014 would be that the Fed would be holding about $100 B less in Treasury securities by the end of 2014 than if it waits to begin tapering until January. Using the above table as a guide, that suggests a difference of perhaps 2.5-5 basis points (that is, less than 0.05 percentage points difference in the annual yield) on a 10-year Treasury. Even if you double or triple that by adding in the consequences of MBS purchases, it’s hard to see this as the #1 news event with which financial markets should be gripped.

Matthew Klein of Bloomberg has some interesting commentary on cat bonds:

While we shouldn’t cry for the reinsurers just yet, some pension funds may end up buying these high-yielding assets before they fully understand how to model their risks, just as some loaded up on subprime mortgage securities during the mid-2000s. (On the bright side, investors won’t have to worry about fraud when calculating the probability of another Hurricane Sandy.)

Initially, this would depress the cost of disaster insurance, which might lead to overbuilding in risky areas and laxer enforcement of building safety codes. It could also push the insurers and reinsurers to underwrite new risks they are less familiar with in an effort to prop up margins, a danger that was highlighted by the UK’s Prudential Regulation Authority last month. The Bank for International Settlements, based in Basel, Switzerland, has also been looking into the impact of the reinsurance business on financial stability.

In the event of disaster, outside investors who didn’t appreciate what they had been buying might get so spooked by losses that they would cut their allocation to the entire sector. Small shifts from the perspective of pensions could have big effects on insurers’ ability to protect against future catastrophes. The result would be much greater volatility in the cost of insurance, to say nothing of the impact on pension beneficiaries. Plan sponsors and regulators should be careful.

It was a positive day for the Canadian preferred share market, with PerpetualDiscounts gaining 2bp, FixedResets winning 16bp and DeemedRetractibles up 10bp. A surprisingly lengthy Performance Highlights table is dominated by winners. Volume was above average.

The BoC has released a paper by Bo Young Chang and Bruno Feunou titled Measuring Uncertainty in Monetary Policy Using Implied Volatility and Realized Volatility:

We measure uncertainty surrounding the central bank’s future policy rates using implied volatility computed from interest rate option prices and realized volatility computed from intraday prices of interest rate futures. Both volatility measures show that uncertainty decreased following the most important policy actions taken by the Bank of Canada as a response to the financial crisis of 2007–08, such as the conditional commitment of 2009–10, the unscheduled cut in the target rate coordinated with other major central banks, and the introduction of term purchase and resale agreements. We also find that, on average, uncertainty decreases following the Bank of Canada’s policy rate announcements. Furthermore, our measures of policy rate uncertainty improve the estimation of policy rate expectations from overnight index swap (OIS) rates by predicting the risk premium in the OIS market.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 1bp, FixedResets down 5bp and DeemedRetractibles gaining 9bp. Volatility was high, but without obvious patterns. Volume was high.

There are so many investors buying US real estate that there is chatter that end-users are being squeezed out of the market:

Home purchases by institutional buyers reached a record high in September and all-cash buyers accounted for almost half of sales as investors responded to rising demand from renters.

Institutional purchases accounted for 14 percent of sales, according to a report today from RealtyTrac. That was the highest share since the real estate data firm began in 2011 to track transactions by that group, which it defines as buyers of 10 or more homes a year. All-cash sales rose to 49 percent from 40 percent in August and 30 percent a year earlier, a sign that rising mortgage rates since May have kept some people out of the market and that smaller investors are stepping up purchases.

“Both investors and traditional buyers are trying to snap up cheap homes before prices go higher, but the investors have the advantage of paying cash and not having to go through a convoluted mortgage process,” said Michael Hanson, a former Federal Reserve economist now working for Bank of America Corp. in New York. “People are being bid out of some markets because of investor demand.”

High-end real-estate in the Hamptons is surging:

Josh Guberman paid $3.4 million in 2011 for a house that had lingered on the market in New York’s Hamptons for almost a year. He knew what it was missing.

Guberman tripled the size of the 3,400-square-foot (316-square-meter) property in Southampton, creating nine bedrooms, a wine cellar and zen garden, before putting it on the market again. In July, a buyer paid $8.8 million, $50,000 more than the asking price.
…
In Suffolk County, home to the Hamptons, 188 residential properties priced at at least $750,000 changed hands within a year of the previous purchase, according to third-quarter data from RealtyTrac. That’s up from 22 such high-end flips at the same time in 2012, the Irvine, California-based firm said.

Treasuries are responding to the wider economy:

Treasury 10-year note yields traded at almost a three-month low as signs of a loss of momentum in global economic growth stoked bets the Federal Reserve will delay slowing its stimulus program until next year.

U.S. government debt was poised for a weekly gain as more Americans than forecast filed applications for jobless benefits last week and the trade deficit was little changed in August as imports and exports stalled. Treasury Inflation Protected Securities headed for the biggest two-month increase in more than a year as a sale of $7 billion of 30-year TIPS drew strong demand in the first auction since lawmakers voted to raise the debt ceiling. The U.S. will sell $96 billion in notes next week.

Liquidity rules in the US are being used as an instrument of financial repression:

The biggest U.S. banks would be required to hold enough easily sold assets to survive a 30-day credit drought under Federal Reserve liquidity rules that exceed international standards adopted earlier this year.

The Fed liquidity coverage ratio proposal approved unanimously today at a meeting in Washington continues the U.S. trend of pushing further than Basel III accords, calling for earlier execution than in the European Union. The U.S. plan, most stringent for banks with more than $250 billion in assets or substantial international reach, seeks implementation by 2017 — two years ahead of the Basel deadline set in January.
…
The banks can use an unlimited amount of cash, Treasuries and central-bank reserves to fulfill the requirement and can also keep 40 percent of it in less liquid assets.

Those other assets can include sovereign debt with a 20 percent risk weight and debt from Fannie Mae and Freddie Mac (FMCC) — subject to a 15 percent haircut. A narrower 15 percent of the liquidity can be in investment-grade corporate debt and publicly traded company stock, with a 50 percent haircut.

Equities as part of a liquidity reserve, even with a 50% haircut? One wonders at the dealmaking process that produced that decision.

David Parkinson of the Globe remarks:

And what happened when the Fed decided at its mid-September policy meeting not to begin tapering after all? Since then, the U.S. 10-year yield has backtracked 35 basis points – and Canada’s 10-year yield has matched it point-for-point.

There’s another ridiculous article on Canadian mortgages:

It was expected that higher interest rates would do the rest of the work. But that’s now in question, after the Bank of Canada pushed out the timeline for raising short-term rates.
…
There are some minor moves that Ottawa is already planning that could have a bit of a cooling impact on the market. Sources say the Department of Finance has circulated a discussion paper on portfolio insurance. It proposes some changes such as limiting portfolio insurance to terms, such as five years, rather than having it be for the full life of the mortgages, and taking away the ability of banks to substitute one mortgage for another within a portfolio. Changes such as these would further reduce Ottawa’s exposure to the housing market.

Of course, selling less mortgage insurance would also reduce Ottawa’s exposure to the housing market. And charging more for it would certainly mitigate and probably reduce Ottawa’s exposure to the housing market. Why isn’t Spend-Every-Penny’s recklessness in fuelling the housing boom ever addressed?

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 18bp, FixedResets up 9bp and DeemedRetractibles gaining 6bp. A surprisingly lengthy Performance Highlights table shows no clear patterns. Volume was very high.

You’ve got to go a long way to find inflation but there is some:

Australia’s consumer prices gained more than economists forecast last quarter, sending the local currency higher as money markets pared bets the central bank will extend its two-year easing of monetary policy this year.

The trimmed mean gauge of core prices rose 0.7 percent from the previous quarter, the Bureau of Statistics said in Sydney today, compared with the median forecast of 25 economists for a 0.6 percent gain. The consumer price index gained 1.2 percent from the previous three months, compared with economists forecast for a 0.8 percent increase.

Reserve Bank of Australia Governor Glenn Stevens reduced borrowing costs eight times — for a total of 2.25 percentage points — from November 2011 to a record low 2.5 percent in August. With annual price rises within its 2 percent to 3 percent target, he’s seeking to boost job-intensive industries such as construction as a mining investment boom crests.

You won’t find much in Canada!

Inflation in Canada has remained low in recent months, reflecting the significant slack in the economy, heightened competition in the retail sector, and other sector-specific factors. With larger and more persistent excess supply in the economy, both total CPI and core inflation are expected to return more gradually to 2 per cent, around the end of 2015.

Although the Bank considers the risks around its projected inflation path to be balanced, the fact that inflation has been persistently below target means that downside risks to inflation assume increasing importance. However, the Bank must also take into consideration the risk of exacerbating already-elevated household imbalances. Weighing these considerations, the Bank judges that the substantial monetary policy stimulus currently in place remains appropriate and therefore has decided to maintain the target for the overnight rate at 1 per cent.

Michael Babad of the Globe emphasizes the ‘household imbalances’ risk:

It’s not that things aren’t necessarily going as expected, it’s the tweaks to the language. In September, for example, the central bank said in its policy announcement that housing had been “slightly stronger than anticipated,”

The central bank’s comments today underscore the angst surrounding Canada’s housing market and record high debt burdens among consumers.

The housing market slumped in the summer of 2012 after Finance Minister Jim Flaherty moved to cool it off with another round of mortgage restrictions.

Of course, Spend-Every-Penny continues to pump up the housing market with reckless provisions of guarantees by the CMHC. These have the ultimate effect of funding mortgage loans much cheaper for the banks than business loans.

The “crowdfunding” idea continues to move ahead slowly:

Entrepreneurs and start-up companies looking for backing will be able to solicit small investments over the Internet from the general public under a new proposal unveiled by U.S. regulators on Wednesday.
…
The crowdfunding rule would let small businesses raise more than $1-million a year by tapping unaccredited investors.

Companies could sell stakes to mom-and-pop investors without registering the securities with the SEC, a move designed to make it cheaper and less cumbersome for struggling startups trying to get their businesses off the ground.

They would still be required to raise the money through regulated broker-dealers such as CircleUp or through crowdfunding portals.

How many entities might register as crowdfunding portals is still unknown, as many are holding off making any decisions until they see how the SEC’s rules shape up.

Under the proposal, crowdfunding portals would be required to provide investors with educational materials and take certain steps to reduce the risk of fraud.

SEC Commissioner Michael S. Piwowar is supportive:

Still, the worthy goals of crowdfunding do not alter the fact that this new mechanism for raising capital presents a number of challenges. The JOBS Act not only requires the Commission to develop a completely new regulatory framework that promotes capital formation for startup companies, but also to implement this innovative framework in a way that protects investors from fraud.

Despite these challenges, crowdfunding presents a number of opportunities. Small businesses – the engines of innovation, economic growth, and job creation – will have the opportunity to access capital from sources that have been previously unavailable. All investors – not just the so-called “accredited investors” – will have the opportunity to invest in entrepreneurs and their ideas at an earlier stage than ever before. The concept of the “wisdom of the crowd,” which has proven to be useful in other areas, will now be unleashed to allocate capital to more productive uses.

Not surprisingly, SEC Commissioner Luis A. Aguilar supports less regulation as long as it is replaced with new regulation:

The use of crowdfunding to reach potentially vulnerable segments of society is a particular concern. Many of the SEC’s enforcement cases arise from “affinity frauds” that exploit the trust and friendship that often exists among members of any ethnic, religious, or other community.[Footnote] Given the possibility that crowdfunding may facilitate affinity fraud by making it easier to identify and target vulnerable groups, I would urge the Commission’s enforcement staff and state securities regulators to take a proactive approach to monitor the crowdfunding space for potential problems. In that regard, I am pleased to note that the North American Securities Administrators Association announced the formation of a task force on Internet fraud investigations shortly after the enactment of the JOBS Act.[Footnote]
…
It is therefore essential that the Commission work to establish this new financing technique in a responsible manner. Because of the importance of small business funding, I support the issuance of this proposal. However, I recognize that crowdfunding may entail substantial risks. I look forward to public comments, particularly from investors and investor advocates, as to how the rules can be improved. I also note that Title III of the JOBS Act expressly requires that, in carrying out the rulemaking required to implement the crowdfunding exemption, the Commission shall consult with the state securities commissions.[Footnote] To that end, I look forward to hearing from state regulators.

SEC Commissioner Kara M. Stein wants to ensure there are lots of jobs created handling the red-tape:

First, there is ambiguity in the statute about how much any single investor should be permitted to invest. There are essentially two tests: one based on the income of the investor, and another based on the net worth of the investor. However, it’s not clear from the statute which test should apply and when. One approach is to separately look at both the investor’s income and net worth, and allow the investor to invest up to the maximum amount allowed by the test permitting the greater investment amount. That is the approach taken in the proposed rule. The proposed rule also excludes from the calculation of net worth an individual’s primary residence. No senior citizen living off of a modest, fixed income should be at risk of losing her home to a crowdfunding venture. But even with primary residences excluded from the calculation, I remain concerned that taking the “greater than” approach may expose seniors or others to risks and losses they cannot afford. Another approach could be to limit the investor to the lower investment amount dictated by either the annual income or net worth tests. The release requests comment on which approach is appropriate, and I look forward to hearing from commenters on all sides of this fundamental issue.

The second area I’d like to highlight is whether we should permit funding portals not based in the United States to register and operate in the United States. The release proposes to allow non-U.S. funding portals to register as long as they meet certain requirements, including the portal’s ability to submit to an on-site examination. Given the complexities currently surrounding compliance and enforcement with respect to non-U.S. entities, I believe we need to hear from all parties on this issue and make certain, at a minimum, that all funding portals are fully within our examination and enforcement jurisdiction. I look forward to hearing commenters’ perspectives on this aspect of the proposal.

Third, there is substantial discussion in the release with respect to an issuer’s responsibility to keep complete and accurate records of its securityholders. I believe this is a critically important issue that could have far-reaching implications for the marketplace. A business simply must be able to track who its owners are. While I understand that requiring a registered transfer agent would increase the costs to an issuer, I would like to hear from commenters about possible third-party, cost-effective solutions to help crowdfunding issuers manage their recordkeeping responsibilities.

SEC Commissioner Daniel M. Gallagher is too shy to reveal his views:

The JOBs Act has provided for many investor protections in Title III, including disclosure requirements and the mandatory use of intermediaries called funding portals, and I believe our proposal is generally careful to not add additional, unnecessary frictions into this marketplace. That said, the proof is in the pudding and I look forward to hearing from commenters on whether the balance of investor protection and innovation we are seeking is appropriate.

And to be sure, there is a lot to comment on. In addition to the substantive rule proposal reflected in the proposed rule text and related release language, there are 295 questions in the release. On the actual rule proposal as well as the questions, I especially want to hear from both the small business entrepreneurs we seek to assist, and those investors who look forward to supporting them.

The full release is over 400 pages long. For those with less patience, the press release states:

Consistent with the JOBS Act, the proposed rules would among other things permit individuals to invest subject to certain thresholds, limit the amount of money a company can raise, require companies to disclose certain information about their offers, and create a regulatory framework for the intermediaries that would facilitate the crowdfunding transactions.

Under the proposed rules:

A company would be able to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period.
Investors, over the course of a 12-month period, would be permitted to invest up to:

• $2,000 or 5 percent of their annual income or net worth, whichever is greater, if both their annual income and net worth are less than $100,000.
• 10 percent of their annual income or net worth, whichever is greater, if either their annual income or net worth is equal to or more than $100,000. During the 12-month period, these investors would not be able to purchase more than $100,000 of securities through crowdfunding.

Certain companies would not be eligible to use the crowdfunding exemption. Ineligible companies include non-U.S. companies, companies that already are SEC reporting companies, certain investment companies, companies that are disqualified under the proposed disqualification rules, companies that have failed to comply with the annual reporting requirements in the proposed rules, and companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies.

As mandated by Title III of the JOBS Act, securities purchased in a crowdfunding transaction could not be resold for a period of one year. Holders of these securities would not count toward the threshold that requires a company to register with the SEC under Section 12(g) of the Exchange Act.

Enforcing the limits per investor sounds like a job and a half! So fear not! There will be plenty of work for the regulators!

Interestingly, Canada Post no longer wants its debt rated by S&P:

• We are affirming our ‘AAA’ long-term issuer credit and senior unsecured debt ratings and ‘A-1+’ short-term rating on Canada Post Corp. (CPC).
• We have revised our assessment of CPC’s role with and link to the Canadian federal government to “critical” and “integral’ from “very important” and “very strong”, respectively, under our government-related entities criteria.
• Accordingly, we have revised the company’s likelihood of receiving extraordinary government support to “almost certain” from “very high”.
• We are withdrawing our ratings at CPC’s request.

I’m not quite sure what to make of that, particularly in light of Royal Mail’s IPO success:

Forget Twitter. The hottest stock offering of the year is the Royal Mail.

Shares in Britain’s 500-year-old postal service soared as high as 50 per cent over their initial offering price in the days after being listed this month, proving that a very mature business can still excite investors.

That has triggered a sense of postal envy in Ottawa. This could have been Canada Post’s big payday.
…
If nothing is done to fix its broken business model Canada Post says it will be losing nearly $1-billion a year by 2020.
…
None of the proposed options for fixing the post office are very palatable. They include moving all Canadians to community mailboxes, going to three-day-a week delivery from the current five, franchising more post offices, raising stamp prices and slowing mail delivery, according to a recent Conference Board of Canada report commissioned by the post office.

I don’t understand why the reporter thinks three-day-a-week delivery is unpalatable. What comes in the mail? Magazines and bills. Twice a week is fine for residential service. Maybe more often in high-volume areas, like downtown Toronto.

DBRS updated its report on Veresen, proud issuer of VSN.PR.A and VSN.PR.C:

Veresen continues to pursue its growth and diversification initiatives. In May 2013, the Company filed an application with the Federal Energy Regulatory Commission (FERC) to construct and operate an LNG export facility and related power and pipeline infrastructure at Coos Bay, Oregon (Jordan Cove Energy Project, or the Project). The estimated cost of the Project is $7.5 billion, with an expected in-service date of 2018. DBRS recognizes that the Project is significant and transformative, as it adds growth and diversification to Veresen’s business, and expects that its success will have a positive impact on the Company’s business risk profile. However, the Project is much larger than those undertaken by the Company in the past and entails significant execution risks. The underpinning of firm long-term anchor shipping contracts will be critical to financing the Project in the market, and DBRS expects the Project to be syndicated, due to its relative size and complexity. DBRS will continue to monitor the developments on the Project to assess any impact on the Company’s financial profile.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 1bp, FixedResets down 6bp and DeemedRetractibles gaining 3bp. Volatility was at normal levels. Volume was high.

PerpetualDiscounts now yield 5.58%, equivalent to 7.25% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.8%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 245bp, unchanged from October 9.