PrefBlog

Some little kids want Mommy to make everything nice:

For nearly a year, a group of major bond investors has been looking for answers to a seemingly simple question — who among Canada’s many regulators is in charge of Cdor [Canadian Dealer Offered Rate], a benchmark rate affecting some $6-trillion bonds, corporate loans, derivatives and other securities held by investors across the country. They have yet to get an answer.

“It’s kind of exasperating,” said Joe Morin, chair of the Canadian Bond Investors Association, which represents some 30 fixed income funds with more than $300-billion of assets. “Nobody has stepped up to take responsibility.”
…
On Aug 20, nearly five months [after whimpering to Mommy], they received a reply from the OSC, referring the group to a “review” of Cdor published by another regulator, the Investment Industry Regulatory Organization of Canada, made public in Jan 2013. The review found that the Cdor rate setting process had the “potential” for manipulation. It also found that none of this country’s regulators had proper jurisdiction over the rate.

In January of this year the Office of the Superintendent of Financial Institutions appeared to clear away the regulatory cobwebs, announcing it would “assume a role” in the oversight of Cdor, which was interpreted by many as a declaration that it was taking responsibility for the rate.

But it turned out that was not the case.

“We would like to clarify that OSFI is not the regulator of Cdor,” a spokesman for the regulator said in an email to the Financial Post on Feb 20.

Assiduous Readers will recognize that these are the same box-tickers who want bond covenants standardized in order to reduce the chance they might have to read a term sheet and, even worse, have to take a view on the value difference between slightly different covenants, as discussed on March 10.

Capital Power Corporation, proud issuer of CPX.PR.A, CPX.PR.C and CPX.PR.E, has been confirmed at Pfd-3(low) [Stable] by DBRS:

CPC’s preferred shares rating is based on the credit quality of its subsidiary, Capital Power L.P. (CPLP; rated BBB). The one-notch differential in the ratings of CPC and CPLP reflects structural subordination at CPC.
…
CPC has no bonds/debentures issued at the parent level and is not expected to issue any debt in the foreseeable future. CPC currently has $464 million of preferred shares outstanding, of which $73 million is treated as debt by DBRS in CPC’s adjusted debt-to-capital calculation (adjusted debt-to-capital ratio was approximately 3% in 2013). In the adjusted debt-to-capital calculation, the amount of preferred shares over the 20% preferred shares-to-equity threshold (defined as the percentage of preferred shares outstanding divided by total equity, excluding preferreds and minority interest) is treated as debt. CPC’s adjusted debt-to-capital ratio remains in line with its rating category. In addition, the pro forma unconsolidated fixed charge coverage ratio is expected to remain high, at around four times.

It was a mildly negative day for the Canadian preferred share market, with PerpetualDiscounts down 3bp, FixedResets off 1bp and DeemedRetractibles flat. Volatility was not just minimal, it just reversed yesterday’s. Volume was below average.

Nothing happened today.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 34bp, FixedResets off 3bp and DeemedRetractibles gaining 3bp. Volatility was low. Volume was average, with the highlights comprised entirely of FixedResets.

The robots are taking over:

When Minneapolis attorney William Greene faced the task of combing through 1.3 million electronic documents in a recent case, he turned to a so-called smart computer program. Three associates selected relevant documents from a smaller sample, “teaching” their reasoning to the computer. The software’s algorithms then sorted the remaining material by importance.

“We were able to get the information we needed after reviewing only 2.3 percent of the documents,” said Greene, a Minneapolis-based partner at law firm Stinson Leonard Street LLP.
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The advances, coupled with mobile robots wired with this intelligence, make it likely that occupations employing almost half of today’s U.S. workers, ranging from loan officers to cab drivers and real estate agents, become possible to automate in the next decade or two, according to a study done at the University of Oxford in the U.K.

“These transitions have happened before,” said Carl Benedikt Frey, co-author of the study and a research fellow at the Oxford Martin Programme on the Impacts of Future Technology. “What’s different this time is that technological change is happening even faster, and it may affect a greater variety of jobs.”

This is exacerbated by the good old WASP work ethic:

About a dozen years ago, one of his biggest competitors started using undocumented Mexican laborers. At the time, the landscaper’s firm suffered high turnover and low productivity, and finding employees to do the actual landscaping — his company’s bread and butter — was difficult.

“We’ve never had anyone come in here looking for work,” he told me, on condition that I withhold his name. He found many of the Americans he has hired over the years to be unreliable and unwilling to work hard. Sometimes they quit; other times he has fired them.

Gradually, he started hiring Mexican laborers. All of them were able to provide Social Security numbers, though he understood they were bogus. “We have to have paperwork on these guys,” he said. “We just don’t have to have it be legitimate.”

In not entirely unrelated news, Fischer is indicating continued expansionary monetary policy:

Stanley Fischer, the nominee to be Federal Reserve vice chairman, said the world’s largest economy still needs the central bank’s unprecedented accommodation as joblessness remains elevated.

“At 6.7 percent, the unemployment rate remains too high,” Fischer, a former Bank of Israel governor and Citigroup Inc. vice chairman, said in remarks prepared for his confirmation hearing tomorrow before the Senate Banking Committee.

“Achievement of both maximum employment and price stability requires the continuation of an expansionary monetary policy — even though the degree of expansion is being gradually and cautiously cut back as the Fed reduces its monthly purchases” of securities, said Fischer, 70.

I’m told I’m not employing enough regulators, but that will change soon enough:

Under NI 31-103, OBSI’s membership will more than double to almost 1600 firms in the financial industry, including:

• •Investment Industry Regulatory Organization of Canada (IIROC) member firms
• •Mutual Fund Dealers Association of Canada (MFDA) member firms
• •Mutual fund companies
• •Exempt market dealers
• •Portfolio managers
• •Scholarship plan dealers
• •Forex trading services
• •Domestic and foreign-owned banks
• •Credit unions
• •Federal trust and loan companies and other deposit-taking organizations

Fabulous Fab has been fined for selling investments to dumb people:

Ex-Goldman Sachs Group Inc. (GS) vice president Fabrice Tourre, found liable for his part in a failed $1 billion investment, was ordered to pay more than $825,000 in the U.S. Securities and Exchange Commission case.

U.S. District Judge Katherine Forrest in Manhattan ruled today that Tourre must pay $650,000 in civil penalties and give up $175,463 of his 2007 bonus, plus interest. He can’t seek reimbursement of the penalties from Goldman Sachs, the judge ruled.

Tourre, 35, was found liable Aug. 1 after a jury trial at which the SEC claimed he intentionally misled investors in a subprime-mortgage vehicle called Abacus 2007-AC1. Tourre lied about the role played by billionaire John Paulson’s Paulson & Co. hedge fund, which helped choose the securities underlying Abacus then made a billion-dollar bet it would fail, the agency said.

… and the SEC weenies are high-fiving each other for their role in making the world a safer place for grossly incompetent professionals:

“We’re pleased that the judge’s decision imposes the disgorgement amount we recommended as well as other significant penalties for providing false marketing materials to investors. The ruling reflects the SEC’s intent of pursuing meaningful sanctions to punish individuals responsible for misconduct and deter others from violating the federal securities laws.”

Assiduous Readers will remember that the Feds are cancelling five hundred years of bankruptcy law by forcing banks to issue bail-in bonds, as discussed on November 14, 2013; following Lap-Dog Carney’s parroting of the official line without any research whatsoever. So what will be the effect of this? Logically, bail-in bonds will be riskier than banks’ current senior debt; therefore they should be more expensive to issue; therefore the banks will issue less of them and rely more on large-scale deposit notes, which have a shorter term. What will be the effect of all this? Teodora Paligorova and João Santos have written a paper titled Rollover Risk and the Maturity Transformation Function of Banks:

This paper shows that banks that rely heavily on short-term funding engage less in maturity transformation in an attempt to decrease their exposure to rollover risk. These banks shorten both the maturity of their portfolio of loans as well as the maturity of newly issued loans. We find that the loan yield curve becomes steeper with banks’ increasing use of short-term funding. The loan maturity shortening is driven by banks and affects borrowers’ financing choices – they turn to the bond market for long-term funding. To the extent that borrowers do not manage to compensate for the undesirable shortening of loan maturities by going to the bond market, they may become more exposed to rollover risk due to banks. This potential synchronization of banks’ and borrowers’ rollover risk can be a source of financial instability once short-term funding suddenly disappears.
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Our results also help to explain the downward trend in the average maturity of outstanding bank loans over the past two decades, documented by Mian and Santos
(2011). [Footnote reads: While average maturity is close to four years in 1988, it declines to just over two-and-a-half-years in 2010.

The paper focusses on money-market instruments as ‘short-term funding’, but the implications are there. It would be really nice to see some research focussed on bail-in bonds as a major change in the structure of bank financing and the implications of this for lending and financial stability, but I don’t think the BoC will be doing much – not with the Parakeet in charge.

Speaking of Lapdog Carney, he his political puppetmasters have given him authority to identify risk as quickly as six years afterwards!

Senior bankers may be forced to pay back bonuses as long as six years after they cash the checks under proposed Bank of England rules to curb short-term financial risk-taking.

The central bank is readying rules that would take effect in 2015, Katherine Braddick, director for policy at the central bank’s Prudential Regulation Authority, said in a speech in London today. Braddick didn’t specify the circumstances under which the clawbacks would be enforced.

“The ability to apply clawback should further encourage the avoidance of excessive risk taking and the alignment of incentives with firms’ longer-term interests,” Braddick said.

The war on traders will have far-reaching consequences, none of which have ever been thought about.

If there’s one thing welfare bums love to do, it’s complain about poor service:

“They have made these changes to reduce their operating costs,” [Western Grain Elevator Association head] Mr. Sobkowich said. “This manifests itself as inadequate service – especially in circumstances when service requirements are higher because of a larger than normal crop and when operating conditions are difficult because of cold weather.“

Excess capacity and system robustness costs money. I wonder who’s going to pay for it. I know! Ottawa! Then Ottawa can write cheques to the railway companies for not shipping the grain that the farmers have been paid not to grow! Everybody wins!

Assiduous Reader DR brings a piece on no-contest settlements to my attention:

No-fault deals would give miscreants credit for co-operating with the OSC and allow the regulator to end enforcement action by simply levying a financial penalty. “These initiatives will allow us to resolve enforcement matters more quickly and issue more protective orders earlier, which would benefit both investors and the capital markets,” is how Tom Atkinson, the OSC’s director of enforcement justified the idea. In other words, these types of settlements will streamline the watchdog’s case log, conserve resources, claim more scalps and burnish its enforcement image. Market players and defence lawyers love it chiefly because it’s preferable to pay a fine than make high-risk admissions that can be used against them in other jurisdictions, such as the civil courts.

For that reason, investor protection advocates and class-action lawyers oppose the idea. OSC enforcement proceedings don’t result in direct compensation, thus fleeced investors and victims of fraud rely on admissions extracted by the regulator to get restitution through litigation, namely class-action lawsuits. “By dispensing with admission, enforcement staff would be leaving investors completely in the cold,” warned a submission filed by class-action law firm Siskinds LLP.

DR asks:

I confess I am confused, I don’t know if this is going to be for better or worse

I am unequivocally against no-contest settlements. If a company has done something wrong, they should be nailed to the wall – that’s the OSC’s putative job. If they haven’t done anything wrong, then the OSC should shut up.

No-contest settlements make it easier for the OSC to indulge in regulatory extortion … ‘OK, Mr. X, we can go after you for ten million dollars and we’ll tell our lawyers – who we have to pay anyway, so there’s no marginal cost on our side – to make it as expensive for you to fight it as they possibly can. Or we can agree on no-contest for $100,000.’ So the company agrees, because just fighting the charges will cost more than $100,000, and the regulator pads his resume with yet another impressive victory.

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

EGD’s financial profile reflects an “A” rating, with all credit metrics remaining solidly within the current rating range. However, two concerns over the near to medium term are as follows: (1) Significant liquidity is required to finance EGD’s volatile working capital (mostly gas inventory for winter distributions). EGD’s liquidity is currently viewed as adequate to meet its operational needs given low natural gas prices. Should natural gas prices increase significantly, DBRS expects EGD to properly manage its liquidity to cope with that situation. (2) Large free cash flow deficits are expected over the next two years because of the $686.5 million GTA Expansion project. EGD’s parent (Enbridge Inc.) is expected to continue providing financial support for EGD. DBRS expects EGD to finance its cash flow shortfalls while maintaining the debt leverage within the regulatory capital structure and all other credit metrics within the DBRS “A” rating range. This project has been approved by the OEB and should provide good earnings growth once it is in service, which is expected to occur by the end of 2015.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 13bp, FixedResets gaining 5bp and DeemedRetractibles up 6bp. Volatility was basically zero – the only performance highlights are Floating Rate issues, which have been jumping around a lot lately according to the scheduling of global hyperinflation. Volume was slightly below average.

PerpetualDiscounts now yield 5.55%, equivalent to 7.22% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.55%, so the pre-tax interest-equivalent spread is now about 265bp, a slight (and perhaps spurious) tightening from the 270bp reported March 5.