PrefBlog

Banner headline on Bloomberg – An FX trade didn’t work out:

A senior currency dealer at Lloyds Banking Group Plc shared details of a pending order by his firm with a trader at another company to the potential detriment of the bank, according to four people with knowledge of the matter.

The Lloyds’s dealer, Martin Chantree, alerted the other trader on Jan. 31, 2013, that his desk had received instructions from the bank’s treasury department to swap more than 300 million pounds ($499 million) for dollars and that they would continue selling regardless of price movements, said two of the people, who asked not to be identified amid a probe into alleged rigging of the currency market. The recipient of the tip worked for oil company BP Plc, the other two people said.

In the seven minutes between the communication at 10:53 a.m. and the time Lloyds began executing the order, the pound fell 16 basis points against the dollar, or 0.16 percentage point, according to data compiled by Bloomberg. As the U.K. currency tumbled, costing Lloyds an estimated $750,000, Chantree told colleagues that maybe he shouldn’t have shared the information, two of the people said.
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Lloyds suspended Chantree on Feb. 3 after inquiries by Bloomberg News about his alleged communications in advance of the trade. The London-based bank, which is 33 percent owned by the U.K. government, approached the FCA after discovering messages, including the 10:53 a.m. voice communication in which Chantree detailed the size and timing of the order, two of the people said.
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Between 10:53 a.m. and 11 a.m. on the day of the trade, about when Lloyds began selling, the pound-dollar exchange rate fell to 1.5790 from 1.5815, data compiled by Bloomberg show.
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Lloyds did internal deals of that size only six or seven times a year, two of the people said. When an order came in, some traders on the second floor of the bank’s Gresham Street headquarters in London’s financial district would place their own bets before executing the trade in a way that moved the market as much as possible, one of the people said. They were able to do this because notice was typically sent to more than one trader on the desk and Lloyds’s treasury unit didn’t scrutinize whether it got the best price, the person said. There’s no indication Chantree placed such bets that morning.

Well, sure. If you’re going to do size, you’ve got to show size. And sometimes showing size means everybody on the opposite side pulls their orders … which is consistent with what happened. Why else do you think dark pools are so popular? Trading size is more of an art than a science, and sometimes it’s art with a capital F. I will be kind and assume that Lloyds has suspended its trader only because they’re terrified of the regulators nowadays.

It seems very likely that the villain of the piece is Lloyds treasury. A market order for half a billion bucks? I will need to see a long detailed explanation before I’m convinced they’re not idiots.

Lest anybody think that I always take the traders’ side, I will say: front-running orders of this type was clearly wrong. In case of this particular type, the traders do in fact owe a fiduciary client to their institutional client … but only because the client is also their employer.

We may finally be approaching the approaching the elimination of the GSEs:

The bipartisan measure, drafted with input from President Barack Obama’s administration, would replace the U.S.-owned mortgage financiers with government bond insurance that would kick in only after private capital suffered losses of at least 10 percent, Senate Banking Committee Chairman Tim Johnson and Senator Mike Crapo said in a statement today. The bill would require most borrowers to make down payments of at least 5 percent.
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The government would play a smaller role in the market by taking a backstop position on mortgage securities, stepping in only if private interests were wiped out by catastrophic losses. A new agency called the Federal Mortgage Insurance Corp. would charge fees to issue a government guarantee on bonds that would kick in only after private investors suffered losses of at least 10 percent.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 17bp, FixedResets off 10bp and DeemedRetractibles gaining 4bp. Volatility was above average due to stellar performance from Floating Rate issues, indicating that the recently postponed global hyperinflation has now been rescheduled. Volume was high.

Canada’s central planners are flexing their muscles:

Ottawa is forcing Canada’s two main railway companies to double the amount of grain they ship in a week to try to unclog a transport bottleneck that has left piles of grain sitting in bins across the Prairies.

Transport Minister Lisa Raitt said cabinet has passed an order-in-council that gives Canadian National and Canadian Pacific a month to start moving a minimum of one million tonnes of grain in 11,000 cars each week.

I wonder what goods won’t get moved because of pandering to farmers. I wonder what the price of transport would be in a free market.

Let’s hope this becomes a trend:

JPMorgan Chase & Co. (JPM), Deutsche Bank AG, UBS AG (UBSN) and Depfa Bank Plc won a bid to overturn a conviction for overseeing fraud by their bankers in the sale of derivatives to the city of Milan.

An appeals court in Milan cleared the banks and individuals at the firms because “the alleged crimes didn’t take place,” Judge Luigi Martino said as he read out the verdict today.

There’s no shortage of government debt to buy:

The amount of debt globally has soared more than 40 percent to $100 trillion since the first signs of the financial crisis as governments borrowed to pull their economies out of recession and companies took advantage of record low interest rates, according to the Bank for International Settlements.

The $30 trillion increase from $70 trillion between mid-2007 and mid-2013 compares with a $3.86 trillion decline in the value of equities to $53.8 trillion in the same period, according to data compiled by Bloomberg. The jump in debt as measured by the Basel, Switzerland-based BIS in its quarterly review is almost twice the U.S.’s gross domestic product.

Borrowing has soared as central banks suppress benchmark interest rates to spur growth after the U.S. subprime mortgage market collapsed and Lehman Brothers Holdings Inc.’s bankruptcy sent the world into its worst financial crisis since the Great Depression. Yields on all types of bonds, from governments to corporates and mortgages, average about 2 percent, down from more than 4.8 percent in 2007, according to the Bank of America Merrill Lynch Global Broad Market Index.

On March 7 I mentioned some competition in American health-care. Here’s some abuse of the system:

Allegations that pre-scheduled cath-lab patients showed up at the ER may signal efforts to get unwarranted payments from health insurers or federal coverage programs for patients who wouldn’t be covered otherwise, said James Sheehan, chief of the charities unit for the New York state attorney general’s office. Sheehan, a former inspector general of the state’s Medicaid system, was speaking generally, not specifically about Mount Sinai.

In emergency situations, patients cannot be turned away just because they can’t pay for care, according to federal and New York state laws. New York’s Medicaid system spends about $500 million a year on emergency procedures for uninsured patients.

After Andy Jagoda, Mount Sinai’s emergency-department chief, heard in 2012 that cardiologists were sending patients through the emergency ward with previously scheduled cath-lab appointments, he indicated that he had brought the matter up with the hospital’s administration and would do so again. Mount Sinai declined to make Jagoda available for an interview.

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On average, doctors who have financial ties to the hospital — such as arrangements to provide Mount Sinai cardiologists with office space for a fee — tend to make more referrals, based on data from 2010. In that year, seven doctors or practices that had such business dealings with Mount Sinai referred 301 patients to the cath lab on average — 15 times the average referrals made by all 546 doctors who sent patients to the lab that year, according to hospital documents.
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New York’s rates are driven by a “surplus” of cath labs seeking patients, a competition that spurs usage of hospitals’ facilities and doctors’ expertise that’s unrelated to patients’ needs and distorts the market for heart procedures, Marmur said. “The pendulum is way out of whack,” he said. “It drives up the cost of health care for everyone.”

I claim this sort of highly suspicious nonsense is inevitable whenever the consumer of a service doesn’t have to pay for it.

Some charming little box-tickers are whimpering about bond covenants:

…major players such as Canso Investment Counsel and Manulife Financial Corp. came together roughly two years ago to create the Canadian Bond Investors’ Association.
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After working with lawyers to draft a working paper, the industry group is now advocating for four fundamental changes to debt covenants. The improvements include new standardized language around a “change of control,” or a switch in company ownership. At the moment, companies can have multiple bonds that each come with different rules on how they will be treated in this situation.

For instance, Safeway Inc., the giant U.S. grocery chain that is now the target of a $9-billion (U.S.) leveraged buyout, has a number of bonds outstanding, and each has different change-of-control provisions. Some bondholders are allowed to sell their bonds back to the acquirer, Cerberus, for full value, while others cannot.

I can tell you as a fact that when such a thing occurs, it is a total surprise to most owners, as they read the term-sheets and prospectuses for the very first time. By and large, the Canadian bond market is oblivious to anything that’s not included in the Bloomberg summary.

To address this inequity, bond investors want issuers to be required to enhance their coupon payments by a preset amount – it could be 100 or 200 basis points – in similar situations in the future, but only if a company loses its investment grade rating.

Yes, it will be a better world, as soon as there are more rules, more red tape, more regulators and more lawyers. It never occurs to any of these clowns that they have a choice regarding what to buy; if big enough, they can even approach issuers themselves with a proposal for a private placement.

TransAlta Corp., proud issuer of , was confirmed at Pfd-3(stable) by DBRS:

TAC’s key credit metrics are currently in the BB (high) range, which provides the Company with very limited financial flexibility. However, key credit metrics are expected to improve following the 38% decrease in dividend payouts and the reduction of debt with the proceeds from the sale of non-core assets (see the DBRS press release dated February 20, 2014). In addition, the Company is expected to generate a free cash flow surplus in 2014, which is expected to further improve its leverage modestly. The Stable trend reflects DBRS’s expectation that TAC will improve its key credit metrics to the BBB (low) range, including leverage to near or below 50% by the end of 2014. DBRS also expects TAC to continue to fund any significant unforeseen costs, cash shortfalls and/or acquisitions in a prudent manner to prevent any further deterioration of key credit metrics. Any delay in reducing leverage, or further weakness of other key credit metrics, could result in a negative rating action.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 12bp, FixedResets gaining 3bp and DeemedRetractibles up 8bp. Volatility was minimal. Volume was below average.

Last mentioned on January 31, 2013, the Litvak case has been brought to an appalling new development:

Litvak, 39, of New York, was found guilty by a federal jury today of all counts including securities fraud and making false statements as well as fraud connected to the U.S. government’s Troubled Asset Relief Program following a trial before U.S. District Judge Janet C. Hall in New Haven, Connecticut. He is scheduled to be sentenced May 30.
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Prosecutors accused Litvak of defrauding investors of $2 million by misrepresenting how much sellers were asking for the securities, or what customers would pay, and keeping the difference for New York-based Jefferies. Richard Khaleel, a spokesman for Jefferies, declined to comment on the verdict.

Litvak was also accused of defrauding investors by telling some buyers that the bonds in the Jefferies inventory were being offered for sale by a third-party seller that didn’t exist. Prosecutors said the claim allowed Litvak to charge an extra commission and increase the profitability of his trades as his trading revenue declined.

Smith said the judge didn’t allow the testimony of expert witnesses who would have testified about the mortgage-backed securities markets and would have shown Litvak’s “good faith state of mind,” and also made several evidentiary rulings limiting the amount of evidence about similar behavior of other Jefferies traders and employees.

So the US is trying to make markets safe for grossly incompetent professional traders. I don’t know where this will end. Trying to pretend that negotiating 9-figure financial deals as principal is not a jungle will lead to more problems than it solves – the world needs fewer “cooperative games” and more recognition of reality:

Click for Big

On the Crimean issue (I think the French and British should arrange for support from Turkey and invade again), the markets are doing a better job than the Boo-Hoo-Hoo Brigade.

Dudley reiterated that tapering is not the same as tightening:

Federal Reserve Bank of New York President William C. Dudley said he sees a “reasonably favorable” outlook for the U.S. economy, even as elevated joblessness and too-low inflation warrant a high level of stimulus for a “considerable time.”

“I would very much prefer faster economic growth and more rapid progress towards our dual mandate objectives of maximum sustainable employment and price stability,” Dudley said today in the text of remarks given at Brooklyn College in New York. “Hence, the continued need for monetary policy to remain highly accommodative to support the economic recovery to the fullest.”

Dudley said a decline in the jobless rate “significantly overstates the degree of improvement in the labor market” because much of the decrease has been caused by people dropping out of the job market. Unemployment fell to 6.7 percent in December, close to Fed’s threshold for considering an increase in the benchmark interest rate, from 7.5 percent last June.

There are stirrings of long overdue competition in US health care:

In the changing world of health care, patients are finding that the best care may be several hundred miles away.

When Travis Bumbaugh needed heart surgery, the Pennsylvania general contractor chose the cheapest option in the Lowe’s Cos. (LOW) health plan. He flew to Cleveland, to one of the top-rated heart hospitals in the nation.

By bundling all costs for the surgery under one negotiated price and offering expertise that lowers the odds of complications, the Cleveland Clinic gave Bumbaugh and his employer a better deal than the hospital close to his home. In some cases, hospitals will drop their prices as much as 40 percent to guarantee a steady stream of patients they wouldn’t have otherwise, said Terry White, president of the BridgeHealth Medical Inc., a Denver-based benefit manager.

To encourage employees, Lowe’s covers the full cost of surgery, as well as travel and lodging for the worker and a relative. The company health plan won’t cover thousands of dollars of unbundled costs at local hospitals.

It was an off day for the Canadian preferred share market, with PerpetualDiscounts off 1bp, FixedResets down 5bp and DeemedRetractibles losing 10bp. Volatility was minimal. Volume was on the high side of average.

Nothing happened today, but I must say that I am astonished at the UofO hockey-team / facebook chat kerfuffle:

As the University of Ottawa wrestles with its response to a week of sexually charged scandals, its leaders promised a new task force to help the school “face up” to issues of violence within the campus culture.

The university’s president, Allan Rock, announced a task force on respect and equality in his first public comments since his school revealed on Monday that police are investigating an alleged sexual assault involving some players from its men’s hockey team. At a Thursday news conference with Michaëlle Jean, the U of O’s chancellor and a former Governor-General, he pledged to “take fearless inventory of our practices and our assumptions.”

The university is still staggering from another revelation, days earlier, of a sexually graphic online chat that several student leaders had about a colleague. In response, many at the school have decried a “rape culture” they say is quietly pervasive on and off campus. Now, public attention is focusing on whether universities are willing and able to drive changes to social attitudes that minimize the real impact of sexual violence.

I simply cannot understand why “changes to social attitudes” are any of the universities’ business; I have come up with a few explanations:

• Young people are being infantilized – 35 is the new 20, as far as maturity goes. Used to be that at age 20, most people would get a job, get married, buy a house … all that grown-up stuff. Now, there’s a longer period of adolescence before adulthood, and the universities are responding to that (while under pressure).
• University administrations are being feminized … when I was of university age, the fact that more than half of all undergrads were female was front page news. Now the proportion is pushing 60% in the US and I’ll guess it’s the same here. So administrations are responding to that and they’re also responding to (what I assume is, without any data at all) an increasing female component of influential administrative staff. A male will – stereotypically – respond to nastiness on his own, while females will – stereotypically – seek to organize a clique to punish the offender properly; this is what the universities are now doing
• Normal bureaucratic mission creep. “We’re in a position to do so much good! Therefore we must promote proper behaviour!”
• It’s all marketting. All the universities now have MBAs in their admissions department who don’t care about much other than getting lots of admission applications through a Positive Public Image. The potential for bequests and alumni donations is important too.

That’s the best I can do; feel free to respond in the comments, even if it’s only to tell me you’re here for the preferred shares and I should shut the hell up (if male) or that you have brought my views to the attention of the appropriate authorities (if female). But one implication of all these precious bureaucrats having earnest discussions with each other about Proper Standards Of Behaviour, and sitting in tribunals to Enforce Promote Community Expectations Of A Safe Learning Environment is increased costs. This type of non-academic activity at universities is one reason why the price keeps going up; and why student debt increases in lockstep.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 6bp, FixedResets off 3bp and DeemedRetractibles up 22bp. Volatility was muted. Volume was above average.

There is confusion at the Bank of England:

The Bank of England suspended a member of staff as it conducts a probe into allegations that officials condoned practices behind the currency-manipulation scandal.

While the BOE said it has found no evidence to date of collusion, it requires staff “to follow rigorous internal control processes and has today suspended a member of staff, pending investigation.” No decision has been taken on disciplinary action against any employees, it said.

Bloomberg News reported on Feb. 7 that senior currency dealers at banks including Citigroup Inc. and UBS AG told BOE officials at an April 2012 meeting that they discussed positions ahead of key benchmarks and matched buyers and sellers ahead of the fix to avoid trading then. Central bank representatives said they viewed the practices as positive to reduce market volatility and banks should formulate their own policies, according to three people with knowledge of the matter.

The Bank of Canada claims our economy’s not getting any worse:

In Canada, economic growth in the fourth quarter of 2013 was slightly stronger than the Bank anticipated, and upward revisions earlier in the year further raised the level of GDP. The Bank still expects underlying growth of around 2 1/2 per cent in 2014, with the current quarter likely to be softer. Exports have been a little stronger than previously thought but continue to underperform, and overall business investment has yet to pick up. Meanwhile, recent data support the Bank’s expectation of a soft landing in the housing market and stabilizing debt-to-income ratios for households.

On the whole, the fundamental drivers of growth and inflation in Canada continue to strengthen gradually, as anticipated. With inflation expected to be well below target for some time, the downside risks to inflation remain important. At the same time, the risks associated with elevated household imbalances have not materially changed. The Bank judges that the balance of risks remains within the zone for which the current stance of monetary policy is appropriate and therefore has decided to maintain the target for the overnight rate at 1 per cent. The timing and direction of the next change to the policy rate will depend on how new information influences this balance of risks.

If there’s one thing welfare bums hate, it’s answering questions:

Chrysler Group LLC walked away from talks with the federal and Ontario governments after they asked how much of its proposed $3.6-billion investment would be spent in Ontario – a request that was likely to draw out negotiations and delay the company’s effort to bring a new minivan to market.

The federal government and the province sent Chrysler a joint letter and term sheets that offered to put up money as a percentage of the investment the company would be spending in Ontario, a source with knowledge of the talks said.

But those terms didn’t appear to sit well with Chrysler chief executive officer Sergio Marchionne.

It was a modestly positive day for the Canadian preferred shares market, with PerpetualDiscounts up 4bp, FixedResets gaining 1bp and DeemedRetractibles winning 5bp. Volatility was very low. Volume was average.

PerpetualDiscounts now yield 5.53%, equivalent to 7.19% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.5%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 270bp, unchanged from the February 26 report.