The financial reform process is getting chippy:
Banks, lobbyists and others have until tomorrow to submit comments to the committee, part of the Basel-based Bank for International Settlements. They have until the end of this month to tell their regulators how much the proposals will cost. The panel, made up of bank supervisors and central bankers from 27 countries and territories, will draft rules by the end of the year for lawmakers to implement by late 2012. The committee first published regulations in 1988 and revised them in 2004.
I was amused by this:
“That’s just a veiled threat,” [chief executive officer of the International Centre for Financial Regulation Barbara] Ridpath said. “You are going to make it too expensive for us to lend, so it is going to be your fault when there’s no economic growth. The truth, who knows? Who’s done the studies? Who has any real concept of what the real impact is of the price of credit and GDP growth?”
Umm…. Central Bankers, maybe? I suspect she was misquoted – or it’s just awkward construction – because she’s been in the business a while, not just as a regulator.
The U.S. banks argue that the liquidity rules could force lenders around the world to sell $6 trillion of new debt to meet the requirements. Under the rules, banks would have to maintain a “net stable funding ratio” of 100 percent, meaning they would need an amount of longer-term loans or deposits equal to their financing needs for 12 months, including off-balance-sheet commitments and anticipated securitizations. This would require that some short-term funding be replaced by longer-term debt.
Higher capital requirements and a stricter definition of capital may reduce lenders’ return on equity to 12.9 percent from the 13.8 percent estimated for 2012, according to UBS AG analysts. Britain’s Royal Bank of Scotland Group Plc, Germany’s Commerzbank AG and France’s Credit Agricole SA are among seven European lenders that may need to raise 60 billion euros ($82 billion) to comply with Basel’s capital rules, JPMorgan analyst Kian Abouhossein said in February.
The market’s telling the EU to put its money where its mouth is:
The 10-year bonds were little changed today after declining the past two days. The yield premium investors demand to hold the securities instead of benchmark German bunds rose above 400 basis points for the first time since euro-region finance ministers announced the aid package last weekend. The parliaments of Germany, France and Ireland will have to vote on whether to contribute their share of the loans, government spokesmen said yesterday. Dutch lawmakers will discuss Greek aid today.
“There are concerns that the money will not be available,” said Toby Nangle, who helps oversee 46 billion euros as director of asset-allocation research at Baring Investment Services Ltd. in London. “There are people who are willing to place their own money at risk in anticipation of this thing not going through.”
…
Pacific Investment Management Co., which owns the world’s largest bond fund, said this week it’s not yet ready to buy Greek bonds. BlackRock Inc., the world’s biggest asset manager, said that donor countries need to demonstrate they can withstand a backlash from their citizens.
I suspect that Nangle is talking about CDS protection buyers, but has to use code for fear of arrest and imprisonment.
In fact, late news brought the following:
Greek Prime Minister George Papandreou yesterday asked for a meeting with the EU, the International Monetary Fund and the European Central Bank, which agreed last week to back a 45 billion-euro ($61 billion) rescue package for the cash-strapped nation. Talks will begin in Athens on April 19.
…
The government’s request came after the yield on Greece’s benchmark 10-year government bond surged to 7.319 percent yesterday, higher than the level before the rescue package was announced on April 11. Papandreou said that the Athens talks didn’t mean Greece was activating the aid request and still planned to finance its debt in financial markets.
Municipal authorities everywhere are attempting to evade responsibility for their decisions:
The town followed the advice of Deutsche Bank in taking out bets on interest rates in 2004 and 2005, according to Susanne Weishaar, Pforzheim’s budget director until March.
The bank gave her a 10-year chart showing long-term rates were consistently higher than short-term, she said. During an initial phase of guaranteed rates, the town paid 1.5 percent to the bank on 60 million euros of debt while receiving 3 percent to 3.75 percent.
In 2005 and 2006, the difference between long- and short- term rates collapsed. As potential losses soared in 2006, Weishaar bought more swaps from JPMorgan Chase & Co. in a vain attempt to protect the town budget. Today Pforzheim owes 55 million euros to New York-based JPMorgan, she said. That’s 11 percent of this year’s spending.
The Deutsche Bank swaps have a positive value for the city of about 9 million euros, Weishaar said, offset by the negative value of JPMorgan swaps set up to protect the city.
“It’s like Easter eggs,” said Weishaar, 45, who holds a degree in math and economics from the University of Ulm. “You want to buy one and somebody sells you a painted hand grenade instead.”
If the grenades explode — or when local officials decide to cut their losses and get out of long-term contracts when the market is against them — taxpayers foot the bill.
It’s always hard to tell exactly what’s going on from news reports, but it looks like Pforzheim sold fixed-rate debt and swapped it into floating. That’s a little strange (where’s the hedge?) but then doubling down when the market moved against the position is straight speculation. Ms. Weishaar appears to be either incompetent or disingenuous, one or the other.
OSFI’s Pension boss, Judy Cameron, testified today:
Two years ago, we reported that the December 2007 average solvency ratio of federal plans was estimated at 1.05. In other words, pension plan assets, on average, exceeded liabilities by an estimated five per cent. A year later, at year-end 2008, the ratio had declined to 0.85, meaning that the market value of pension plan assets would have been sufficient to cover, on average, only 85 percent of promised benefits on plan termination.
Our most recent estimates show that the average ratio has increased modestly to 0.90 at December 2009. An indicator that has shown a more marked improvement is the proportion of materially under-funded plans. Based on OSFI’s estimates, at the end of 2009, only 15 per cent of all federally regulated pension plans had a solvency ratio of less than 0.80, whereas at the end of 2008, the comparable proportion was 40 per cent.
The recent bounce in PerpetualDiscounts came to earth today, with PerpetualDiscounts losing 14bp and FixedResets down 9bp, bringing yields on the latter up to 3.96%. Volume remains at elevated levels.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 2.59 % | 2.67 % | 55,540 | 20.90 | 1 | -0.2288 % | 2,137.6 |
| FixedFloater | 4.98 % | 3.05 % | 47,609 | 20.34 | 1 | -1.2670 % | 3,211.4 |
| Floater | 1.90 % | 1.65 % | 43,764 | 23.46 | 4 | 0.0967 % | 2,425.8 |
| OpRet | 4.88 % | 3.09 % | 118,371 | 0.29 | 10 | -0.0272 % | 2,313.5 |
| SplitShare | 6.35 % | 1.97 % | 139,517 | 0.08 | 2 | 0.0219 % | 2,148.8 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0272 % | 2,115.5 |
| Perpetual-Premium | 5.85 % | 3.90 % | 31,963 | 0.62 | 2 | 0.0203 % | 1,841.4 |
| Perpetual-Discount | 6.15 % | 6.20 % | 194,822 | 13.63 | 76 | -0.1438 % | 1,731.8 |
| FixedReset | 5.43 % | 3.96 % | 502,854 | 3.65 | 44 | -0.0942 % | 2,170.2 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| BAM.PR.J | OpRet | -1.34 % | YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2018-03-30 Maturity Price : 25.00 Evaluated at bid price : 25.70 Bid-YTW : 5.03 % |
| IAG.PR.E | Perpetual-Discount | -1.30 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-04-15 Maturity Price : 24.07 Evaluated at bid price : 24.27 Bid-YTW : 6.24 % |
| BAM.PR.G | FixedFloater | -1.27 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-04-15 Maturity Price : 25.00 Evaluated at bid price : 21.82 Bid-YTW : 3.05 % |
| IAG.PR.F | Perpetual-Discount | -1.10 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-04-15 Maturity Price : 23.21 Evaluated at bid price : 23.36 Bid-YTW : 6.42 % |
| POW.PR.B | Perpetual-Discount | -1.03 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-04-15 Maturity Price : 21.09 Evaluated at bid price : 21.09 Bid-YTW : 6.39 % |
| GWO.PR.I | Perpetual-Discount | 1.33 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-04-15 Maturity Price : 18.34 Evaluated at bid price : 18.34 Bid-YTW : 6.20 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| TD.PR.G | FixedReset | 113,033 | Nesbitt crossed blocks of 30,000 and 70,000, both at 27.30. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-05-30 Maturity Price : 25.00 Evaluated at bid price : 27.25 Bid-YTW : 3.88 % |
| RY.PR.N | FixedReset | 60,670 | RBC crossed 32,400 at 27.44; TD crossed 20,000 at 27.45. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-26 Maturity Price : 25.00 Evaluated at bid price : 27.45 Bid-YTW : 3.82 % |
| BNS.PR.P | FixedReset | 57,311 | RBC crossed 25,000 at 25.70; National crossed 20,000 at 25.74. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-05-25 Maturity Price : 25.00 Evaluated at bid price : 25.65 Bid-YTW : 4.06 % |
| TD.PR.R | Perpetual-Discount | 56,805 | TD crossed 50,000 at 23.40. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-04-15 Maturity Price : 23.22 Evaluated at bid price : 23.40 Bid-YTW : 6.00 % |
| TD.PR.O | Perpetual-Discount | 56,370 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-04-15 Maturity Price : 20.40 Evaluated at bid price : 20.40 Bid-YTW : 5.97 % |
| TRP.PR.A | FixedReset | 53,133 | RBC crossed 23,900 at 25.78. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-01-30 Maturity Price : 25.00 Evaluated at bid price : 25.74 Bid-YTW : 3.98 % |
| There were 50 other index-included issues trading in excess of 10,000 shares. | |||