Greek bond yields yesterday rose above their level before the government agreed on a European Union-led bailout on May 2 as escalating protests cast doubt on its ability to drive through austerity measures. Spanish and Portuguese bonds also renewed last week’s slide as investors question their ability to cut budget deficits that are among the highest in the euro area.
…
The extra yield that investors demand to buy its debt over German bunds rose 21 basis points to a 14-month high of 117.8 points. Spain’s benchmark IBEX Index, the euro region’s worst performer after Greece, fell 5.4 percent to the lowest since July. Portugal’s spread rose 40 basis points to 247 yesterday.The euro weakened 1.4 percent to $1.3011, the lowest in more than a year. The currency retreated further in Asian trading today, to $1.2961 as of 11 a.m. in Singapore.
The Swiss are making a big play to attract mobile professionals:
Swiss government officials and Geneva-based financial advisers have come to London to lure rich residents with glowing descriptions of the country’s low taxes, safe streets, private-banking options and convenient ski weekends.
“We are here to make it easier for you to come to Switzerland,” says Martin Meyer, head of economic development for the Swiss canton of Valais, which borders Lake Geneva, Bloomberg Markets reports in its June issue.
Next door, an overflow crowd of 50 more attendees enjoys wine and canapes as they watch the presentation on closed- circuit televisions in a mahogany-lined library, which includes a chart showing the prevalence of English as a language for doing business in Switzerland. A JPMorgan Chase & Co. banker who declined to be identified confides he’s planning to relocate next year. His main complaint: higher U.K. taxes, a theme the Swiss delegation has pounced upon.
Geithner has a solution to the problem: regulate everything!
No regulator or supervisor had the legal authority to look across the financial system and take action to prevent the diversion of activity away from regulation. A system that applied safety and soundness regulation only to banks was unable to protect the overall safety and stability of a financial system composed substantially of non-banks that played a role traditionally reserved for banks.
Moreover, accounting and disclosure requirements and regulatory capital requirements helped encourage the shift in risk to the parallel financial system, without adequately capturing the remaining exposure of banks to those risks.
When the crisis hit and huge swaths of the American financial system got caught in the run on the parallel banking system, many came running to the Federal Reserve for liquidity and for protection.
The emergency financial response to the run that started in the parallel financial system was necessary to protect our economy from an even greater calamity. But if our regulatory and supervisory systems had had the tools and authorities to prevent risks from accumulating in unregulated sectors of the financials system in the first place, such a large emergency response would not have been necessary. That is a key reason why financial reform is so essential.
This is disingenuous at best. The Fed had unlimited authority to penalize the exposure of the core financial system to the shadow financial system; by limiting such exposure it could have restrained the growth of the shadow sector and limited the damage when the bust occurred.
However, they elected to ignore concentration risk and things like Citigroup’s “liquidity puts” (discussed April 13 and risk-weighted liquidity guarantees at a low value; ignored concentration risk, and allowed risk-weighting of bank paper according to the credit rating of the sovereign.
Financial crises will never be abolished. GM & Chrysler have cost far more than the piddly little bank crisis, and Club Med is going to cost even more. But the former players are popular with blue-collar voters and the latter with expansionary EU politicians, while banks are always a popular target for regulatory opprobrium.
Hank Paulson commented on Bear Stearns today:
Former Treasury Secretary Henry Paulson said bets against the survival of Bear Stearns Cos. before the firm’s sale to JPMorgan Chase & Co. amounted to “the wolf pack trying to pull down the weak deer.”
“I don’t use the word collusive because it’s got a legal connotation,” Paulson said today at a hearing of the Financial Crisis Inquiry Commission in Washington. “It sure looked to me like some kind of coordinated action.”
Paulson said he wasn’t “saying there was behavior that was illegal” and he thinks short-selling “is essential for the price-discovery process.”
All this brings to mind the importance of liquidity. Price discovery requires liquidity. Say BSC is at $50, a bunch get shorted, and the price goes down. Theoretically, this should mean that holders of other brokerages will find BSC relatively more attractive and sell, say, JPM to buy BSC. Eventually, the price of the brokerage sector will go down and become relatively more attractive to holders of other sectors; a new equilibrium will be established.
But say all the potential buyers of BSC are full up? What if investment decisions are not made on the basis of hard-nosed facts, but on the basis of the marketting department’s evaluation of how much the clients want to see a troubled brokerage on their books? The slope of the demand curve will decline; perhaps go flat; and the price goes to zero. Contingent Capital is one way of ensuring that the demand for common is not flat (although forced selling by irate bond investors may further reduce the price), but it’s an interesting question and one that I have not yet been able to answer.
Common stock had an exciting day:
The Dow Jones Industrial Average plunged almost 1,000 points today before paring its decline and ended down 347.80 points, or 3.2 percent, at 10,520.32. About $700 billion of U.S. stock-market value was erased in less than 10 minutes, data compiled by Bloomberg show.
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A total of 19 trades of 100 shares each [of Accenture common] were executed at 1 cent in seven seconds from 2:47 p.m. to 2:48 p.m. in New York, a minute after the Dow average plunged by the most since the market crash of 1987, the data showed.Eighteen of the trades were executed on the CBOE Stock Exchange and were canceled. The first trade that sent Accenture to a penny was executed on the Nasdaq Stock Market. That transaction has yet to be canceled, the data showed.
Accenture shares closed today at $41.09, down 2.6 percent in New York Stock Exchange composite trading.
There is speculation that the plunge was due to trader error:
A possible culprit for the drop was a trader error in which someone entered a “b” for billion instead of an “m” for million in a trade. Multiple sources confirmed the report to CNBC and CNBC.com
The apparent trigger for the massive selloff, which began shortly after 2 pm ET, was the approval of austerity measures by the Greek Parliament, which sparked renewed rioting in Athens.
It could very well be trader error – the absence of a clear trigger, the steepness of the descent and the swift recovery make that plausible – but I’d be happier with such an explanation if some corroborative evidence were provided: ‘waves of selling in 23 liquid basket stocks’, for instance.
Update: Corroborative evidence?
While the first half of the Dow Jones Industrial Average’s 998.5-point plunge probably reflected normal trading, the selloff snowballed because of orders sent to venues with no investors willing to match them, [NYSE Euronext COO Larrry] Leibowitz said in an interview on Bloomberg Television.
“If you look at the charts you can see fairly clearly where the trades came in,” he said from New York. “It’s that V-shaped drop where it came down and snapped right back up. You had some very high-cap stocks trading down 50 percent or large percentages in a split instant because there really was no liquidity in electronic markets.”
…
“The fact that it snapped back so quickly made it clear that it was an aberration,” Leibowitz said. “When a large order or series of orders comes into electronic markets, they don’t really have any way to recognize either that they’re a mistake or to slow them to down to attract the proper liquidity on the other side. And so the electronic markets actually traded all the way through the slower New York Stock Exchange markets where we were trying to slow down trading.”
…End of update
The SEC & CFTC are looking into it:
The SEC and CFTC are working closely with the other financial regulators, as well as the exchanges, to review the unusual trading activity that took place briefly this afternoon. We are also working with the exchanges to take appropriate steps to protect investors pursuant to market rules.
“We will make public the findings of our review along with recommendations for appropriate action.
Just a little too precious for my taste. An “investor” has no need of protection in cases like this. The ones who need protection from volatility are better referred to as “bozos”.
The Canadian preferred share market was nowhere nearly as exciting, but went in the same direction as PerpetualDiscounts lost 28bp and FixedResets were down 13bp. Volume lightened considerably to well-maybe-just-a-little-above-average, with FixedResets scoring a shut-out on the volume highlights table.
| 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 | 2.58 % | 2.66 % | 48,507 | 20.93 | 1 | -2.1973 % | 2,143.0 |
| FixedFloater | 4.94 % | 3.00 % | 43,920 | 20.34 | 1 | -0.4525 % | 3,237.9 |
| Floater | 2.05 % | 2.29 % | 104,883 | 21.64 | 3 | -0.6032 % | 2,371.2 |
| OpRet | 4.92 % | 4.03 % | 94,599 | 2.90 | 11 | -0.1992 % | 2,294.7 |
| SplitShare | 6.45 % | 6.89 % | 129,025 | 3.54 | 2 | -0.8824 % | 2,114.5 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.1992 % | 2,098.3 |
| Perpetual-Premium | 5.53 % | 4.77 % | 22,167 | 15.84 | 1 | 0.0000 % | 1,823.5 |
| Perpetual-Discount | 6.30 % | 6.37 % | 215,089 | 13.36 | 77 | -0.2829 % | 1,696.8 |
| FixedReset | 5.54 % | 4.42 % | 512,293 | 3.59 | 44 | -0.1313 % | 2,139.6 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| BAM.PR.I | OpRet | -3.41 % | YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2013-12-30 Maturity Price : 25.00 Evaluated at bid price : 24.64 Bid-YTW : 6.15 % |
| IAG.PR.E | Perpetual-Discount | -2.30 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-06 Maturity Price : 23.25 Evaluated at bid price : 23.41 Bid-YTW : 6.50 % |
| BAM.PR.E | Ratchet | -2.20 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-06 Maturity Price : 22.52 Evaluated at bid price : 21.81 Bid-YTW : 2.66 % |
| CIU.PR.B | FixedReset | -2.05 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-07-01 Maturity Price : 25.00 Evaluated at bid price : 26.91 Bid-YTW : 4.62 % |
| TD.PR.Y | FixedReset | -1.95 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-06 Maturity Price : 25.07 Evaluated at bid price : 25.13 Bid-YTW : 4.61 % |
| MFC.PR.A | OpRet | -1.75 % | YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2015-12-18 Maturity Price : 25.00 Evaluated at bid price : 25.25 Bid-YTW : 4.03 % |
| GWO.PR.I | Perpetual-Discount | -1.70 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-06 Maturity Price : 17.35 Evaluated at bid price : 17.35 Bid-YTW : 6.58 % |
| POW.PR.C | Perpetual-Discount | -1.68 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-06 Maturity Price : 21.81 Evaluated at bid price : 22.27 Bid-YTW : 6.57 % |
| POW.PR.D | Perpetual-Discount | -1.55 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-06 Maturity Price : 19.00 Evaluated at bid price : 19.00 Bid-YTW : 6.66 % |
| BAM.PR.K | Floater | -1.37 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-06 Maturity Price : 17.31 Evaluated at bid price : 17.31 Bid-YTW : 2.29 % |
| BNA.PR.D | SplitShare | -1.19 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2014-07-09 Maturity Price : 25.00 Evaluated at bid price : 25.67 Bid-YTW : 6.89 % |
| BAM.PR.H | OpRet | 1.39 % | YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2012-03-30 Maturity Price : 25.00 Evaluated at bid price : 25.45 Bid-YTW : 5.08 % |
| CU.PR.B | Perpetual-Discount | 1.54 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-06 Maturity Price : 24.04 Evaluated at bid price : 24.40 Bid-YTW : 6.14 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| TD.PR.E | FixedReset | 102,476 | TD crossed 90,000 at 26.80. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-05-30 Maturity Price : 25.00 Evaluated at bid price : 26.80 Bid-YTW : 4.41 % |
| BMO.PR.M | FixedReset | 95,197 | TD crossed 90,000 at 25.85. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-09-24 Maturity Price : 25.00 Evaluated at bid price : 25.80 Bid-YTW : 3.88 % |
| TD.PR.G | FixedReset | 81,840 | TD crossed blocks of 50,000 and 25,000 at 26.86 each. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-05-30 Maturity Price : 25.00 Evaluated at bid price : 26.77 Bid-YTW : 4.44 % |
| RY.PR.T | FixedReset | 78,020 | RBC crossed blocks of 29,000 and 40,000 at 26.85. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-09-23 Maturity Price : 25.00 Evaluated at bid price : 26.86 Bid-YTW : 4.35 % |
| TD.PR.I | FixedReset | 66,255 | RBC crossed 17,600 at 26.81 and the same amount at 26.82. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-08-30 Maturity Price : 25.00 Evaluated at bid price : 26.76 Bid-YTW : 4.50 % |
| NA.PR.O | FixedReset | 59,979 | National crossed 40,000 at 26.80; RBC crossed 10,000 at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-17 Maturity Price : 25.00 Evaluated at bid price : 26.80 Bid-YTW : 4.58 % |
| There were 33 other index-included issues trading in excess of 10,000 shares. | |||
James,
I think you got the date wrong in the title!
Whoopsee! That’s me, always living in the past!
Thanks – I’ve fixed it.
[…] price (or, at least, one that is based on the fundamentals of a bank’s assets). The May 6 bungee-jump (or “flash-crash”, as the cool kids are calling it now) showed that. I will […]