Government financial problems are all the dealers’ fault!
The state’s securities division sent letters today to 10 underwriters of municipal bonds, asking them to detail their trading of credit-default swaps linked to state and local government bonds they’ve underwritten in Massachusetts since 2003. Recipients have until May 28 to respond. The letter asked each bank to “identify the entity that purchased CDS from your firm for each Massachusetts state or municipal bond offering.”
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The probe follows a similar inquiry in California, where Treasurer Bill Lockyer asked banks to say whether they bet against the state with credit-default swaps. The U.S. Securities and Exchange Commission is also exploring conflicts of interest for banks that sold municipal bonds and bet the securities would fail, the Wall Street Journal reported, citing people familiar with the matter who it didn’t name.
IIROC has released a a new version of the consolidated UMIR, with updated annotations.
Somehow, you just knew that Greek deficits are the banks’ fault, didn’t you?
Greece is considering taking legal action against U.S. investment banks that might have contributed to the country’s debt crisis, Prime Minister George Papandreou said.
“I wouldn’t rule out that this may be a recourse,” Papandreou said, in response to questions about the role of U.S. banks in the crisis, in an interview on CNN’s “Fareed Zakaria GPS.” The program, scheduled to air tomorrow, was taped on May 13. Neither Papandreou nor Zakaria mentioned any banks by name.
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Papandreou said the decision on whether to go after U.S. banks will be made after a Greek parliamentary investigation into the cause of the crisis.“Greece will look into the past and see how things went,” Papandreou said. “There are similar investigations going on in other countries and in the United States. This is where I think, yes, the financial sector, I hear the words fraud and lack of transparency. So yes, yes, there is great responsibility here.”
Pity he couldn’t think of anything suspicious! I suggest that his parliamentary investigation focus on Mr. Micawber’s Principle:
Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Meanwhile, European banks are having trouble raising funds:
Banks were locked out of the credit markets as the eurozone debt crisis escalated this month. A week after the European Union and International Monetary Fund’s €750bn ($935bn) bailout was announced, concerns remain.
The shockwaves from the debt woes in Europe mean that all but a few highly rated banks will find bond issuance tougher over the rest of the year, according to bankers.Following a strong first quarter when European banks sold $243.5bn in bonds, so far this month they have sold bonds worth only $879m, according to data provider Dealogic.
Domestic banks in Greece, Portugal and Spain have been hit over the past six weeks by movements in spreads on their governments’ bonds. For example, credit default swap spreads on National Bank of Greece more than doubled between April 5 and May 6, climbing to a high of 890bp.
James Hamilton of Econbrowser passes on some fascinating observations on the European shadow economy:
Aruoba’s paper notes some interesting regularities in a data set of 118 different countries. One measure he looks at is the size of the underground economy in different countries. If you carry out your business in the underground economy, you will benefit by avoiding taxation, but you lose the legal and contract protection that you would have had if you’d instead been working in the formal sector. If only the first effect mattered, you’d expect to see countries with higher tax rates have a greater role for the informal sector. But Aruoba finds just the opposite– the bigger the informal sector, the lower tax receipts as a percent of formal-sector GDP. Aruoba attributes this to the fact that in countries with better legal institutions, the benefits of conducting business above board outweigh the taxation costs, and the governments can afford to raise more of their revenue through traditional taxation.
Mind you, banks are already being punished for Greece:
Royal Bank of Scotland Plc and Barclays Plc led financial firms punished by rising borrowing costs, British Bankers’ Association data show. The cost to hedge against losses on European bank bonds is 63 percent higher than a month earlier. Investment-grade corporate debt sales in the region plummeted 88 percent last week to $1.2 billion from the prior period, according to data compiled by Bloomberg.
The rate banks say they charge each other for three-month loans in dollars is the highest in nine months, even after a government-led rescue designed to prevent Greece from defaulting on its debt and a new financial crisis. The euro is trading at its weakest level versus the dollar since the aftermath of Lehman Brothers Holdings Inc.’s collapse, and stocks tumbled.
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The three-month London interbank offered rate in dollars, or Libor, rose to 0.445 percent last week, the highest level since August, from 0.428 percent on May 7 and 0.252 at the end of February, according to the British Bankers’ Association.
This is why the Fed has restarted the dollar swap lines, as noted May 10.
A Bloomberg story illustrates one of the hazards of contingent capital: if it converts, there might be tears:
A JPMorgan Chase & Co. reverse- convertible note paying 64 percent annualized interest plunged in value on May 14, three days after being sold, showing the risks of these products usually bought by individual investors.
The structured notes offered 10.7 percent in interest payments over their two-month term and a return of principal, as long as shares of TiVo Inc. didn’t fall more than 25 percent, according to a prospectus. TiVo dropped 42 percent on May 14 after an adverse court ruling, triggering a provision that will leave investors holding the possibly depressed stock at maturity.
Banks including JPMorgan, Morgan Stanley and Barclays Plc sold $656 million of reverse convertibles in the U.S. last month, according to data compiled by Bloomberg. The securities, which combine features of bonds and stock options, are often sold to individuals who don’t understand the risks, said Jake Zamansky, a New York-based attorney who represents investors.
“It’s being sold as a bond, an income-generating product, and I don’t think it’s being explained to people that you can get stuck with the stock,” the securities lawyer at Zamansky & Associates said in a telephone interview on May 14. He has represented investors in lawsuits related to the products.
The Canadian preferred share market resumed its slide today, with PerpetualDiscounts down 17bp and FixedResets down 10bp, with a return to highly elevated volume. Equity markets were enlivened by the scheduling and subsequent cancellation of the end of the world.
| 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 | 2.68 % | 2.76 % | 46,273 | 20.65 | 1 | -2.0930 % | 2,068.4 |
| FixedFloater | 5.15 % | 3.22 % | 40,125 | 20.07 | 1 | -0.4245 % | 3,106.9 |
| Floater | 2.14 % | 2.46 % | 105,774 | 21.12 | 3 | -0.0181 % | 2,267.2 |
| OpRet | 4.90 % | 3.84 % | 93,612 | 1.01 | 11 | 0.1209 % | 2,303.4 |
| SplitShare | 6.39 % | 6.46 % | 119,891 | 3.52 | 2 | 0.3314 % | 2,137.1 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1209 % | 2,106.3 |
| Perpetual-Premium | 5.53 % | 4.78 % | 26,119 | 15.81 | 1 | -0.0399 % | 1,823.5 |
| Perpetual-Discount | 6.32 % | 6.38 % | 213,824 | 13.33 | 77 | -0.1652 % | 1,689.7 |
| FixedReset | 5.52 % | 4.33 % | 497,129 | 3.57 | 44 | -0.0965 % | 2,145.5 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| BAM.PR.E | Ratchet | -2.09 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-17 Maturity Price : 21.68 Evaluated at bid price : 21.05 Bid-YTW : 2.76 % |
| CM.PR.K | FixedReset | -1.53 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-17 Maturity Price : 23.45 Evaluated at bid price : 25.75 Bid-YTW : 4.66 % |
| IAG.PR.F | Perpetual-Discount | -1.52 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-17 Maturity Price : 22.59 Evaluated at bid price : 22.71 Bid-YTW : 6.65 % |
| IAG.PR.C | FixedReset | -1.45 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-01-30 Maturity Price : 25.00 Evaluated at bid price : 26.44 Bid-YTW : 4.74 % |
| IAG.PR.A | Perpetual-Discount | -1.45 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-17 Maturity Price : 17.69 Evaluated at bid price : 17.69 Bid-YTW : 6.62 % |
| CL.PR.B | Perpetual-Discount | -1.34 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-17 Maturity Price : 23.94 Evaluated at bid price : 24.22 Bid-YTW : 6.55 % |
| PWF.PR.L | Perpetual-Discount | -1.33 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-17 Maturity Price : 19.25 Evaluated at bid price : 19.25 Bid-YTW : 6.70 % |
| PWF.PR.F | Perpetual-Discount | -1.24 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-17 Maturity Price : 19.91 Evaluated at bid price : 19.91 Bid-YTW : 6.67 % |
| GWO.PR.I | Perpetual-Discount | -1.19 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-17 Maturity Price : 17.46 Evaluated at bid price : 17.46 Bid-YTW : 6.56 % |
| MFC.PR.E | FixedReset | 1.13 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-10-19 Maturity Price : 25.00 Evaluated at bid price : 25.99 Bid-YTW : 4.52 % |
| ELF.PR.G | Perpetual-Discount | 1.13 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-17 Maturity Price : 17.00 Evaluated at bid price : 17.00 Bid-YTW : 7.09 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| SLF.PR.D | Perpetual-Discount | 82,218 | RBC crossed blocks of 36,000 shares, 12,100 and 10,000, all at 17.35. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-17 Maturity Price : 17.30 Evaluated at bid price : 17.30 Bid-YTW : 6.55 % |
| TD.PR.K | FixedReset | 53,100 | RBC crossed 40,000 at 27.05. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-08-30 Maturity Price : 25.00 Evaluated at bid price : 27.06 Bid-YTW : 4.24 % |
| TRP.PR.B | FixedReset | 51,300 | RBC crossed blocks of 27,900 and 12,500 at 24.65. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-17 Maturity Price : 24.58 Evaluated at bid price : 24.63 Bid-YTW : 4.01 % |
| TD.PR.R | Perpetual-Discount | 44,150 | Nesbitt crossed 30.000 at 23.18. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-17 Maturity Price : 23.00 Evaluated at bid price : 23.16 Bid-YTW : 6.10 % |
| BMO.PR.M | FixedReset | 43,935 | Nesbitt crossed 30,000 at 25.75. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-09-24 Maturity Price : 25.00 Evaluated at bid price : 25.75 Bid-YTW : 3.97 % |
| SLF.PR.C | Perpetual-Discount | 38,441 | RBC crossed 27,000 at 17.35. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-17 Maturity Price : 17.28 Evaluated at bid price : 17.28 Bid-YTW : 6.55 % |
| There were 49 other index-included issues trading in excess of 10,000 shares. | |||