PrefBlog

Regulatory capture is getting some media attention (hat tip: Financial Webring Forum):

A CBS News analysis of the revolving door between Goldman and government reveals at least four dozen former employees, lobbyists or advisers at the highest reaches of power both in Washington and around the world.

For example, former Treasury Secretary Henry Paulson is a former Goldman CEO; Arthur Levitt, the head of the Securities and Exchange Commission is a now a Goldman adviser; and former House Majority Leader Dick Gephardt is now a paid lobbyist for the firm.

There’s more, less well written. Automatically branding every instance of revolving door regulation as “corruption” is an extreme view; conflicts of interest are everywhere and – even in the finance world! – most people are not crooks.

A lot of it has simply to do with the nature of the world: I’ve seen ads for very senior risk management officials at salaries best described as “pathetic”. Anybody smart enough and knowledgable enough and tough enough to do a good job at the post could make a lot more doing something else.

Hands up who wants, say, the head of the Ontario Securities Commission or the Superintendent of Financial Institutions to get a government salary of – say – $5-million p.a. … didn’t think so.

The influence of retail investors on markets is getting more interesting to track. During the crunch, we saw how US – MMF redemptions exacerbated the funding crisis and forced (encouraged?) the Fed to set up dollar swaps. Now junk bonds are getting the same treatment:

Yields on junk bonds rose to the highest since December relative to Treasuries, with prices declining on debt from American International Group Inc. to Harrah’s Entertainment Inc. on concern Europe’s debt strains will derail the global economic recovery.

Spreads widened 27 basis points yesterday to 724 basis points, or 7.24 percentage points, the highest since Dec. 9, according to Bank of America Merrill Lynch index data. That’s up from a low this year of 542 basis points on April 26.

High-yield debt has lost 4.6 percent in May, on pace for the first drop in 15 months, after gaining 73 percent from the market bottom in March 2009 through last month. Investors withdrew more than $3.1 billion in the past two weeks from junk funds amid growing concern that European efforts to control government deficits would interrupt the recovery, making it harder for the neediest companies to reduce and refinance their borrowings.
…
“Due to low levels of cash at mutual funds, redemptions are forcing sales,” said Brian Yelvington, head of fixed-income strategy at Knight Libertas LLC in Greenwich, Connecticut.

This looks like an unintended consequence of the electronic era – now that it is so easy to switch between funds of the same family at 3am, people are doing it. Retail is, in general, more jumpy than institutional money, so it’s interesting to speculate where all this might lead. One possibility is a greater emphasis by issuers on long term debt, paying up if they need to.

Volume picked up today to levels approaching the average of the past two months and PerpetualDiscounts caught fire, gaining 65bp. FixedResets were up 12bp.

PerpetualDiscounts now yield 6.36%, equivalent to 8.90% interest at the standard equivalency factor of 1.4x. Long Corporates now yield about 5.65%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 325bp, a mild (and perhaps spurious) decline from the 330bp reported on May 16.

This entry was posted on Wednesday, May 26th, 2010 at 9:34 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.