June 25, 2010

It looks like tranche retention will become law, as proposed by the SEC and supported by John Hull, among others:

Private lenders will be required to keep at least a 5 percent stake in loans they package and sell under an agreement reached by House and Senate lawmakers who are negotiating the financial-regulatory bill.

Lawmakers said the goal of the risk retention rule, also known as the skin-in-the-game provision, is to raise the quality of loans by keeping companies tied to the loans they make. Lax underwriting on subprime mortgages helped fuel the mortgage market collapse in 2007.

The measure would affect credit-card debt, auto loans, mortgages and other securitized debt. Issuers of asset-backed debt and the originators who supply them with pools of loans would be forced to retain at least 5 percent of the credit risk.

Lawmakers exempted many mortgages from the rules after lobbying by brokers and community banks, who said forcing lenders to keep loans on their books would tie up capital and lead to higher interest rates.

So higher interest rates is OK for credit-card debt, auto loans and other things, but not for Holy Mortgages? Haven’t I heard this song before?

The basic problem with the proposal is that tranche retention was the actual problem during the crisis – if the investment banks had be forced to sell their holdings to arms-length third parties, price discovery and lack of appetite would have been apparent much, much sooner.

I have even more disdain for the proposed underwriting rules:

Dodd proposed adding language based on the Merkley-Levin proposal to curb conflicts of interest by preventing firms that underwrite an asset-backed security from placing bets against the security.

The conflict-of-interest provision is aimed at addressing the fraudulent activity alleged in the Securities and Exchange Commission’s lawsuit against Goldman Sachs Group Inc. The SEC is alleging the bank created and sold collateralized debt obligations linked to subprime mortgages without disclosing that hedge fund Paulson & Co. helped pick the underlying securities and bet against the vehicles.

Every time a dealer sells me something as principal, he’s betting against it. Every single time! What’s the big deal here?

The congressional panel has approved a reconciled bill; most is as reported above, but there’s another thing:

An amendment introduced by Senator Susan Collins, the Maine Republican who joined Democrats in voting for the broader bill, will bar bank holding companies from keeping less capital than their bank subsidiaries. That will have an impact on the use of trust preferred securities, known as TruPS. Lawmakers bowed to pressure from banks, agreeing to a transition period for large firms and grandfathering of the securities for smaller lenders.

Banks with assets of at least $15 billion will get five years to replace TruPS with common stock or other securities that count as capital. Community banks that have raised cash through TruPS since 2000 will, in effect, get 20 years to make the switch because most of the securities have 30-year maturities. Smaller lenders sold roughly $45 billion of the $150 billion in TruPS issued by U.S. banks, which packaged them into collateralized debt obligations.

I’m not sure yet, but I think that this outlaws double leverage, at least as far as banks are concerned.

Importantly, there is a job-creation scheme for ex-regulators:

Large hedge and private equity funds will be forced to register with the SEC, subjecting them to mandatory federal oversight for the first time. Venture capital funds were exempted from the registration rule.

Any firm with $150 million or more in assets, such as ESL Investments Inc. and Soros Fund Management, will be covered by the law. Funds also must hire a chief compliance officer and set up policies to avoid conflicts of interest.

Complying with registration rules may cost hedge funds as much as $500 million in the first year, said Judith Gross, founder of JG Advisory Services LLC, a New York-based consulting firm to the hedge-fund industry. The estimate is based on 2,000 new registrants and reflects the cost of implementing necessary compliance procedures.

Salesmen are still salesmen, at least for a while:

Lawmakers scrapped a proposal that would have made securities firms more accountable to individual investors. Instead, the SEC is required to study whether changes are necessary.

The debate focused on whether stock brokers who offer clients investment advice should have a fiduciary duty that requires disclosure of all conflicts and restricts marketing to products that are in customers’ best interests. Currently, brokers must only ensure that a stock or bond is suitable before selling it to a client.

There is a States-rights turf battle brewing over insurance:

The bill creates a new Federal Insurance Office within the Treasury to monitor insurers, and requires a study that will recommend ways to further overhaul regulation of the industry. Industry groups say a new layer of oversight may complicate compliance and increase costs.

Insurers, which are mainly regulated by states, will now have to deal with a national watchdog. State insurance commissioners are concerned federal oversight will interfere with rules already in place. Insurers are concerned that they will have to devote more resources to answer to multiple officials.

Morningstar is rating fundcos on how precious they are. To hell with performance!

Today’s lesson is on “getting it”, as explained by Kenneth Feinberg:

New government oversight should avert a return to the “good old days” of outsize bonuses and lavish perks on Wall Street even if bankers still don’t “get it,” Obama administration paymaster Kenneth Feinberg said.

Earlier this week, Feinberg said he will step down from his Treasury Department pay post by the end of August to focus on his new job as the government-appointed administrator of BP Plc’s $20 billion fund to pay claims stemming from the Gulf of Mexico oil spill.

Feinberg gets it!

Turkey has announced that Mustafa Kemal Ataturk’s reputation is so dubious it requires special protection:

Furious over Internet insults of the country’s beloved founder, Turkey has gone on the offensive against Google, tightening a ban on YouTube and cutting public access to a host of Google-owned sites.

The country began blocking access to websites in 2007, after parliament adopted an a law against cyber crime in an effort to curb child porn, prevent the dissemination of terrorist propaganda and stamp out illegal gambling. Websites deemed to be disrespectful of Turkey’s founder, Mustafa Kemal Ataturk, and of religious beliefs were also outlawed.

Under court order, Turkey’s telecommunications authority banned access to YouTube, the video-sharing site, in May 2008, after users complained that some videos insulted Ataturk. Earlier this month, Turkey expanded the ban to include some Google pages that use the same Internet Protocol addresses as YouTube, to prevent users from circumventing the ban. The search giant Google Inc. is YouTube’s parent company.

Volume was light today as all the part-timers stayed home to play with their dollies (though, to be fair, it is possible that somebody might be wearing a T-shirt with a slogan that might have made them uncomfortable (see May 18)). PerpetualDiscounts made another gain, 7bp this time, to keep the streak alive, while FixedResets gained 8bp.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
(at bid)
Mod Dur
Issues Day’s Perf. Index Value
Ratchet 2.73 % 2.79 % 30,017 20.48 1 0.0000 % 2,097.6
FixedFloater 5.11 % 3.27 % 21,388 19.86 1 0.1881 % 3,134.9
Floater 2.40 % 2.80 % 80,158 20.24 3 0.0000 % 2,260.5
OpRet 4.86 % 1.86 % 85,166 0.08 11 -0.0845 % 2,340.0
SplitShare 6.31 % 6.16 % 91,670 3.48 2 0.1089 % 2,197.8
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0845 % 2,139.7
Perpetual-Premium 0.00 % 0.00 % 0 0.00 0 0.0657 % 1,913.7
Perpetual-Discount 5.94 % 6.01 % 195,599 13.93 77 0.0657 % 1,811.4
FixedReset 5.42 % 3.99 % 323,227 3.47 45 0.0816 % 2,185.4
Performance Highlights
Issue Index Change Notes
POW.PR.A Perpetual-Discount -1.20 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-06-25
Maturity Price : 22.73
Evaluated at bid price : 23.02
Bid-YTW : 6.09 %
MFC.PR.C Perpetual-Discount 1.12 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-06-25
Maturity Price : 18.96
Evaluated at bid price : 18.96
Bid-YTW : 5.98 %
GWO.PR.J FixedReset 1.24 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-30
Maturity Price : 25.00
Evaluated at bid price : 26.95
Bid-YTW : 3.67 %
Volume Highlights
Issue Index Shares
BMO.PR.O FixedReset 35,560 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-06-24
Maturity Price : 25.00
Evaluated at bid price : 27.56
Bid-YTW : 3.93 %
BNS.PR.T FixedReset 33,747 TD bought 13,100 from Nesbitt at 27.40.
Maturity Type : Call
Maturity Date : 2014-05-25
Maturity Price : 25.00
Evaluated at bid price : 27.61
Bid-YTW : 3.70 %
BMO.PR.N FixedReset 25,685 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-27
Maturity Price : 25.00
Evaluated at bid price : 27.50
Bid-YTW : 3.79 %
MFC.PR.E FixedReset 23,824 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-19
Maturity Price : 25.00
Evaluated at bid price : 26.44
Bid-YTW : 4.19 %
RY.PR.B Perpetual-Discount 22,148 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-06-25
Maturity Price : 20.56
Evaluated at bid price : 20.56
Bid-YTW : 5.79 %
BNS.PR.K Perpetual-Discount 16,062 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-06-25
Maturity Price : 20.85
Evaluated at bid price : 20.85
Bid-YTW : 5.86 %
There were 21 other index-included issues trading in excess of 10,000 shares.

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