July 23, 2010

The European Stwess Tests appear farcical:

European stress tests on 91 banks will take into account bank losses only on government bonds they trade rather than those they hold to maturity, according to a draft European Central Bank document.

“The haircuts are applied to the trading book portfolios only, as no default assumption was considered,” according to a confidential document dated July 22 and titled “EU Stress Test Exercise: Key Messages on Methodological Issues.”

The tests will assume a loss of 23.1 percent on Greek debt, 14 percent of Portuguese bonds, 12.3 percent on Spanish debt, and 4.7 percent on German state debt, according to the document obtained by Bloomberg News. U.K. government bonds will be subject to a 10 percent haircut, and France 5.9 percent.

On cue, Hungary’s problems became more visible:

Standard & Poor’s said it may cut Hungary’s credit rating to junk after the collapse of talks with the International Monetary Fund and European Union. Moody’s Investors Service said it may also lower the country’s grade.

The IMF and EU on July 17 suspended talks with the government without endorsing Prime Minister Viktor Orban’s plans to control the budget deficit. The creditors provided Hungary with a 20 billion-euro ($25.9 billion) rescue package in 2008, which had served to reassure investors.

“We believe that without an EU/IMF program to anchor policy, Hungary is likely to face higher and more volatile funding costs, which in our view could weigh on financial sector balance sheets, the public finances, and economic growth,” S&P said today in a statement.

C-EBS has released the results. The report on the aggregate outcome makes the exercise appear to be rather gentle stwess! Initial reactions to the reports on individual banks are negative – the total capital shortfall is only USD 4.5-billion.

But the best line in the farce comes from a central banker:

ECB Vice President Vitor Constancio called the tests “severe” and explained they didn’t include a scenario of a national default because “we don’t believe there will be a default.”

That’s just great, Vitor! Maybe you’ll be put in charge of the government run credit rating agency the Europeans are thinking about, you know, the ones that will be much nicer to sovereigns than those mean old-style CRAs!

Seems to me that if the bank market is locking up because of fears of chaos after a sovereign default, then you restore confidence by proving the banking system is robust to sovereign default. But reasoning like this isn’t likely to get me appointed to any regulatory positions of note.

Increased regulation of the public markets is having a predictable effect: less public issuance:

The most sweeping regulatory legislation for Wall Street since the Great Depression, signed into law by President Barack Obama on July 21, makes ratings companies vulnerable to lawsuits when underwriters include their assessments in documents used to sell debt. The law subjects firms such as Moody’s Investors Service, Standard & Poor’s and Fitch Ratings to so-called expert liability, meaning they would face the same legal risks as accountants and other parties that participate in bond sales.

Under the new law, issuers weren’t able to obtain permission from ratings firms to include their rankings in their registration filings, according to the SEC.

As a result, sales were held up, said Malcolm Dorris, a senior partner in the securitization group at law firm Dechert LLP. Companies were considering alternatives to the public markets, such as selling in the 144a market, where sales aren’t registered with the SEC, Dorris said.

Ford Motor Co.’s finance arm canceled a planned sale of asset-backed debt, the Wall Street Journal reported July 21 on its website, citing market participants it didn’t name.

There’s an awfully odd senate investigation into Goldman:

Goldman Sachs Group Inc. told U.S. investigators which counterparties it used to hedge the risk that American International Group Inc. would fail, according to three people with knowledge of the matter.

The list was sought by panels reviewing the beneficiaries of New York-based AIG’s $182.3 billion government bailout, said the people, who declined to be identified because the information is private. Goldman Sachs, which received $12.9 billion after the 2008 rescue tied to contracts with the insurer, has said it didn’t need AIG to be rescued because it was hedged against the firm’s failure.

“We want to know the identity of those parties, partly just to know where American taxpayer dollars went, but partly to assess Goldman’s claim,” said Elizabeth Warren, chairman of the Congressional Oversight Panel, in a Senate hearing this week. “We cannot evaluate the credibility of their claim that they had nothing at stake one way or the other in the AIG bailout.”

Goldman Sachs had $10 billion of exposure to AIG when the insurer was rescued in September 2008, offset by $7.5 billion of collateral and swaps, Viniar said. The hedges were one reason that Goldman wouldn’t accept anything less than full payment on the guarantees it purchased from AIG, he said.

It’s not clear to me why this is so important; I suspect its just another instance of Goldman being punished for being the only competently managed investment bank in the world. The politicians need mea culpas and cringing gratitude – and they’re not getting it from GS.

Magna bought out Stronach with a 93% positive vote, despite the efforts of the precious to ensure the world is aware just how precious they are (I think Teachers’ won, having purchased one share so they could be officially offended at the deal. Their beneficiaries should be most upset that management time and money is being spent tilting at other people’s windmills). The vote is good news for readers of financial newspapers, who may hope for an end to the eternal whining of morons who are surprised when their participating debentures – also known as subordinated voting shares – don’t give them much say in the company. ‘But that’s just mean!’ they bleat ‘Business and investing should be a cooperative game, just like we had in kiddiegarter!’

It was a quiet day in the Canadian preferred share market, with PerpetualDiscounts up 1bp and FixedResets gaining 4bp on low volume.

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 2.85 % 2.93 % 21,580 20.19 1 0.0000 % 2,073.2
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.0652 % 3,152.5
Floater 2.51 % 2.15 % 41,960 21.97 4 -0.0652 % 2,247.0
OpRet 4.87 % -2.37 % 97,702 0.08 11 0.0813 % 2,344.0
SplitShare 6.28 % 6.16 % 71,582 3.41 2 -0.4315 % 2,206.9
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0813 % 2,143.4
Perpetual-Premium 5.90 % 5.19 % 106,555 1.81 4 0.0786 % 1,941.8
Perpetual-Discount 5.83 % 5.91 % 183,248 14.02 73 0.0090 % 1,855.6
FixedReset 5.32 % 3.49 % 337,209 3.45 47 0.0435 % 2,223.8
Performance Highlights
Issue Index Change Notes
MFC.PR.C Perpetual-Discount -1.29 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-07-23
Maturity Price : 19.08
Evaluated at bid price : 19.08
Bid-YTW : 5.98 %
RY.PR.H Perpetual-Discount -1.11 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-23
Maturity Price : 25.00
Evaluated at bid price : 24.97
Bid-YTW : 5.62 %
POW.PR.D Perpetual-Discount 1.20 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-07-23
Maturity Price : 21.16
Evaluated at bid price : 21.16
Bid-YTW : 5.96 %
RY.PR.W Perpetual-Discount 1.39 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-07-23
Maturity Price : 21.63
Evaluated at bid price : 21.90
Bid-YTW : 5.58 %
Volume Highlights
Issue Index Shares
CM.PR.M FixedReset 31,900 Scotia crossed 25,000 at 28.00.
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 27.90
Bid-YTW : 3.44 %
SLF.PR.G FixedReset 25,975 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-07-23
Maturity Price : 25.35
Evaluated at bid price : 25.40
Bid-YTW : 3.93 %
CM.PR.H Perpetual-Discount 24,594 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-07-23
Maturity Price : 20.59
Evaluated at bid price : 20.59
Bid-YTW : 5.86 %
BMO.PR.J Perpetual-Discount 24,510 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-07-23
Maturity Price : 20.51
Evaluated at bid price : 20.51
Bid-YTW : 5.58 %
MFC.PR.D FixedReset 22,849 Desjardins crossed 12,000 at 27.75.
Maturity Type : Call
Maturity Date : 2014-07-19
Maturity Price : 25.00
Evaluated at bid price : 27.72
Bid-YTW : 3.85 %
SLF.PR.C Perpetual-Discount 21,658 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-07-23
Maturity Price : 18.70
Evaluated at bid price : 18.70
Bid-YTW : 6.02 %
There were 18 other index-included issues trading in excess of 10,000 shares.

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