This is old, but Laurie Carver wrote a good piece on Credit Rating Agencies titled Losing Credit:
Brooks says the NAIC decided to move to the new methodology because of rating agencies’ failure to accurately capture the risk of severity of loss in structured credit (and consequently its flipside – recovery). “Under the old regime, ratings were a kind of blunt tool for determining the risk-based capital, whereas now we’re doing a more detailed analysis of each security held by the insurer.”
He sees the old rating-based RBC charges as creating ‘cliff risk’, because their focus on the first dollar of loss in the whole structure caused sudden downgrades to be assigned to tranches that were actually likely to recoup or profit. For instance, under the old regime, AAA securities would carry a capital charge of just 0.4%, compared to 23% for a CCC security. “This very sharp change in the RBC charge can happen without a material effect on the actual return on the insurer’s investment,” says Brooks.
“The rating agencies’ methodology is binary – they take account of the probability of default but not the severity of loss to the insurer’s specific position. Just because there’s a default, doesn’t mean that the security held by the insurer is going to experience 100% loss.”
Trichet has figured out that maybe the EU should have paid attention when Greece announced it was cooking its books:
The economic crisis in Europe is not a crisis of the euro currency or of the monetary union, says the president of the European Central Bank.
“The current crisis stems rather from insufficient monitoring of economic policies in a number of member states,” Jean-Claude Trichet said in a speech at the Conference of Montreal. “Today, it’s not the monetary pillar of economic and monetary union that is at stake but the economic pillar,” he said.
Gee, and I thought it was all Goldman Sachs’ fault, as mocked 2010-4-19.
I’m tired of YLO – bor-ring! I wish Sino-Forest had preferred shares.
A mildly depressing day on the Canadian preferred share market, with PerpetualDiscounts down 8bp, FixedResets off 4bp and DeemedRetractibles losing 9bp. Volatility was muted. Volume was dead. D-E-D. Dead.
| 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 | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0349 % | 2,464.0 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0349 % | 3,705.9 |
| Floater | 2.45 % | 2.24 % | 46,590 | 21.62 | 4 | -0.0349 % | 2,660.5 |
| OpRet | 4.87 % | 3.39 % | 64,273 | 0.95 | 9 | -0.1886 % | 2,419.9 |
| SplitShare | 5.24 % | 0.12 % | 60,345 | 0.52 | 6 | -0.1168 % | 2,504.4 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.1886 % | 2,212.8 |
| Perpetual-Premium | 5.65 % | 4.99 % | 156,258 | 1.41 | 12 | 0.1281 % | 2,080.2 |
| Perpetual-Discount | 5.44 % | 5.49 % | 120,492 | 14.55 | 18 | -0.0838 % | 2,184.3 |
| FixedReset | 5.14 % | 3.19 % | 193,408 | 2.83 | 57 | -0.0383 % | 2,314.7 |
| Deemed-Retractible | 5.07 % | 4.88 % | 293,927 | 8.13 | 47 | -0.0875 % | 2,155.7 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| FTS.PR.E | OpRet | -1.40 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2013-07-01 Maturity Price : 25.75 Evaluated at bid price : 26.69 Bid-YTW : 2.97 % |
| FTS.PR.G | FixedReset | -1.22 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2013-10-01 Maturity Price : 25.00 Evaluated at bid price : 25.93 Bid-YTW : 3.52 % |
| POW.PR.D | Perpetual-Discount | -1.21 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-06-06 Maturity Price : 23.43 Evaluated at bid price : 23.69 Bid-YTW : 5.35 % |
| GWO.PR.I | Deemed-Retractible | 1.33 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.90 Bid-YTW : 5.55 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| CM.PR.H | Deemed-Retractible | 29,368 | Called for redemption. YTW SCENARIO Maturity Type : Call Maturity Date : 2011-07-06 Maturity Price : 25.75 Evaluated at bid price : 25.93 Bid-YTW : 1.89 % |
| RY.PR.W | Perpetual-Discount | 28,709 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-06-06 Maturity Price : 24.34 Evaluated at bid price : 24.65 Bid-YTW : 4.99 % |
| PWF.PR.A | Floater | 24,800 | Desjardins crossed 14,300 at 23.65. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-06-06 Maturity Price : 23.36 Evaluated at bid price : 23.65 Bid-YTW : 2.20 % |
| CM.PR.J | Deemed-Retractible | 23,171 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.87 Bid-YTW : 4.64 % |
| BMO.PR.J | Deemed-Retractible | 21,185 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.81 Bid-YTW : 4.63 % |
| BNS.PR.M | Deemed-Retractible | 20,561 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.81 Bid-YTW : 4.67 % |
| There were 18 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| FTS.PR.E | OpRet | Quote: 26.69 – 27.24 Spot Rate : 0.5500 Average : 0.3883 YTW SCENARIO |
| POW.PR.D | Perpetual-Discount | Quote: 23.69 – 24.12 Spot Rate : 0.4300 Average : 0.2937 YTW SCENARIO |
| BMO.PR.K | Deemed-Retractible | Quote: 25.53 – 25.90 Spot Rate : 0.3700 Average : 0.2628 YTW SCENARIO |
| MFC.PR.C | Deemed-Retractible | Quote: 22.66 – 22.94 Spot Rate : 0.2800 Average : 0.1805 YTW SCENARIO |
| PWF.PR.O | Perpetual-Premium | Quote: 25.45 – 25.86 Spot Rate : 0.4100 Average : 0.3124 YTW SCENARIO |
| TD.PR.S | FixedReset | Quote: 26.02 – 26.25 Spot Rate : 0.2300 Average : 0.1432 YTW SCENARIO |