December 5, 2007

I am fascinated by the unfolding story of the Florida State Board of Administration’s Money Market fund that I discussed on December 3. Bloomberg reports that the Executive Director has quit:

Coleman Stipanovich, the head of an agency managing a troubled $14 billion Florida investment pool for local governments, quit as officials approved a plan by BlackRock Inc. to salvage the fund.

Stipanovich, whose brother J.M. “Mac” Stipanovich is a Tallahassee lobbyist and Republican strategist who ran former Governor Jeb Bush’s campaign for governor in 1994, was appointed executive director of the state board in 2002.

In the late 1990s, Coleman Stipanovich worked as a lobbyist for PaineWebber Inc. in Florida and was paid $7,500 per month to help the firm win municipal bond business.

Stipanovich, a Vietnam veteran, has a master of science degree in criminal justice administration from Michigan State University and a bachelors of science in criminology from Florida State University.

Pretty impressive credentials for running an investment management firm with $184-billion under management, eh? There’s a small biography on the site:

As Executive Director of the State Board of Administration of Florida (SBA), Coleman Stipanovich serves as the Chief Investment Officer of the fifth largest pension fund in the United States. Total assets under management at the SBA are in excess of $150 billion, which includes the Florida Retirement System Pension Plan (Defined Benefit Trust Fund) and Investment Plan (Defined Contribution Trust Fund). Under broad authority granted by the Trustees, the Executive Director has administrative and investment authority and responsibility, within the statutory limitations and rules, to develop investment policies and tactically manage investments. The Trustees are Governor Charlie Crist, Chief Financial Officer Alex Sink, and Attorney General Bill McCollum.

But look at him:


Isn’t that just the kind of distinguished look that investment counsellors should all have? I haven’t been able to find any CV on the web that might possibly shed some light on why this man was considered suitable to run a large asset management firm – all I’ve found is a story about his 2002 appointment and a record of his reappointment. If anybody has information that might clarify the question of his qualifications, please share it.

But I suspect it’s just political patronage. Investment counsellors are all a bunch of overpaid yumps who, on average, perform averagely, right? So I suppose that since any idiot can do it and get paid extremely well while doing so, it doesn’t make any difference who you hire.

Just for comparison, let’s look at the CV of Jim Leech, CEO of Teachers.

Mr. Leech joined Teachers’ in 2001 to lead Teachers’ Private Capital and succeeded Claude Lamoureux as President and CEO in 2007.

Before joining Teachers’, Mr. Leech was President and CEO of Unicorp Canada Corp., one of Canada’s first public merchant banks, and Union Energy Inc., then one of North America’s largest integrated energy and pipeline companies.

Now, I don’t know Mr. Leech. I haven’t worked with him, I haven’t studied his career in detail, I haven’t even spoken to the man. But I have a lot of respect for Teachers’ and whether or not Mr. Leech is the perfect man for the job, it seems to me that this is the way public funds should be run … a guy with a solid CV runs a division for six years, THEN gets to be boss. Maybe that CV is in investment management, maybe it’s in some other industry … but it’s solid.

I last reviewed Prof. Stephen Cecchetti‘s series on subprime on November 28. Part 3 of the series, Why Central Banks should be Financial Supervisors talks about some countries’ separation of function that are elsewhere combined:

In places like Italy, the Netherlands, Portugal, the United States and New Zealand, the central bank supervises banks. By contrast, in Australia, the United Kingdom, and Japan, supervision is done by an independent authority.

He notes that Bernanke is an ardent supporter of combination:

[Bernanke Speech]  Its supervisory activities also allow the Fed to obtain useful information about the financial companies that do business with the banking organizations it supervises. For example, some large banks are heavily engaged in lending and providing various services to hedge funds and other private pools of capital. In the process of ensuring that banks prudently manage these counterparty relationships, Fed staff members, collaborating with their colleagues from other agencies, learn a great deal about the business practices, investment strategies, and emerging trends in this industry.

The other side of the coin is:

[Cecchetti essay] the most compelling rationale for separation is the potential for conflict of interest. The central bank will be hesitant to impose monetary restraint out of concern for the damage it might do to the banks it supervises. The central bank will protect banks rather than the public interest. Making banks look bad makes supervisors look bad. So, allowing banks to fail would affect the central banker/supervisor’s reputation.

In this same vein, Goodhart argues for separation based on the fact that the embarrassment of poor supervisory performance could damage the reputation of the central bank.

Cecchetti quotes an amusing example of the benefits of combination:

On 20 November 1988 a computer software error prevented the Bank of New York from keeping track of its US Treasury securities trading. For 90 minutes orders poured in and the bank made payments without having the funds as normal. But when it came time to deliver the bonds and collect from the buyers, the information had been erased from the system. By the end of the day, the Bank of New York had bought and failed to deliver so many securities that it was committed to paying out $23 billion that it did not have. The Federal Reserve, knowing from its up-to-date supervisory records that the bank was solvent, made an emergency $23 billion loan taking the entire bank as collateral and averting a systemic financial crisis. Importantly, only a supervisor was in a position to know that the Bank of New York’s need to borrow was legitimate and did not arise from fraud.

[note] At the time, computers could store only 32,000 transactions at a time. When more transactions arrived than the computer could handle, the software’s counter restarted at zero. Since the counter number was the key to where the trading information was stored, the information was effectively erased. Had all the original transactions been processed before the counter restarted, there would have been no problem.

(I should point out that computers, per se, are not to blame for the error – assuming that the malfunction happened as described, this was an example of poor programme management, design and testing as indicated in the main text, rather than a hardware error as implied in the note) … and then an example of the evils of separation …

Shortly after Bank of England Governor Mervyn King sent a letter to the Treasury Committee of the House of Commons,6 the U.K. Financial Services Authority made it known both that Northern Rock was on the verge of collapse, and that supervisors had known this for some time. Contrary to wide-spread perception of the position taken just a few days earlier in the Governor’s letter, the Bank of England was forced to make a substantial emergency loan, substantially tarnishing their public image.

I will say is that things surely would have gone more smoothly had the Bank of England had supervisory authority so that the officials with intimate knowledge of Northern Rock’s balance sheet would have been sitting at the table on a regular basis with the management of the central bank.

Cecchetti is very persuasive! The arguments make a lot of sense to me – but I’ll keep my eyes open for something from the other side. His fourth and final essay in the series, Does Well-Designed Monetary Policy Encourage Risk Taking, is not nearly as interesting – as far as I’m concerned he could have written finis after the first sentence:

Yes, but isn’t that what it’s supposed to do?

… but he had to fill it out a little. I have often argued in this blog that by way of policy objectives, what we want is a rock-solid, highly regulated banking sector, well insulated from the outer (much more fun) layer of innovation and speculation. He concludes:

Some observers worry that recent central bankers’ responses to the subprime crisis of 2007 will encourage asset managers to take on more risk than is in society’s interest. I believe that this is wrong. Punishment is being meted out to many of those whose risky behaviour led to the problems, while central banks’ actions have, so far, reduced the collateral damage that this crisis could have inflicted on the economy.

As far as the series is concerned, he has made the following four concrete proposals:

  • Trust, but verify. Investors should insist that asset managers and underwriters start by disclosing both the detailed characteristics of what they are selling together with their costs and fees. This will allow us to know what we buy and understand our bankers’ incentives.
  • Standardisation and trading. Governments could help clarify the relative riskiness of assets by fostering the standardization of securities and encouraging trading on organized exchanges.
  • Deposit insurance. A well-designed, rules-based deposit insurance scheme is essential to protecting the banking system from future financial crises. Lender of last resort actions are no substitute for deposit insurance.
  • Central banks should be financial regulators. Central banks should have a direct role in financial supervision. In times of financial crisis – as in times of war – good policy-making requires a single ‘general’ directing the operations.

Item 1 is not really a policy issue – it’s a matter for investors, their investees and their advisors. Just make sure people are, in fact, feeling some pain from bad decisions and not bailed out – that’s enough policy.

Item 2 – I argued against this on November 19. However, it may be that in ensuring the stability of the banking system, margin & capital requirements could well be raised to the point at which exchange-trading (and clearing houses with daily mark-to-markets) become competitive. However, an exchange cannot function in a thin market – which Mr. Cecchetti, I am sure, will say is addressed by his urging for increased standardization. By way of policy … make sure the banks are stable, ensure capital requirements are conservative, and let exchange trading and standardization look after themselves.

Item 3 – full agreement from me!

Item 4 – very persuasive arguments have been put forward, but I’ll reserve judgement until I hear more from the other side. I am confident that each example of the benefits of unification can be matched with an example of harm.

PerpetualDiscounts continued to rock-and-roll today, while floaters just rolled over and played dead. Sadly, there are only two issues in this sub-index, both BAM, so it’s very hard to determine just how much is due to credit concerns, how much is Floater concerns and how much is just random vagaries of the market. There was reasonably good volume, a reasonable number of trades, and a reasonable time between the decline of prices and the market close, so I’d have to say this move is as real as anything else.

But really, how about them PerpetualDiscounts? I KNOW it’s only three days into the month and a lot can happen, but let me enjoy it while I can, won’t you? It’s been a long year.

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 4.90% 4.89% 105,645 15.66 2 +0.0409% 1,050.0
Fixed-Floater 4.88% 4.88% 97,732 15.68 8 -0.0147% 1,033.5
Floater 5.25% 5.34% 80,611 14.84 2 -4.7619% 904.3
Op. Retract 4.87% 3.41% 79,435 3.59 16 +0.0331% 1,034.3
Split-Share 5.31% 6.20% 95,100 4.08 15 +0.2438% 1,024.8
Interest Bearing 6.22% 6.44% 70,121 3.74 4 +0.1513% 1,069.4
Perpetual-Premium 5.81% 5.34% 81,122 6.03 11 +0.1527% 1,012.3
Perpetual-Discount 5.51% 5.56% 353,858 14.55 55 +0.6527% 921.0
Major Price Changes
Issue Index Change Notes
BAM.PR.B Floater -4.7619%  
BAM.PR.K Floater -4.7619%  
BAM.PR.J OpRet -1.5519% Now with a pre-tax bid-YTW of 5.05% based on a bid of 26.01 and a softMaturity 2018-3-30 at 25.00.
BNA.PR.B SplitShare -1.5480% Asset coverage of just under 4.0:1 as of October 31, according to the company. Now with a pre-tax bid-YTW of 6.73% based on a bid of 22.26 and a hardMaturity 2016-3-25 at 25.00. Compare with BNA.PR.A (6.05% to 2010-9-30) and BNA.PR.C (7.52% to 2019-1-10).
BNS.PR.M PerpetualDiscount +1.0859% Now with a pre-tax bid-YTW of 5.32% based on a bid of 21.41 and a limitMaturity.
POW.PR.B PerpetualDiscount +1.1849% Now with a pre-tax bid-YTW of 5.67% based on a bid of 23.91 and a limitMaturity.
GWO.PR.G PerpetualDiscount +1.2227% Now with a pre-tax bid-YTW of 5.61% based on a bid of 23.18 and a limitMaturity.
RY.PR.A PerpetualDiscount +1.2900% Now with a pre-tax bid-YTW of 5.29% based on a bid of 21.20 and a limitMaturity.
GWO.PR.H PerpetualDiscount +1.3825% Now with a pre-tax bid-YTW of 5.52% based on a bid of 22.00 and a limitMaturity.
RY.PR.F PerpetualDiscount +1.3936% Now with a pre-tax bid-YTW of 5.32% based on a bid of 21.10 and a limitMaturity.
SLF.PR.A PerpetualDiscount +1.3953% Now with a pre-tax bid-YTW of 5.44% based on a bid of 21.80 and a limitMaturity.
RY.PR.G PerpetualDiscount +1.4347% Now with a pre-tax bid-YTW of 5.35% based on a bid of 21.21 and a limitMaturity.
SLF.PR.B PerpetualDiscount +1.4787% Now with a pre-tax bid-YTW of 5.47% based on a bid of 21.96 and a limitMaturity.
POW.PR.A PerpetualDiscount +1.5226% Now with a pre-tax bid-YTW of 5.75% based on a bid of 24.67 and a limitMaturity.
SLF.PR.E PerpetualDiscount +1.7023% Now with a pre-tax bid-YTW of 5.39% based on a bid of 20.91 and a limitMaturity.
GWO.PR.I PerpetualDiscount +1.8399% Now with a pre-tax bid-YTW of 5.50% based on a bid of 20.48 and a limitMaturity.
ACO.PR.A OpRet +1.9048% Now with a pre-tax bid-YTW of 2.85% based on a bid of 26.75 and a call 2008-12-31 at 26.00. The annual dividend is a fat $1.4375, but the company can save $0.50 annually for two years by delaying redemption … but the yield to a call 2010-12-1 still looks pretty lousy!
POW.PR.D PerpetualDiscount +2.2142% Now with a pre-tax bid-YTW of 5.61% based on a bid of 22.62 and a limitMaturity.
ELF.PR.G PerpetualDiscount +2.2727% Now with a pre-tax bid-YTW of 6.72% based on a bid of 18.00 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
SLF.PR.C PerpetualDiscount 242,045 Now with a pre-tax bid-YTW of 5.40% based on a bid of 20.65 and a limitMaturity.
IAG.PR.A PerpetualDiscount 214,115 Scotia crossed 200,000 at 21.00. Now with a pre-tax bid-YTW of 5.53% based on a bid of 20.85 and a limitMaturity.
GWO.PR.G PerpetualDiscount 83,218 Nesbitt bought a total of 38,100 from Scotia in two tranches at 23.10. Now with a pre-tax bid-YTW of 5.61% based on a bid of 23.18 and a limitMaturity.
BMO.PR.J PerpetualDiscount 54,390 Now with a pre-tax bid-YTW of 5.34% based on a bid of 21.25 and a limitMaturity.
BNS.PR.M PerpetualDiscount 51,518 Now with a pre-tax bid-YTW of 5.32% based on a bid of 21.41 and a limitMaturity.

There were forty-five other index-included $25.00-equivalent issues trading over 10,000 shares today.

2 Responses to “December 5, 2007”

  1. […] There has been a lot of commentary regarding the coordinated liquidity injection (discussed on December 12) led by the Fed. First to the plate was Stephen Cecchitti, who has written many high quality essays for VoxEU, the most recent of which was discussed on December 5. […]

  2. […] was last discussed in PrefBlog in the post regarding Willem Buiter’s Prescription and on December 5 in response to a VoxEU article by Stephen Cecchetti. There are certainly good arguments to be made […]

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