September 1, 2011

The goose that laid the golden eggs is looking a little green around the gills:

Banks in Europe are exploring ways to cut costs by routing more of their trades and other business through overseas subsidiaries, a plan that may shift tax revenue away from London and loosen European regulators’ influence over the lenders.

Banks could record as much as 30 percent of the value of their trades through Hong Kong, Singapore and other jurisdictions instead of hubs such as London and New York without running into trouble with regulators, Matten said. Such a move would hurt traditional hubs such as London because assets are treated for tax and regulatory purposes in the country where they are booked. It would also allow banks to sidestep the U.K. bank levy, introduced last year to raise 2.5 billion pounds ($4.1 billion) from lenders operating in Britain, as well as any financial transaction tax imposed by the European Union.

Haresh Sapra, professor of accounting at the University of Chicago Booth School of Business, writes an interesting piece on Bloomberg titled More Transparency May Hurt Markets:

Standard setters have argued that fair-value accounting would alleviate information asymmetry between insiders and outsiders. Yet insiders of many financial institutions have complained that rather than enhancing market discipline, fair- value accounting would introduce volatility into their reported numbers, thereby inducing suboptimal decisions.

The recent financial crisis is a case in point. When liquidity started drying up, some banks began to sell their illiquid loans, putting downward pressure on prices. Anticipating the fall in prices, other banks started selling their loans and prices declined further, leading more banks to sell their loans. The effects were so severe that prices no longer reflected fundamentals but rather the amount of cash or liquidity available to buyers in the market.

If information asymmetry were the only friction between insiders and outsiders, the feedback effect would be weak or even nonexistent and prices would play their proper role of providing market discipline. But in strategic environments with multiple imperfections, market participants who try to extract the informational content of current prices distort this very content by adding an extra, nonfundamental component to price fluctuations.

As a result, the choice of an appropriate measurement regime amounts to a dilemma between ignoring price signals — as one would in a historical-cost regime — and relying on their degraded versions, as would be done in a fair-value regime.

Fabulous Fab, the man being persecuted by the SEC for acting as a broker, is in the news again:

Goldman Sachs Group Inc. (GS) trader Fabrice Tourre, accused of misleading investors in a collateralized debt obligation, said in a court filing that IKB Deutsche Industriebank AG (IKB)’s alleged $150 million investment was actually made by two Jersey-based companies.

Tourre wants to take testimony of witnesses at Loreley Financing (Jersey) No. 29 Ltd. and Loreley Financing (Jersey) No. 30 Ltd., according to the filing yesterday in federal court in Manhattan. The U.S. Securities and Exchange Commission has said Duesseldorf, Germany-based IKB made the investment in the CDO, Abacus 2007-AC1.

“Discovery in this matter thus far has shown, however, that IKB’s alleged $150 million investment was, in fact, made by” the Jersey-based companies, Tourre’s lawyers wrote in the filing.

“I think what they’re trying to establish here is they have sophistication piled on top of sophistication to show that this was a well-reasoned investment by, yet again, a sophisticated institution,” Jacob S. Frenkel, a former Securities and Exchange Commission lawyer now in private practice in Potomac, Maryland, said in a phone interview today.

The Canadian preferred share market started the month on a happy note, with PerpetualDiscounts winning 25bp, FixedResets up 21bp and DeemedRetractibles gaining 6bp. Volatility was a little bit better than usual, skewed towards positive returns. Volume was low.

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 0.1069 % 2,162.7
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.1069 % 3,252.7
Floater 2.80 % 2.54 % 24,854 20.95 4 0.1069 % 2,335.1
OpRet 4.89 % 2.88 % 65,988 0.16 9 -0.1119 % 2,442.2
SplitShare 5.37 % 0.07 % 58,137 0.49 4 0.0104 % 2,498.8
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.1119 % 2,233.2
Perpetual-Premium 5.65 % 4.76 % 130,690 0.65 14 0.0605 % 2,110.4
Perpetual-Discount 5.33 % 5.37 % 98,408 14.76 16 0.2482 % 2,240.3
FixedReset 5.13 % 3.14 % 207,725 2.66 60 0.2063 % 2,328.0
Deemed-Retractible 5.06 % 4.68 % 260,969 7.99 46 0.0569 % 2,190.5
Performance Highlights
Issue Index Change Notes
BAM.PR.O OpRet -1.70 % YTW SCENARIO
Maturity Type : Option Certainty
Maturity Date : 2013-06-30
Maturity Price : 25.00
Evaluated at bid price : 25.46
Bid-YTW : 4.47 %
GWO.PR.G Deemed-Retractible -1.32 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.72
Bid-YTW : 5.32 %
SLF.PR.G FixedReset 1.00 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.25
Bid-YTW : 3.41 %
TRI.PR.B Floater 1.14 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-09-01
Maturity Price : 22.01
Evaluated at bid price : 22.25
Bid-YTW : 2.35 %
HSB.PR.C Deemed-Retractible 1.28 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.34
Bid-YTW : 5.07 %
GWO.PR.J FixedReset 1.36 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-12-31
Maturity Price : 25.00
Evaluated at bid price : 26.86
Bid-YTW : 2.50 %
CIU.PR.A Perpetual-Discount 1.51 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-09-01
Maturity Price : 23.05
Evaluated at bid price : 23.50
Bid-YTW : 4.90 %
FTS.PR.H FixedReset 1.56 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-09-01
Maturity Price : 23.58
Evaluated at bid price : 26.00
Bid-YTW : 2.96 %
Volume Highlights
Issue Index Shares
Traded
Notes
IFC.PR.C FixedReset 134,028 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-09-30
Maturity Price : 25.00
Evaluated at bid price : 25.00
Bid-YTW : 4.26 %
SLF.PR.D Deemed-Retractible 104,896 Nesbitt crossed 100,000 at 21.90.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.91
Bid-YTW : 6.05 %
MFC.PR.D FixedReset 62,816 Nesbitt crossed 49,300 at 27.05.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-06-19
Maturity Price : 25.00
Evaluated at bid price : 27.14
Bid-YTW : 3.29 %
RY.PR.A Deemed-Retractible 53,320 Nesbitt crossed 14,000 at 24.94; RBC crossed 10,000 at 24.96.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.91
Bid-YTW : 4.53 %
TD.PR.K FixedReset 43,096 Scotia crossed 25,000 at 27.35.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-31
Maturity Price : 25.00
Evaluated at bid price : 27.33
Bid-YTW : 3.10 %
SLF.PR.H FixedReset 35,900 Recent new issue.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.79
Bid-YTW : 3.99 %
There were 21 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
PWF.PR.A Floater Quote: 20.75 – 22.15
Spot Rate : 1.4000
Average : 1.1897

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-09-01
Maturity Price : 20.75
Evaluated at bid price : 20.75
Bid-YTW : 2.54 %

GWO.PR.G Deemed-Retractible Quote: 24.72 – 25.16
Spot Rate : 0.4400
Average : 0.3230

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.72
Bid-YTW : 5.32 %

NA.PR.N FixedReset Quote: 26.02 – 26.55
Spot Rate : 0.5300
Average : 0.4222

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-08-15
Maturity Price : 25.00
Evaluated at bid price : 26.02
Bid-YTW : 3.36 %

BAM.PR.O OpRet Quote: 25.46 – 25.95
Spot Rate : 0.4900
Average : 0.3891

YTW SCENARIO
Maturity Type : Option Certainty
Maturity Date : 2013-06-30
Maturity Price : 25.00
Evaluated at bid price : 25.46
Bid-YTW : 4.47 %

BMO.PR.Q FixedReset Quote: 25.21 – 25.49
Spot Rate : 0.2800
Average : 0.1866

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.21
Bid-YTW : 3.27 %

CIU.PR.C FixedReset Quote: 25.01 – 25.49
Spot Rate : 0.4800
Average : 0.4065

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-09-01
Maturity Price : 23.18
Evaluated at bid price : 25.01
Bid-YTW : 3.02 %

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