July 3, 2012

Nada Mora What Determines Creditor Recovery Rates? should be an Interesting External Paper – but I have no time!

There are interesting mortgage bond shennanigans in Europe:

Spanish and Portuguese banks are leading European lenders in buying back their own mortgage- backed securities at distressed prices to bolster capital and stockpile eligible collateral for European Central Bank loans.

Banco Bilbao Vizcaya Argentaria SA (BBVA), Banco Comercial Portugues SA (BCP) and other lenders this year repurchased 6.6 billion euros ($8.4 billion) of asset-backed bonds they issued, more than double the level for all of 2011, according to data compiled by Deutsche Bank AG. Banks buy the debt, packages of loans in which they kept subordinated portions, for less than face value, and book a capital gain similar to the discount.

The deals are poised to accelerate after the ECB last month reduced the minimum ratings it will accept for mortgage securities offered as collateral for cheap loans, adding incentive to lenders to buy back debt and pledge it with the Frankfurt-based institution.

Investors demand 1025 basis points, or 10.25 percentage points, more than interbank rates to hold a senior five-year bond backed by Portuguese home loans, according to JPMorgan Chase & Co. data. That exceeds the 10 percent level considered distressed. The spread for Spanish residential mortgages is 615 basis points compared with 150 for Dutch mortgage backed securities and 132 for British transactions.

There’s an interesting paper on game theory released by the Boston Fed by Michalis Drouvelis and Julian C. Jamison titled Selecting Public Goods Institutions: Who Likes to Punish and Reward?:

The authors extend the standard public goods game in a variety of ways, in particular by allowing for endogenous preference over institutions and by studying the relationship between individual types, their preferences, and later behavior within the various institutional environments. They collect individual data on a variety of demographic factors, in addition to measuring levels of risk aversion and ambiguity aversion (over both gains and losses). The authors then elicit preferences in an incentive-compatible manner over voluntary contribution mechanisms with and without reward and punishment options. Finally, they randomly assign subjects to one of the four institutions and observe repeated play. They find that payoffs are significantly greater when punishment is allowed but that only a small minority of participants prefers such an environment. There is at most a weak link between individual characteristics and elicited preferences over environments. On the other hand, institutional preferences, as well as individual characteristics, are more strongly predictive of behavior in the public goods game. For instance, loss averse individuals preemptively reward more often when that option is available. This result suggests that when studying social interactions, especially if people can choose whether to participate in a sanctions-and-rewards mechanism, it is important to consider individual attitudes toward risk and uncertainty.

Our main findings can be summarized as follows. First, our four preference measures are significantly correlated with each other. Second, subjects’ individual characteristics help explain their preferences over risk, loss, and ambiguity. Third, which institutions individuals prefer are, surprisingly, not influenced by preference measures, although other individual traits do have some explanatory power. Fourth, institutions with punishment options are best able to maintain cooperative norms. Fifth, relative to institutions without sanctioning mechanisms, institutions that permit sanctions incur enforcement costs that lower overall welfare in the short run but increase overall efficiency in the long run. Sixth, positive and negative reciprocity are significantly correlated with our preference measures. Seventh, subjects’ individual characteristics account for the way sanctions and rewards are used.

Relative to those subjects who declare no political party affiliation, we observe that those who are affiliated with the Conservative party are more ambiguity averse, whereas those who are affiliated with a party other than the four major ones in the United Kingdom (that is, Conservative, Labour, Liberal Democrats, and Green) are found to be less ambiguity averse.

The banks’ “Living Will” joke has reached the punchline:

The Federal Deposit Insurance Corp. posted the public portions of so-called living wills on its website today as required by the 2010 Dodd-Frank Act. The documents outline more detailed proposals submitted privately to regulators describing how the companies can be dismantled if they fail.

The aim of the living wills is to give regulators a plan for shutting down complex financial firms without taxpayer bailouts or the turmoil that followed the 2008 collapse of Lehman Brothers Holdings Inc.

Ha-ha! They’ll be lucky! If I remember correctly, the politicians always had the choice of whether or not to bail out the banks, and voted in favour because they thought that the alternative was worse. But this sounds tough, anyway. And look at the revolutionary statements in the Bank of America plan:

Bank of America’s Operating Principles
  • Be customer-driven
  • Manage risk well
  • Continue to build a fortress balance sheet
  • Deliver for our shareholders
  • Manage efficiency well
  • Be the best place to work

Pretty radical stuff!

The three top honchos at Barclays have all quit:

Robert Diamond stepped down today as chief executive officer of Britain’s second-biggest bank and Jerry Del Missier quit as chief operating officer, London-based Barclays said in a statement. Chairman Marcus Agius, 65, will quit once he has found a replacement for Diamond, who has worked at the bank for the past 16 years and oversaw its investment banking expansion.

The three are leaving after regulators fined the bank a record 290 million pounds ($455 million) for attempting to rig the London interbank offered rate for profit. With Diamond due to appear before lawmakers tomorrow to answer their questions, Barclays released a note of a 2008 call purporting to show that Paul Tucker, the central bank’s then markets director, hinted the firm could cut its Libor rates.

“Tucker stated that the levels of calls he was receiving from Whitehall were ‘senior’ and that while he was certain we did not need advice, that it did not always need to be the case that we appeared as high as we have recently,” Diamond said in an Oct. 30, 2008 e-mail to then CEO John Varley and Del Missier.

Diamond, 60, didn’t believe he had received any instruction or that he gave any order to Del Missier to lower the bank’s submissions, Barclays said in evidence to lawmakers today. Del Missier, 50, concluded that the Bank of England had instructed the firm not to keep Libor so high and mistakenly instructed employees to lower their submissions, Barclays said.

Whatever. Everybody’s ducking blame. As I stated on June 27, it seems quite clear to me that the regulators were either grossly negligent or willfuly blind. I am pleased to note that I am not the only one who thinks the regulators have some ‘splainin’ to do – in fact, my views are somewhat mild:

If [deputy head of the BoE] Mr. [Paul] Tucker said Barclays’ Libor submissions didn’t need to appear so high, what could he have meant other than that the bank should lower them? And why did Mr. Tucker mention Whitehall if not to legitimize such misstatements? Perhaps there are other explanations, but Mr. Tucker will now have to respond.

Moreover, the Diamond memo potentially contradicts the FSA account of the exchange. The regulator states that “no instruction for Barclays to lower its Libor submissions was given during this telephone conversation.” Well, there’s explicit instruction and implicit instruction. The BoE won’t like being dragged into this. But Mr. Tucker needs to provide some clarity – fast.

Manulife redeemed some Tier 1 Capital:

Manulife Financial Capital Trust (the “Trust”), a subsidiary of Manulife Financial Corporation, today announced that on June 30, 2012, it completed the redemption of all of its outstanding $60,000,000 principal amount of Manulife Financial Capital Securities – Series A and all of its outstanding $940,000,000 principal amount of Manulife Financial Capital Securities – Series B.

These notes had what are now rather generous termsand redemption is no surprise:

On June 30, 2012, the Company will have the right to call the total of $1,000 million of capital notes issued by Manulife Financial Capital Trust, qualifying as Innovative Tier 1 capital under OSFI rules. The amount represents two tranches: $940 million of 6.700% Manulife Financial Capital Trust Securities (“MaCS”) Series A Units and $60 million of 7.000% MaCS Series B Units. Depending on, among other things, capital adequacy assessments and regulatory approval of redemption, management will decide whether or not to exercise the right to call these instruments.

On December 10, 2001, Manulife Financial Capital Trust (the “Trust”), a wholly owned open-end trust, issued 60,000 Manulife Financial Capital Securities (“MaCS”) – Series A and 940,000 MaCS – Series B.

Each MaCS – Series A entitles the holder to receive fixed cash distributions payable semi-annually in the amount of $35.00 representing an annual yield of 7%. Each MaCS – Series B entitles the holder to receive fixed cash distributions payable semi-annually in the amount of $33.50 representing an annual yield of 6.70%.

On any distribution date prior to June 30, 2012, the Trust may redeem, with regulatory approval, any outstanding MaCS series, in whole or in part, at the greater of par or the present value of the debt based on the yield on uncallable Government of Canada bonds plus 0.40% in the case of MaCS – Series A and 0.32% in the case of MaCS – Series B. On or after June 30, 2012, the Trust may redeem any outstanding MaCS series at par, together with any unpaid interest.

Each MaCS is exchangeable at the option of the holder into 40 newly issued MLI Class A Shares Series 2, in the case of MaCS – Series A, or 40 newly issued MLI Class A Shares Series 4, in the case of MaCS – Series B, under certain circumstances.

Under certain circumstances, each MaCS will be automatically exchanged, without the consent of the holders, for 40 MLI Class A Shares Series 3, in the case of MaCS – Series A, and 40 MLI Class A Shares Series 5, in the case of MaCS – Series B. The MaCS may be redeemed with regulatory approval in whole, upon the occurrence of certain tax or regulatory capital changes, at the option of the Trust.

On or after June 30, 2051, the MLI Class A Shares Series 2 and Series 3 will be convertible at the option of the holder into MFC common shares. On or after December 31, 2012, the MLI Class A Shares Series 4 and Series 5 will be convertible at the option of the holder into MFC common shares. In each case, the number of MFC common shares is determined by the face amount of the MLI Class A Shares divided by the greater of $1.00 and 95% of the then market price of MFC common shares.

The MaCS – Series A and MaCS – Series B constitute Tier 1 regulatory capital.

BRF.PR.A, proudly issued by Brookfield Renewable Power Preferred Equity Inc., is guaranteed by Brookfield Renewable Energy Partners L.P. Brookfield Renewable Energy Partners L.P.’s acquisition of dams in the US is expected by DBRS to be credit neutral:

DBRS expects that BREP will be able to provide its share of the permanent financing for the acquisition with non-recourse debt and equity capital and achieve a leverage ratio consistent with the Company’s existing capital structure and within the acceptable range of the current rating category. The deconsolidated metrics are expected to benefit from the incremental remitted or distributed cash flow from the assets, although the level of this cash flow would be subject to the regional hydrology and wholesale power market conditions.

It was a strong day for the Canadian preferred share market, with PerpetualPremiums gaining 10bp, FixedResets up 21bp and DeemedRetractibles winning 53bp. The lengthy Performance Highlights table was, unsurprisingly, dominated by Insurer-issues DeemedRetractibles. Volume was a little below average.

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 -0.0804 % 2,297.5
FixedFloater 4.60 % 3.99 % 20,565 17.29 1 -0.2896 % 3,428.4
Floater 3.17 % 3.19 % 74,125 19.29 3 -0.0804 % 2,480.7
OpRet 4.77 % 2.60 % 34,031 0.97 5 0.3468 % 2,528.9
SplitShare 5.26 % -5.57 % 42,134 0.46 4 -0.2475 % 2,722.3
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.3468 % 2,312.5
Perpetual-Premium 5.40 % 4.01 % 83,827 0.56 26 0.1023 % 2,245.5
Perpetual-Discount 5.02 % 5.01 % 117,538 15.40 7 0.1414 % 2,477.6
FixedReset 5.03 % 3.07 % 193,260 4.44 71 0.2108 % 2,405.2
Deemed-Retractible 4.98 % 3.89 % 138,209 1.77 45 0.5281 % 2,325.8
Performance Highlights
Issue Index Change Notes
FBS.PR.C SplitShare -1.67 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-12-15
Maturity Price : 10.00
Evaluated at bid price : 10.62
Bid-YTW : -8.01 %
SLF.PR.H FixedReset -1.53 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.39
Bid-YTW : 3.98 %
SLF.PR.E Deemed-Retractible 1.08 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.40
Bid-YTW : 5.98 %
BNA.PR.C SplitShare 1.15 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2019-01-10
Maturity Price : 25.00
Evaluated at bid price : 22.96
Bid-YTW : 5.97 %
IAG.PR.A Deemed-Retractible 1.21 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.38
Bid-YTW : 5.52 %
BNS.PR.N Deemed-Retractible 1.29 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-01-29
Maturity Price : 26.00
Evaluated at bid price : 26.75
Bid-YTW : -0.64 %
GWO.PR.F Deemed-Retractible 1.29 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-08-02
Maturity Price : 25.25
Evaluated at bid price : 25.93
Bid-YTW : -24.33 %
SLF.PR.C Deemed-Retractible 1.32 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.28
Bid-YTW : 6.00 %
GWO.PR.H Deemed-Retractible 1.35 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.76
Bid-YTW : 5.01 %
MFC.PR.B Deemed-Retractible 1.35 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.24
Bid-YTW : 5.67 %
CM.PR.K FixedReset 1.49 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-31
Maturity Price : 25.00
Evaluated at bid price : 26.54
Bid-YTW : 2.12 %
SLF.PR.B Deemed-Retractible 1.58 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.77
Bid-YTW : 5.51 %
SLF.PR.D Deemed-Retractible 1.59 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.42
Bid-YTW : 5.91 %
MFC.PR.C Deemed-Retractible 1.63 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.11
Bid-YTW : 5.58 %
SLF.PR.A Deemed-Retractible 2.10 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.81
Bid-YTW : 5.43 %
Volume Highlights
Issue Index Shares
Traded
Notes
MFC.PR.I FixedReset 164,775 RBC crossed 49,400 at 24.99 and bought 10,000 from CIBC at the same price. RBC then crossed three blocks, of 17,400 shares, 31,000 and 10,000, all at 25.00. TD crossed 10,000 at 25.00.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.99
Bid-YTW : 4.37 %
BMO.PR.J Deemed-Retractible 143,081 Nesbitt crossed two blocks of 49,700 each, both at 25.65.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-02-25
Maturity Price : 25.00
Evaluated at bid price : 25.71
Bid-YTW : 3.82 %
MFC.PR.G FixedReset 110,805 Nesbitt crossed blocks of 70,000 and 20,000, both at 25.20.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.16
Bid-YTW : 4.24 %
HSE.PR.A FixedReset 89,108 TD crossed 33,200 at 25.60. Desjardins bought 18,500 from anonymous at 25.60, then crossed 30,000 at the same price.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-07-03
Maturity Price : 23.46
Evaluated at bid price : 25.57
Bid-YTW : 3.01 %
RY.PR.A Deemed-Retractible 64,865 Desjardins crossed 50,000 at 25.57.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-24
Maturity Price : 25.25
Evaluated at bid price : 25.57
Bid-YTW : 3.98 %
TRP.PR.C FixedReset 55,229 TD crossed 31,500 at 25.50; Desjardins bought 10,700 from CIBC at 25.40.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-07-03
Maturity Price : 23.42
Evaluated at bid price : 25.37
Bid-YTW : 2.83 %
There were 25 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
HSB.PR.C Deemed-Retractible Quote: 25.53 – 26.30
Spot Rate : 0.7700
Average : 0.5297

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-06-30
Maturity Price : 25.25
Evaluated at bid price : 25.53
Bid-YTW : 3.98 %

IAG.PR.F Deemed-Retractible Quote: 25.70 – 26.39
Spot Rate : 0.6900
Average : 0.4885

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-03-31
Maturity Price : 25.00
Evaluated at bid price : 25.70
Bid-YTW : 5.45 %

FBS.PR.C SplitShare Quote: 10.62 – 11.61
Spot Rate : 0.9900
Average : 0.8644

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-12-15
Maturity Price : 10.00
Evaluated at bid price : 10.62
Bid-YTW : -8.01 %

NA.PR.M Deemed-Retractible Quote: 26.72 – 27.13
Spot Rate : 0.4100
Average : 0.2846

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-05-15
Maturity Price : 26.00
Evaluated at bid price : 26.72
Bid-YTW : 3.39 %

BNA.PR.D SplitShare Quote: 26.40 – 26.70
Spot Rate : 0.3000
Average : 0.1870

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-08-02
Maturity Price : 26.00
Evaluated at bid price : 26.40
Bid-YTW : -5.57 %

BAM.PR.N Perpetual-Discount Quote: 23.75 – 24.05
Spot Rate : 0.3000
Average : 0.1984

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-07-03
Maturity Price : 23.48
Evaluated at bid price : 23.75
Bid-YTW : 5.02 %

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