October 26, 2012

The Kansas City Fed has published an interesting paper by George A. Kahn titled Estimated Rules for Monetary Policy:

This article estimates policy rules over periods of favorable economic performance to derive benchmark rules that might be useful guides for future monetary policy. Section I describes two simple, nonestimated rules that have been proposed as guides for policy and examines how closely they describe the actual setting of policy over various periods. Section II identifies time periods over which macroeconomic performance has generally been favorable and estimates policy rules that describe how monetary policy responded to key indicators over these periods. Section III evaluates past and current policy relative to the estimated rule and gives a number of reasons why policymakers should remain cautious about blindly following any estimated rule.

There was a meeting today regarding Money Market Fund reform:

Investment managers including BlackRock Inc. (BLK) and Fidelity Investments, under pressure to pre- empt action by a new super-committee of regulators, are seeking to end an impasse over money-fund reform.

Officials from several firms, as well as representatives from the Investment Company Institute, the industry’s trade group, are scheduled to meet with the Securities and Exchange Commission and Treasury Department officials today to discuss proposals for a potential compromise, BlackRock spokeswoman Bobbie Collins and Fidelity spokesman Vincent Loporchio said today. The industry helped block a plan in August that was backed by SEC Chairman Mary Schapiro.

BlackRock, the world’s largest asset manager, has held talks previously with SEC staff over a proposal that would include temporary withdrawal restrictions when money funds are under stress, said two people familiar with the matter, who asked not to be identified because the discussions were private.

BlackRock published an outline of its plan in a Sept. 27 paper, proposing that money funds, under some circumstances, impose “stand-by liquidity fees” on investors who withdraw money. The fee would be triggered only when a fund’s liquidity failed to meet existing minimums, or when a fund’s mark-to- market share value dipped below a certain level.

The BlackRock proposal is titled Money Market Funds: A Path Forward:

Circuit Breakers. Build in circuit breakers to all MMFs to limit runs in the time of a crisis. We believe these should take the form of stand-by liquidity fees (SLFs). We recommend these have the following features:
a) Objective triggers. The SLFs would not be active during times of normal market functioning. They would be triggered when a fund has fallen to half the requirement for NAV rounding or to one quarter the required liquidity levels based on the standards set above. In the case of US Rule 2a-7 MMFs, this means that the SLFs would be triggered when the fund fell below a mark-to-market NAV of 99.75 or when its 1-week liquidity fell below 7.5%.

b) The amount of the fee is a simple calculation. We recommend the amount of the fee charged when the SLFs are in force to be twice (2x) the difference between the mark-to-market NAV and $1. As an example, if the mark-to-market NAV fell to 99.70%, the fee would be 60 basis points (30 bps x 2). The rationale for this fee is to create a positive cycle as clients redeem in place of a negative cycle. As each client redeems and leaves behind twice the deficit, the NAV for the remaining shareholders is strengthened. In a run today, redeeming shareholders can weaken the fund as they leave and the NAV begins to spiral downward further accelerating the run. With SLFs in place, the NAV would improve as people who leave are charged a fee, which would create a natural brake on a run, and investors remaining in the fund would be protected from the behavior of those who redeemed.

c) Let clients choose. The SLF model gives clients a choice in a crisis, based on straight-forward economic incentives. Clients that truly need liquidity (e.g., to meet the payment of salaries and pensions) can get it, but they must pay a price for it. If a client can wait for their liquidity, they can attempt to preserve the value of their shares by staying put and redeeming once the SLFs are lifted. This is a model similar to the one BlackRock employed in working with the State of Florida on a government cash pool that was experiencing mass redemptions in 2007.

d) Closure to redemptions. Fund boards should have the right to close funds to redemptions in extreme circumstances, as they currently do in the US. Fund Boards should also be given the discretion to end the SLFs after an appropriate recovery of the fund, and after a determination that it is in the shareholders’ interests to do so.

e) Payment to clients that stayed. Any amount of liquidity fees gathered by the fund would be retained in the fund to restore the NAV to $1 (or par). If there were an excess liquidity fee in the fund, it would be paid to all shareholders of record on the last day in which the SLFs were in force. This way, those shareholders that stayed with the fund in the difficult time, as well as those who invested or reinvested and thereby helped “boost” the fund, would receive a benefit for the risk they took.

I think this is nonsensical. The single-issuer limit is 5% and it will be remembered that lightning can strike at any time. Let’s look at Primary Reserve Fund’s buck-break:

In a new sign of market turbulence, managers of a multibillion-dollar money market fund said on Tuesday that customers might lose money in the fund, a type of investment that has long been considered as safe and risk-free as a bank savings account, The New York Times’s Diana B. Henriques writes.

The announcement was made by the Primary Fund, which had almost $65 billion in assets at the end of May. It is part of the Reserve Fund, a group whose founder helped invent the money market fund more than 30 years ago.

The fund said that because the value of some investments had fallen, customers now have only 97 cents for each dollar they had invested.

So if I’m to be allowed to access my ninety-seven cents, you’re going to charge me a fee of three cents? That doesn’t sound like much of a MMF to me! Or the alternative is to leave the funds locked in for a whole freakin’ year while it earns enough interest to crawl back to par.

The other phrase of interest in the proposal is Fund Boards should also be given the discretion to end the SLFs after an appropriate recovery of the fund, and after a determination that it is in the shareholders’ interests to do so. Huh? I thought there were supposed to be “Objective triggers“! Objective triggers but subjective reversals? It would be most interesting to nail down just what they have in mind.

So, this is just another attempt by the MMF industry to put lipstick on the pig. Sorry, folks, but when you lend money, there’s always a chance you won’t get it back, no matter how high the credit rating, no matter how short term the loan. All the regulatory ticky-boxes in the world won’t change that simple fact. The risk needs to be covered by capital.

I’ve said it before, I’ll say it again: MMFs are banks. They need to be regulated like banks.

The slowness in finding tenancies for the World Financial Centre played a major role in the DBRS trend change for BPO. The company is taking decisive action:

Lower Manhattan’s World Financial Center, the 8 million-square-foot complex near the Hudson River, will soon have a new identity as owner Brookfield Office Properties Inc. (BPO) seeks to attract a shifting mix of tenants.

By late next year, the property will be known as Brookfield Place, said Mitchell Rudin, the company’s president of U.S. commercial operations. The landlord has already started the process, with its website referring to the new name under the current one.

The change reflects the smaller role finance plays in lower Manhattan as Brookfield faces vacancies at the site. Bank of America Corp. is leaving almost 3 million square feet (279,000 square meters) inherited with its 2009 takeover of Merrill Lynch & Co., which was based at the property. Its leases expire next year in what Green Street Advisors Inc.’s Michael Knott calls a “perfect real estate storm” because it coincides with two new towers at the nearby World Trade Center becoming available and a broader slowdown in leasing by financial firms.

Jonathan Weil makes an interesting point about the BofA / Countrywide fraud lawsuit:

Prosecutors are suing under a statute called the False Claims Act, which imposes liability on those who defraud the federal government. Curiously, the suit is seeking damages for acts that Countrywide Financial Corp. committed before Fannie and Freddie were seized by the government — back when U.S. officials were adamant that Fannie and Freddie didn’t have any implicit government guarantee. (Bank of America bought Countrywide in July 2008.)

During testimony before Congress in 2003, then-Treasury Secretary John Snow explicitly denied there was any implicit government guarantee of Fannie or Freddie: “We do not believe there is any government guarantee, and we go out of our way to say there is not a government guarantee,” he said. “We need to be on guard against this perception. It is a perception. It is not, in our view, a reality.”

Here’s a quote from U.S. Representative Barney Frank, one of the companies’ most vocal supporters in Congress, in 2003: “There is no guarantee. There’s no explicit guarantee. There’s no implicit guarantee. There’s no wink-and-nod guarantee. Invest and you’re on your own.”

Of course, now we’re being asked to believe that Countrywide was defrauding the government in 2007 and early 2008 when it was ripping off Fannie and Freddie — in spite of the government’s vehement insistence that Fannie and Freddie weren’t backed by the government in any way.

Laws, schmaws! There’s headlines to be made and bank-bashing to be done!

There has finally been a grain of common sense written about MPs pensions:

Speaking in the Senate Wednesday, Alberta Senator Grant Mitchell said Western industrialized democracies have made huge efforts to pay their politicians well enough to discourage corruption.

“All of our MPs are above reproach, but the pressures of not making enough money can become an issue and that is why [take-home salary] needs to be maintained at a certain level,” Mitchell said.”We could talk about brown paper bags with cash in it, because there is pressure all the time. That is why pay needs to be absolutely adequate.”

Although he acknowledged he was taking an unpopular position and one for which he could be left “politically vulnerable,” Mitchell went on to make several points against Conservative plans to increase pension contributions for MPs and senators — legislation that was fast-tracked because of Liberal support in the House of Commons.

Mitchell addressed the issue of contribution rates and the decline of take-home pay, but I consider the issue of pension receipts to be more important. If we have an unpopular government six months away from an election that they’re going to lose – and lose badly – do we really want the cabinet to be wondering how they’re going to make ends meet after defeat? There doesn’t even have to be an explicit quid pro quo – just a little … friendliness.

For instance, how about this Conservative thug:

Conservative MP Dean Del Mastro suggests that the government should look at ending anonymous comments on news articles as a way to combat online bullying.

“One of the best ways to end on-line and electronic bullying, libel and slander would be to force people posting hurtful comments to properly identify themselves,” Del Mastro wrote Thursday on Facebook. “This morning I read comments on a news story posted on an electronic news publication, many of them could only be described as hateful rants. The common denominator is that none of them identified the person that wrote them; this strikes me as something that parliament should address.”

I have a degree of contempt for those who post anonymously on the Internet, but no rational person will join Del Mastro in his efforts to make it an offense under the Criminal Code and use all the enormous powers of the state to punish those who do so. At least, no rational Western person. It’s quite popular in China.

Libels? Slanders? With a court order you can already track down mean people who say mean things. Even Constable Adam Josephs of the Toronto Police knows that, as discussed on October 18, 2010.

It was a moderately good day for the Canadian preferred share market, with PerpetualPremiums winning 12bp, FixedResets up 4bp and DeemedRetractibles gaining 1bp. Volatility was nothing special. Volume was well above average.

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 0.00 % 0.00 % 0 0.00 0 0.0800 % 2,468.7
FixedFloater 4.18 % 3.51 % 36,731 18.33 1 -0.6550 % 3,853.3
Floater 2.80 % 2.99 % 59,370 19.74 4 0.0800 % 2,665.6
OpRet 4.63 % 1.99 % 40,662 0.66 4 -0.0477 % 2,565.1
SplitShare 5.40 % 4.86 % 69,563 4.48 3 -0.0787 % 2,841.7
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0477 % 2,345.5
Perpetual-Premium 5.28 % 1.53 % 83,540 0.33 27 0.1221 % 2,309.9
Perpetual-Discount 5.01 % 4.92 % 43,921 15.49 4 0.1334 % 2,582.2
FixedReset 4.97 % 3.02 % 205,381 3.96 73 0.0402 % 2,446.1
Deemed-Retractible 4.94 % 3.64 % 132,974 1.91 47 0.0142 % 2,381.9
Performance Highlights
Issue Index Change Notes
TD.PR.Y 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 : 3.14 %
GWO.PR.R Deemed-Retractible 1.09 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 4.87 %
Volume Highlights
Issue Index Shares
POW.PR.D Perpetual-Premium 274,804 Desjardins crossed blocks of 249,500 and 15,500, both at 25.50.
Maturity Type : Call
Maturity Date : 2014-10-31
Maturity Price : 25.00
Evaluated at bid price : 25.50
Bid-YTW : 4.06 %
TD.PR.S FixedReset 146,080 Nesbitt crossed 132,600 at 25.05.
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.07
Bid-YTW : 3.09 %
CM.PR.E Perpetual-Premium 93,603 TD crossed 83,000 at 25.60.
Maturity Type : Call
Maturity Date : 2012-11-30
Maturity Price : 25.00
Evaluated at bid price : 25.53
Bid-YTW : -16.25 %
BNS.PR.Q FixedReset 85,806 Nesbitt bought 82,400 from Scotia at 25.25.
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.25
Bid-YTW : 3.15 %
TD.PR.Y FixedReset 66,915 Scotia sold 20,500 to Nesbitt and 35,200 to RBC, both at 25.25.
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.25
Bid-YTW : 3.14 %
BMO.PR.O FixedReset 60,772 Scotia crossed 25,000 at 27.05.
Maturity Type : Call
Maturity Date : 2014-05-25
Maturity Price : 25.00
Evaluated at bid price : 27.05
Bid-YTW : 1.91 %
There were 40 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
BNA.PR.E SplitShare Quote: 25.16 – 25.50
Spot Rate : 0.3400
Average : 0.2119

Maturity Type : Hard Maturity
Maturity Date : 2017-12-10
Maturity Price : 25.00
Evaluated at bid price : 25.16
Bid-YTW : 4.88 %

MFC.PR.H FixedReset Quote: 25.92 – 26.24
Spot Rate : 0.3200
Average : 0.1966

Maturity Type : Call
Maturity Date : 2017-03-19
Maturity Price : 25.00
Evaluated at bid price : 25.92
Bid-YTW : 3.82 %

TRP.PR.C FixedReset Quote: 25.34 – 25.65
Spot Rate : 0.3100
Average : 0.2175

Maturity Type : Limit Maturity
Maturity Date : 2042-10-26
Maturity Price : 23.45
Evaluated at bid price : 25.34
Bid-YTW : 2.92 %

PWF.PR.M FixedReset Quote: 25.90 – 26.36
Spot Rate : 0.4600
Average : 0.3725

Maturity Type : Call
Maturity Date : 2014-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.90
Bid-YTW : 3.02 %

BAM.PR.Z FixedReset Quote: 26.22 – 26.46
Spot Rate : 0.2400
Average : 0.1600

Maturity Type : Call
Maturity Date : 2017-12-31
Maturity Price : 25.00
Evaluated at bid price : 26.22
Bid-YTW : 3.85 %

MFC.PR.A OpRet Quote: 25.58 – 25.80
Spot Rate : 0.2200
Average : 0.1427

Maturity Type : Soft Maturity
Maturity Date : 2015-12-18
Maturity Price : 25.00
Evaluated at bid price : 25.58
Bid-YTW : 3.48 %

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