January 28, 2013

Call the papers! A Chadian official was corrupted!

Griffiths Energy International Inc. to the wife of an African diplomat, a transaction that led the company to pay a $10.35-million fine in a bribery case this week.

According to people familiar with the case, the junior oil and gas company turned to the blue chip corporate law firms to help guide it in the late 2000s through a series of difficult negotiations with officials from Chad, which ranks as one of the world’s most corrupt countries. When a new slate of Griffiths executives uncovered the $2-million (U.S.) bribe in 2011, it alerted police, sparking an investigation that culminated this week in a settlement agreement and fine that a Calgary judge on Friday called “an embarrassment to all Canadians.”

For the life of me, I don’t understand why I should be embarrassed by other people’s actions, nor do I understand why it is against Canadian law to bribe foreigners. We should cooperate with their investigations, certainly, and extradite when necessary, but why is it against Canadian law? Which Canadians were harmed? How much tax is Chad paying to cover the cost of the investigation, trial and paperwork? Who made it my job to look out for Chad’s interests, as defined by me? Ah well … just another example of the white man’s burden, I suppose.

I missed this when it was new … OSFI likes the banks in capital markets:

Policymakers in Europe and the U.S. are getting set to prohibit banks from getting into risky capital markets activities, but such a step would not make sense in Canada, according a senior executive at the country’s top banking regulator.

Speaking to an industry conference in Toronto, Mark Zelmer, assistant superintendent of the Office of the Superintendent of Financial Institutions, said that for Canada to adopt such a strategy would “be akin to conducting surgery on the [banking system] in the hope of” finding a miraculous solution to the problem of excess risk.

Canada has no need to follow the U.S. approach because for decades banks in this country have benefitted from owning capital markets businesses. Ever since lenders were able to own investment dealers back in the 1980s the increased diversification of revenue “helped them weather several financial storms,” he said. “For example, profits from investment banking activities helped cushion bank profits a few years ago when commercial banking activities were experiencing rising loan loss provisions. By the same token, commercial bank profits over the years have helped some banks weather the occasional stumble in capital markets.”

Mr. Zelmer cautioned that the issue is not for OSFI alone to decide, but his comments make clear which way the regulator is leaning.

There’s another delay in Basel III implementation:

EU nations may seek to push the start date for mandatory disclosure of this so-called leverage ratio from Jan. 1, 2015, to Jan. 1, 2016, said the people, who couldn’t be named because the talks are private. The revised date was discussed by diplomats at a meeting today, they said.

The EU, like the U.S. missed the January deadline to start phasing in parts of Basel III. The Basel Committee on Banking Supervision, the international group that drew up the standards, agreed earlier this month to delay and water down another key part of the package designed to ensure banks have enough easy- to-sell assets in a crisis.

The possible delay to the leverage ratio was triggered by the EU’s failure to meet the January deadline. Officials will hold further talks on the timing for the leverage ratio and other parts of the Basel III rules in the coming weeks, two of the people said.

There’s some interesting data from the equity markets:

The lockstep moves in global stocks that dominated equity markets for the past six years are breaking down at the fastest rate on record, a sign investor confidence is finally returning from the financial crisis.

A measure of how much the 2,073 companies in the FTSE All- World Developed Index (FTAD01) swing in unison has dropped 31 percent since June, the biggest retreat since at least 1993, according to data compiled by Societe Generale SA and Bloomberg. The indicator ended last month at the lowest level since 2007.

Equities are responding to earnings and merger speculation again after being pushed up and down by events from the credit freeze to Europe’s debt crisis to the stalemate in U.S. budget negotiations. Diminishing correlation was a buy signal in 1998 and 2003 (SPX) and has coincided this year with the biggest January rally for the Standard & Poor’s 500 Index since 1997, according to data compiled by Bloomberg.

The reading, a measurement of how much returns in individual stocks are attributable to swings in the broader market, stood at 32.4 at the end of last month, down from 47.2 in June, according to Societe Generale in Paris. The drop was the biggest since the data started in 1993, indicating stocks are moving with greater independence.

The index reached a high of 49.6 in December 2011. A reading of 100 indicates shares are trading in lockstep.

The divergence in returns is prompting Morgan Stanley to send more money to managers who buy stocks based on profit growth and takeover odds, [Morgan Stanley Alternative Investment Partners co-manager Jose] Gonzalez-Heres said in a telephone interview on Jan. 16. Bears say the improvement will be temporary as U.S. lawmakers confront March deadlines on spending plans and elections are held in Italy and Germany.

Speaking of market timing I wrote a passage in an outgoing eMail recently dealing with Malachite Aggressive Preferred Fund and was able to recycle it into another eMail almost immediately afterwards. Must be a trend:

While I agree that government rates are currently unsustainably low, that is the easy part of the investment question! While it is easy to say that such-and-such a situation is unsustainable, it is very risky to predict when the situation will resolve or the nature of its resolution and as a matter of investment philosophy I eschew market timing (see LINK and LINK). Investors are generally much better off by forming an asset allocation plan based on the long term characteristics of each asset class and then attempting to perform as well as possible while retaining those characteristics.

Thus, the fund will not take a view on overall market movements and I do not recommend that any clients take a view.

The US is continuing its campaign to make securities trading more of a kindergarten level kiddie-game:

A former Jefferies & Co. managing director was arrested and accused of defrauding customers of more than $2 million on trades of residential mortgage-backed securities, prosecutors said.

Jesse C. Litvak, 38, of New York, was arrested today at his home and charged with 16 counts including securities fraud, fraud connected with the Troubled Asset Relief Program and making false statements to the federal government, Connecticut U.S. Attorney David Fein said in a statement.

“Every Jefferies counterparty in each transaction in this indictment got the exact bond bargained for at a price each wanted to pay,” Patrick J. Smith, an attorney with DLA Piper in New York who is representing Litvak, said in a statement.

“These were principal transactions between sophisticated market participants. There were no ‘commissions’ on any of these trades. All of the profits that Jefferies earned on each trade were well within industry norms for the mortgage-backed bonds in this case.”

Litvak is accused of misrepresenting the asking price of sellers of residential mortgage backed securities to buyers or vice versa, keeping the difference for Jefferies, according to Fein’s statement.

Litvak is also accused of misrepresenting to buyers in other transactions that the bonds in Jefferies’s inventory were being offered for sale by a fake third-party seller, according to Fein’s statement.

According to the SEC press release:

According to the SEC’s complaint filed in federal court in Connecticut, Jesse Litvak arranged trades for customers as part of his job as a managing director on the MBS desk at Jefferies. Litvak would buy a MBS from one customer and sell it to another customer, but on many occasions he lied about the price at which his firm had bought the MBS so he could re-sell it to the other customer at a higher price and keep more money for the firm. On other occasions, Litvak misled purchasers by creating a fictional seller to purport that he was arranging a MBS trade between customers when in reality he was just selling MBS out of his firm’s inventory at a higher price. Because MBS are generally illiquid and difficult to price, it is particularly important for brokers to provide honest and accurate information.

“Brokers must always tell their customers the truth, particularly in complex securities transactions in which it is difficult for investors to determine market prices on their own,” said George Canellos, Deputy Director of the SEC’s Division of Enforcement. “Litvak repeatedly lied to his customers and invented facts to bring additional profits into his firm and ultimately his own pocket at their expense.”

The SEC complaint states:

Jefferies’ customers owed fiduciary duties to their clients. Jefferies’ customers included funds which were established by the United States government under a program designed to help strengthen the markets for MBS during the financial crisis. Had Jefferies’ customers been aware that they could have paid less for the MBS they purchased, they would have made an effort to do so.

the U.S. Treasury selected nine investment advisers to serve as PPIP managers, including several that became customers of Jefferies’ (AllianceBernstein, LP (“AllianceBernstein”); Angelo, Gordon & Co., LP (“Angelo Gordon”); Blackrock, Inc. (“Blackrock”); Invesco, Ltd. (“Invesco”); and Wellington Management, LLP (“Wellington”)). Other customers were hedge funds or non-PPIP funds.

It’s a pity the SEC doesn’t spell out which of the fiduciaries were involved in the case, or how much money they lost for their clients as a result of their incompetent price discovery. But, of course, most of them were working for the US Treasury. Returns, schmeturns! They got paid no matter what and will get another turn at the trough no matter what.

It was another mixed day for the Canadian preferred share market, with PerpetualPremiums off 1bp, FixedResets up 12bp and DeemedRetractbles gaining 7bp. Volatility was minimal. Volume remained at above-average levels.

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 -0.0780 % 2,546.7
FixedFloater 4.25 % 3.57 % 27,103 18.22 1 0.0000 % 3,827.9
Floater 2.73 % 2.94 % 69,022 19.88 4 -0.0780 % 2,749.8
OpRet 4.63 % 1.55 % 52,124 0.38 4 0.1147 % 2,596.0
SplitShare 4.58 % 4.48 % 44,377 4.29 2 -0.0994 % 2,910.0
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.1147 % 2,373.8
Perpetual-Premium 5.25 % 0.01 % 81,630 0.70 30 -0.0064 % 2,348.3
Perpetual-Discount 4.88 % 4.92 % 136,458 15.59 4 -0.3764 % 2,632.1
FixedReset 4.91 % 2.90 % 239,999 3.39 78 0.1214 % 2,482.0
Deemed-Retractible 4.87 % 3.36 % 127,174 0.32 45 0.0656 % 2,429.9
Performance Highlights
Issue Index Change Notes
BAM.PR.R FixedReset 1.25 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-06-30
Maturity Price : 25.00
Evaluated at bid price : 26.66
Bid-YTW : 3.48 %
Volume Highlights
Issue Index Shares
RY.PR.R FixedReset 213,740 Nesbitt crossed blocks of 50,000 and 100,000 at 26.00 and sold 29,700 to Scotia at the same price. Scotia bought another 17,900 from anonymous at the same price.
Maturity Type : Call
Maturity Date : 2014-02-24
Maturity Price : 25.00
Evaluated at bid price : 25.99
Bid-YTW : 2.09 %
ENB.PR.T FixedReset 53,942 RBC crossed 30,000 at 25.50.
Maturity Type : Limit Maturity
Maturity Date : 2043-01-28
Maturity Price : 23.24
Evaluated at bid price : 25.45
Bid-YTW : 3.79 %
BNS.PR.Q FixedReset 39,600 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.11
Bid-YTW : 3.27 %
FTS.PR.H FixedReset 35,350 TD bought 23,400 from Scotia at 25.70.
Maturity Type : Limit Maturity
Maturity Date : 2043-01-28
Maturity Price : 23.76
Evaluated at bid price : 25.80
Bid-YTW : 2.82 %
CU.PR.C FixedReset 33,449 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-01
Maturity Price : 25.00
Evaluated at bid price : 26.15
Bid-YTW : 3.04 %
ENB.PR.B FixedReset 30,357 Scotia bought 15,900 from CIBC at 25.65.
Maturity Type : Call
Maturity Date : 2017-06-01
Maturity Price : 25.00
Evaluated at bid price : 25.65
Bid-YTW : 3.53 %
There were 40 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
RY.PR.G Deemed-Retractible Quote: 25.68 – 25.98
Spot Rate : 0.3000
Average : 0.1883

Maturity Type : Call
Maturity Date : 2016-05-24
Maturity Price : 25.00
Evaluated at bid price : 25.68
Bid-YTW : 3.54 %

TRI.PR.B Floater Quote: 23.10 – 24.00
Spot Rate : 0.9000
Average : 0.8107

Maturity Type : Limit Maturity
Maturity Date : 2043-01-28
Maturity Price : 22.82
Evaluated at bid price : 23.10
Bid-YTW : 2.25 %

GWO.PR.H Deemed-Retractible Quote: 25.20 – 25.47
Spot Rate : 0.2700
Average : 0.1991

Maturity Type : Call
Maturity Date : 2014-09-30
Maturity Price : 25.00
Evaluated at bid price : 25.20
Bid-YTW : 4.62 %

PWF.PR.M FixedReset Quote: 25.80 – 26.00
Spot Rate : 0.2000
Average : 0.1333

Maturity Type : Call
Maturity Date : 2014-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.80
Bid-YTW : 2.73 %

RY.PR.C Deemed-Retractible Quote: 25.80 – 25.97
Spot Rate : 0.1700
Average : 0.1147

Maturity Type : Call
Maturity Date : 2013-02-27
Maturity Price : 25.75
Evaluated at bid price : 25.80
Bid-YTW : -1.91 %

MFC.PR.G FixedReset Quote: 26.25 – 26.50
Spot Rate : 0.2500
Average : 0.1953

Maturity Type : Call
Maturity Date : 2016-12-19
Maturity Price : 25.00
Evaluated at bid price : 26.25
Bid-YTW : 3.17 %

One Response to “January 28, 2013”

  1. […] squared its rot for a good booHooHoo about the Litvak charges mentioned on January 28: Since for the most part, the buyside traders operated with other people’s money, they were […]

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