June 24, 2008

An interesting bit of NRSRO news today … the Treasury is jumping on the bandwagon, albeit with an afterthought that makes sense:

There must be changes in credit-rating companies’ practices, as well as in the way corporations use those ratings, he said

“The users of their services must rely less on, and appreciate more, the limitations of ratings products,” he said.

Bloomberg’s afraid to admit that the full speech has been posted by the Treasury department … I wish the media would quit these coy little games! He went on to say:

To aid in accomplishing this goal, a second private-sector group is outlining further steps that issuers, underwriters, and credit rating agencies can take to ensure the integrity and transparency of ratings, and to foster the appropriate use of ratings in risk assessment. The Asset Managers’ Group at SIFMA is leading this effort. They are exploring issues including: use and quality of ratings; business models; and credit rating agency independence. We expect their work to be completed by the end of July.

Once identified and assessed, risks must be better managed. During the past year, many financial institutions, money managers, and investors simply failed to appreciate the magnitude and nature of risks on their books. This inability to aggregate risk and transparently address public concerns led to even further uncertainty, volatility, and dislocations. We need improved risk management practices by investors and financial institutions.

Great. Better Living Through More Rules. More box-ticking to do and (inevitably) an increasingly vicious regulatory response towards asset managers unlucky enough to be invested in the cause celebre of the day.

Also on the credit ratings front, Naked Capitalism takes a dim view of the latest (rumoured) rules to decrease blind reliance on ratings in regulation of Money Market Funds.

Bloomberg has picked up on the story.

It’s all craziness. The Portfolio Manager is responsible for Everything. He may, or may not, wish to rely on Credit Rating Agency advice … although, as I have argued, it would be really nice if the Friendly Regulators did not ensure that Credit Rating Agencies have better access to information than us ordinary mortals.

The root of the trouble is this: performance doesn’t matter. Salesmen have taken over the industry and all they need is something to package and sell … whether the package is any good or not is something that really doesn’t enter into the question. If the regulators wish to avoid blow-ups and improve the quality of investment advice, then they must track performance. Anybody with a license to trade with discretion, or who is part of a team of advisors helping the PM to trade with discretion, should be reporting performance versus a benchmark. And that performance should become part of the regulatory record that is published by the regulators forever. No more burying of unsuccessful funds; no more coyness regarding long term results.

The Credit Rating Agencies, for instance, publish their track records going back 20 years. When was the last time any Assiduous Reader saw a stockbroker’s 20-year track record? Or saw a brokerage provide half the self-analysis that the NRSRO’s routinely produce?

When discussing the teleportation of US Municipal ratings to the global scale in Be Careful What You Wish For!, I suggested one flaw in the analysis was the assumption that all newly-indistinguishable credits would trade as if they were top-quality; Accrued Interest points out that there is hazard on the issuer side too:

The high ratings standards for municipals encourages some measure of fiscal conservatism. This is especially true for Aaa-rated credits, where loss of the rating would be politically embarrassing. Of course, municipalities are downgraded all the time, but clearly local politicians would rather maintain their rating than not. If the overwhelming majority of general obligation issuers are going to be rated Aaa anyway, that incentive is greatly reduced. In other words, a state like Georgia (rated Aaa) is currently incented to maintain its austerity. But if they could slide all the way down to California’s level (currently A1) and still be rated Aaa, they’ll probably do it.

But the rating hysteria is regulator/politician driven – neither group is notable for thinking things through.

The recently issued L.PR.A traded 24,250 shares today in a range of 23.00-24.40, closing at 24.00-15, 2×5. Nice range, eh? It does not reflect well on either the market maker or the underwriters. Those who sold today at 23.00 should be writing letters of complaint to the TSX regarding the day’s thoroughly appalling market-making.

Let’s see if these overpaid jokers can get it right tomorrow, when, I suspect, the excitement will be regarding BAM Flambé.

Another good day today, although not exceptional. Very good crossing volume in some of the near-term Operating Retractibles.

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 4.21% 4.23% 51,881 16.95 1 +0.1180% 1,115.5
Fixed-Floater 4.80% 4.54% 63,571 16.17 7 +0.1884% 1,044.3
Floater 4.02% 4.02% 68,866 17.38 2 -0.2407% 952.9
Op. Retract 4.86% 3.20% 86,356 2.54 15 -0.1476% 1,053.6
Split-Share 5.34% 5.83% 67,430 4.13 15 -0.5931% 1,043.4
Interest Bearing 6.11% 3.59% 47,111 2.00 3 -0.2000% 1,121.1
Perpetual-Premium 5.91% 4.59% 349,437 9.54 13 +0.2151% 1,015.3
Perpetual-Discount 5.94% 6.01% 221,570 13.85 59 +0.2223% 884.6
Major Price Changes
Issue Index Change Notes
BAM.PR.J OpRet -2.8398% Now with a pre-tax bid-YTW of 6.00% based on a bid of 23.95 and a softMaturity 2018-3-30 at 25.00.
WFS.PR.A SplitShare -1.5625% Downgraded yesterday … but still Pfd-2(low)! Asset coverage of just under 1.7:1 as of June 19, according to Mulvihill. Now with a pre-tax bid-YTW of 7.34% based on a bid of 9.45 and a hardMaturity 2011-6-30 at 10.00.
BNA.PR.B SplitShare -1.2833% Asset coverage of just under 3.6:1 as of May 31, according to the company. Now with a pre-tax bid-YTW of 8.64% based on a bid of 20.00 and a hardMaturity 2016-3-25 at 25.00.
SBN.PR.A SplitShare -1.0891% Asset coverage of 2.2+:1 as of June 19, according to Mulvihill. Now with a pre-tax bid-YTW of 5.31% based on a bid of 9.99 and a hardMaturity 2014-12-1 at 10.00.
BCE.PR.Z Fixfloat +1.0381%  
BMO.PR.H PerpetualDiscount +1.0989% Now with a pre-tax bid-YTW of 5.79% based on a bid of 23.00 and a limitMaturity.
POW.PR.A PerpetualDiscount +1.0989% Now with a pre-tax bid-YTW of 6.09% based on a bid of 23.00 and a limitMaturity.
PWF.PR.E PerpetualDiscount +1.1688% Now with a pre-tax bid-YTW of 5.94% based on a bid of 23.37 and a limitMaturity.
TD.PR.Q PerpetualDiscount +1.1837% Now with a pre-tax bid-YTW of 5.74% based on a bid of 24.79 and a limitMaturity.
BNS.PR.N PerpetualDiscount +1.3158% Now with a pre-tax bid-YTW of 5.78% based on a bid of 23.10 and a limitMaturity.
SLF.PR.C PerpetualDiscount +2.4665% Now with a pre-tax bid-YTW of 5.86% based on a bid of 19.11 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
BMO.PR.I OpRet 286,200 CIBC crossed 275,000 at 25.18, then another 10,200 at the same price. Now with a pre-tax bid-YTW of 1.06% based on a bid of 25.17 and a call 2008-7-24 at 25.00.
ACO.PR.A PerpetualDiscount 217,707 CIBC crossed 217,700 at 26.75. Now with a pre-tax bid-YTW of 2.10% based on a bid of 26.55 and a call 2008-12-31 at 26.00.
GWO.PR.E OpRet 172,595 Now with a pre-tax bid-YTW of 3.80% based on a bid of 25.60 and a call 2011-4-30 at 25.00.
CM.PR.R OpRet 144,950 Nesbitt crossed every single share in three tranches, all at 26.15. Now with a pre-tax bid-YTW of 2.11% based on a bid of 26.00 and a call 2008-7-24 at 25.75.
TD.PR.Q PerpetualDiscount 29,785 Nesbitt crossed 25,000 at 24.80. Now with a pre-tax bid-YTW of 5.74% based on a bid of 24.79 and a limitMaturity.

There were thirty-three other index-included $25-pv-equivalent issues trading over 10,000 shares today.

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