March 26, 2014

Some civil servant claims that we need more civil servants:

Accordingly, in January, OSFI announced that, consistent with its mandate and expertise, it will supervise the effectiveness of governance and risk controls surrounding banks’ CDOR submission processes. Subsequently, in its recent budget, the federal government announced its intention to include a regulation-making authority in the Bank Act covering bank submissions to financial benchmarks.

Furthermore, the banks on the CDOR panel should, fairly soon, release a submitters’ code of conduct that they have developed in consultation with IIROC and the Bank of Canada. In addition to providing a formal definition of CDOR and requirements for being a submitter, the code will specify minimum standards for submission methodology, internal oversight and records retention.

Work continues to strengthen other aspects of the governance of CDOR to meet the principles established by IOSCO. For instance, we have discussed with industry the need for it to establish more formal administrative arrangements for CDOR, and the industry has begun work to take this forward.

Yeah, right. This guy works for the Bank of Canada, which reports 5-year GICs at 1.63%, and 5-year mortgages at 4.99%, in addition to problems with the housing price/rent ratio.

But there’s no shortage of questionable statistics:

Economists have been scratching their heads for weeks as to how the Conservative government could claim on budget day that Canada’s job vacancy rate was on the rise when Statistics Canada said it was declining.

The answer, it appears, is that Finance Canada’s numbers were thrown off by data from a surprising place: questionable job postings on Kijiji, a popular classified site used by Canadians to buy and sell everything from rarely used exercise bikes to old electronics.

Officials with the Parliamentary Budget Office say Kijiji is so unreliable as a job site that it can single-handedly explain away the government’s claims. With the simple removal of that one site from the search, the steep rise Ottawa flagged becomes much closer to a flat line.

The Fed’s regulators have determined that Citigroup doesn’t employ enough ex-regulators:

Citigroup Inc.’s capital plan was among five that failed Federal Reserve stress tests, while Goldman Sachs Group Inc. and Bank of America Corp. passed only after reducing their requests for buybacks and dividends.

Citigroup, as well as U.S. units of Royal Bank of Scotland Group Plc, HSBC Holdings Plc and Banco Santander SA, failed because of qualitative concerns about their processes, the Fed said today in a statement. Zions Bancorporation was rejected as its capital fell below the minimum required. The central bank approved plans for 25 banks.

The central bank identified multiple deficiencies in Citigroup’s planning practices, including areas the Fed had flagged previously. The regulator expressed concern with the New York-based company’s ability to project losses in “material parts of its global operations” and to reflect all business exposures in its internal stress test.

“Taken in isolation, each of the deficiencies would not have been deemed critical enough to warrant an objection, but when viewed together, they raise sufficient concerns regarding the overall reliability of Citigroup’s capital planning process,” the Fed said.

Mike Corbat, the bank’s chief executive officer, said in a statement that Citigroup is “deeply disappointed” by the rejection and said the company will “work closely with the Fed to better understand their concerns so that we can bring our capital planning process in line with their expectations.” The timing of any resubmission hasn’t been decided, he said.

Osler has a chapter in their Capital Markets 2013 report titled Canada’s Technology Renaissance. It seems a successful entrepreneurs are mainly successful at sucking the public tit:

In addition, the Business Development Bank of Canada provides further funding to each successful accelerator graduate in the form a $150,000 convertible note.

The federal government has demonstrated its strong commitment to the sector by announcing (as part of the 2012 budget) that it would set aside $400 million for investment in Canadian venture capital funds. The Ontario government demonstrated a similar commitment by announcing in March 2013 that it would set aside $50 million for a new Ontario venture capital fund. In addition, the Ontario government continues to be an active direct investor through initiatives such as the Ontario Capital Growth Corporation (which matches investments made by qualified investors) and MaRS Innovation Accelerator Fund (which provides seed investments of up to $500,000 to promising Ontario-based start-ups).

The other point, in the chapter The Leading Role of Canadian Pension Funds at Home and Abroad is that returns look better when you mark to make-believe:

Pension funds have increased their direct investments in private equity, infrastructure and real estate as they continue to seek to align fund investment horizons with their long-term liability profile and reap the rewards of higher returns. Preliminary results from an ongoing survey by global consultant Mercer LLC reveal that the percentage of Canadian pension funds investing in alternative investments climbed to 38% from 25% over the past three years and that the average allocation to alternatives has increased to 18% from 15% in 2010.1 As their allocations to these areas have increased, Canadian pension funds have become highly visible in these markets. Smaller Canadian pension funds have also demonstrated an inclination towards alternative asset investing, guided by the expertise of Canadian pension consultants.

Yes, sir, if you want good investment advice, you really can rely on the expertise of Canadian pension consultants, all right! This isn’t going to turn out well.

Hedge funds are helping the US housing market renormalize. Of course, it helps when somebody else takes the first loss:

Louis Ragusa, who hasn’t paid his mortgage in two years, says he now has a chance to save his Blackwood, New Jersey, home from foreclosure after a hedge fund bought the loan.

American Homeowner Preservation, a Chicago-based investment firm, purchased the mortgage for less than half of what Ragusa owed. Chief Executive Officer Jorge Newbery called the father of three in August with an offer: Pay $5,000 and the company will drop the foreclosure case and erase the more than $100,000 of unpaid principal and penalties amassed.

The firms are making deep cuts to loan balances so borrowers can afford to pay again and the mortgages can be sold as more valuable “performing” notes. Another strategy is to offer thousands of dollars to those who agree to hand over keys without a fight. While borrowers seeking foreclosure alternatives from large banks have complained of lengthy processes and lost paperwork, Newbery says his company requires little or no documentation to approve a sale or loan workout.

Lenders are selling pools of soured mortgages as they face new regulations that make bad debt more expensive to hold. Banks sold $34.7 billion in nonperforming loans last year, up from $13.1 billion in 2012, according to Mission Capital Advisors, a New York-based real estate loan broker.

A delinquent mortgage in [judicial] New Jersey [where foreclosures need court approval] will cost about 60 percent of the property’s current value, compared with as much as 80 percent for a similar loan in California, a nonjudicial state, according to Derek Katz, managing director of Denver-based MountainView Capital Holdings, a residential whole-loan investor and sale adviser.

It is interesting to note that Enbridge has issued 50-year paper at 4.56%. This may be contrasted with their recent issue of ENB.PF.A, a FixedReset, 4.40%+266. I like the preferred better – and I didn’t like the preferred much!

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 14bp, FixedResets gaining 3bp and DeemedRetractibles off 2bp. Volatility was nothing special. Volume was slightly below average, but there were some nicely sized block trades.

PerpetualDiscounts now yield 5.47%, equivalent to 7.11% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.5%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 260bp, a significant tightening from the 275bp reported March 19 … although that figure is now suspect, given that the March 12 calculation resulted in an estimate of 265bp.

Geez, much more of this and I’ll have to go work for the Bank of Canada.

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 0.0143 % 2,425.7
FixedFloater 4.69 % 4.29 % 35,808 17.73 1 0.2475 % 3,617.4
Floater 3.00 % 3.11 % 51,095 19.45 4 0.0143 % 2,619.1
OpRet 4.65 % -1.20 % 92,662 0.23 3 0.0000 % 2,687.9
SplitShare 4.80 % 4.13 % 67,574 4.30 5 0.1829 % 3,084.4
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0000 % 2,457.9
Perpetual-Premium 5.63 % -4.97 % 94,848 0.09 11 0.1238 % 2,366.5
Perpetual-Discount 5.43 % 5.47 % 121,942 14.47 26 0.1363 % 2,450.5
FixedReset 4.69 % 3.59 % 221,909 4.38 79 0.0326 % 2,516.7
Deemed-Retractible 5.05 % 2.31 % 152,705 0.33 42 -0.0250 % 2,471.0
FloatingReset 2.62 % 2.59 % 196,343 7.05 5 0.0400 % 2,451.3
Performance Highlights
Issue Index Change Notes
MFC.PR.C Deemed-Retractible -1.37 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.55
Bid-YTW : 6.32 %
GWO.PR.N FixedReset 1.22 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.38
Bid-YTW : 4.37 %
FTS.PR.H FixedReset 1.59 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-03-26
Maturity Price : 21.43
Evaluated at bid price : 21.75
Bid-YTW : 3.73 %
Volume Highlights
Issue Index Shares
HSE.PR.A FixedReset 989,071 Nesbitt crossed two blocks of 50,000 each, both at 22.92. RBC crossed two blocks of 443,800 each, both at the same price. Nice tickets!
Maturity Type : Limit Maturity
Maturity Date : 2044-03-26
Maturity Price : 22.58
Evaluated at bid price : 22.90
Bid-YTW : 3.87 %
RY.PR.Z FixedReset 170,085 RBC bought 10,200 from Nesbitt at 25.50, crossed 10,000 at 25.53 and finally crossed 100,000 at 25.50.
Maturity Type : Call
Maturity Date : 2019-05-24
Maturity Price : 25.00
Evaluated at bid price : 25.51
Bid-YTW : 3.71 %
BMO.PR.J Deemed-Retractible 144,410 RBC crossed 139,000 at 25.75.
Maturity Type : Call
Maturity Date : 2014-04-25
Maturity Price : 25.50
Evaluated at bid price : 25.75
Bid-YTW : -3.21 %
PWF.PR.E Perpetual-Discount 132,350 Scotia crossed 131,000 at 24.92.
Maturity Type : Limit Maturity
Maturity Date : 2044-03-26
Maturity Price : 24.68
Evaluated at bid price : 25.00
Bid-YTW : 5.58 %
BMO.PR.P FixedReset 119,677 RBC crossed blocks of 47,900 shares, 25,000 and 19,900, all at 26.06. TD crossed 20,000 at the same price.
Maturity Type : Call
Maturity Date : 2015-02-25
Maturity Price : 25.00
Evaluated at bid price : 26.02
Bid-YTW : 1.42 %
NA.PR.Q FixedReset 104,200 TD crossed 50,000 at 25.90 and 28,700 at 25.95; they also bought 17,900 from RBC at 25.90.
Maturity Type : Call
Maturity Date : 2017-11-15
Maturity Price : 25.00
Evaluated at bid price : 25.89
Bid-YTW : 2.90 %
There were 28 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
MFC.PR.C Deemed-Retractible Quote: 21.55 – 21.90
Spot Rate : 0.3500
Average : 0.2204

Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.55
Bid-YTW : 6.32 %

BAM.PR.X FixedReset Quote: 21.17 – 21.43
Spot Rate : 0.2600
Average : 0.1646

Maturity Type : Limit Maturity
Maturity Date : 2044-03-26
Maturity Price : 21.17
Evaluated at bid price : 21.17
Bid-YTW : 4.41 %

ELF.PR.H Perpetual-Discount Quote: 24.41 – 24.79
Spot Rate : 0.3800
Average : 0.3094

Maturity Type : Limit Maturity
Maturity Date : 2044-03-26
Maturity Price : 24.01
Evaluated at bid price : 24.41
Bid-YTW : 5.73 %

CU.PR.C FixedReset Quote: 25.40 – 25.59
Spot Rate : 0.1900
Average : 0.1230

Maturity Type : Call
Maturity Date : 2017-06-01
Maturity Price : 25.00
Evaluated at bid price : 25.40
Bid-YTW : 3.57 %

FTS.PR.E OpRet Quote: 25.90 – 26.10
Spot Rate : 0.2000
Average : 0.1412

Maturity Type : Call
Maturity Date : 2014-06-01
Maturity Price : 25.50
Evaluated at bid price : 25.90
Bid-YTW : -1.92 %

BAM.PR.T FixedReset Quote: 24.00 – 24.20
Spot Rate : 0.2000
Average : 0.1487

Maturity Type : Limit Maturity
Maturity Date : 2044-03-26
Maturity Price : 22.97
Evaluated at bid price : 24.00
Bid-YTW : 4.23 %

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