The regulators’ crack-down on European banks is having the intended effect:
Ignoring the rules has never been so pricey for European lenders, spurring them to hire more people to ferret out wrongdoing and offer salaries more in line with the bankers they police.
“It’s actually a very hot market right now,” said Mike Roemer, who became head of compliance at London-based Barclays Plc (BARC) in January. Today the role is seen “as an integral part of how companies manage the overall risk of the organization,” he said.
After the U.S. extracted almost $12 billion in fines in settlements with France’s BNP Paribas SA (BNP) and Zurich-based Credit Suisse Group AG (CSGN) since May, European firms say they’re overhauling culture and boosting pay for compliance staff faster than for revenue-earning bankers.
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The average annual salary for a compliance employee in London rose 12.9 percent to 80,538 pounds ($138,000) in 2013, according to a survey by London-based recruitment firm Astbury Marsden & Partners Ltd. That compares with a 6.1 percent increase to 90,669 pounds for a revenue-generating banker.
No real surprises in the BoC rate announcement:
Total CPI inflation has moved up to around the 2 per cent target in recent months, sooner than expected. Core inflation has also increased but remains below 2 per cent. Recent higher inflation is attributable to the temporary effects of higher energy prices, exchange rate pass-through and other sector-specific shocks, rather than to any change in domestic economic fundamentals.
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Given the downgrade to the global outlook, economic activity in Canada is now projected to be a little weaker than previously forecast.
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For the inflation target to be achieved on a sustained basis in 2016, the economy must reach and remain at full capacity. Closing the output gap over the time frame described above is reliant on continued stimulative monetary policy and hinges critically on stronger exports and business investment. Meanwhile, the risks associated with household imbalances, while evolving in a constructive way, are still elevated. Weighing these considerations within the Bank’s risk-management framework, the monetary policy stance remains appropriate and the target for the overnight rate remains at 1 per cent. The Bank is neutral with respect to the timing and direction of the next change to the policy rate, which will depend on how new information influences the outlook and assessment of risks.
Today’s PrefBlog Wingnut of the Day Award goes to the authors of a new book:
In their new book, House of Debt, Atif Mian and Amir Sufi argue that out-of-control housing prices tend to inflict long-lasting pain on a country’s economy, but much of that distress can be avoided. The key? Forcing banks and other lenders to share in the ups-and-downs of the real estate cycle by requiring them to bear part of the cost if a housing boom implodes.
The authors, who teach at Princeton and the University of Chicago, respectively, are mostly concerned with the U.S. housing debacle, but their work deserves attention in any country that suspects it, too, may be suffering from real estate dementia.
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The two professors propose an idea with far more teeth. They suggest rewriting mortgage contracts so that a homeowner’s payments and principal shrink if an index of local home prices declines. In effect, their system would shove part of the losses onto the shoulders of the mortgage holder. (Yes, in Canada that would be mostly you, Big Six banks.) In return, the lender would get a 5-per-cent slice of any capital gains on the house when it is sold or refinanced.
Wondderful. So my mortgage rate will go up if the bank figures the market will go down, and vice versa. Classic negative convexity, just for starters. I continue to advocate a gradual withdrawal of the government from mortgage insurance and countercyclical capital requirements when the proportion of mortgage assets to financial system assets deviates significantly from historical norms.
There’s some cheerful news for those in the investment management business:
Net flows into U.S. investment accounts were just 1 percent last year. That could create problems when, inevitably, stocks cool off. And if a bear market comes along, managers of funds may face a true reckoning.
The hardest hit will likely be traditional active money managers. They’re being underpriced by cheap passive strategies that hold stocks and bonds based on indexes in mutual funds or exchange-traded funds. Managers of mutual funds are also getting squeezed by a variety of new, more sophisticated strategies, which BCG calls “solutions.” These are options like target-date funds, income funds and global asset allocation funds that operate pretty much on autopilot.
The result is that an elite group of big asset managers, who provide such alternatives, are winning the lion’s share of new dollars. In the U.S., Vanguard Group, famous for its cheap index funds and ETFs, and BlackRock, the world’s largest money manager, together get two of every five new dollars that get invested in the U.S. BCG says the top 10 asset managers make up almost three-quarters of new investment flows.
Short selling is a dangerous game:
A Wall Street trader said Cynk Technology Corp.’s (CYNK) 36,000 percent stock surge cost him his job, and he blames a short squeeze and regulators who didn’t halt the shares before the company’s value shot past $6 billion.
Tom Laresca, a market-maker at Buckman Buckman & Reid Inc., said he was among traders who thought they spotted a scam as the shares jumped to $2.25 last month from pennies. He sold it short last week around $6 — which means selling stock you don’t own with a plan to buy it cheaper soon, pocketing the difference. Laresca figured the Securities and Exchange Commission would suspend trading, sending the price toward zero. Cynk has said it’s a social-network service with no revenue and one employee.
“The stock looked worthless, if there’s even a company behind it,” Laresca said. “My 10-year-old knew it was a scam. It was a complete joke.”
Instead of falling, the price more than doubled the next day, July 9, starting the squeeze. Market-makers who had sold the shares short got nervous and scrambled to buy them to close their positions, driving the price even higher, Laresca said. The SEC stopped trading two days later, citing concerns about the accuracy of information in the marketplace and “potentially manipulative transactions.” That was too late, Laresca said.
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Only 500,000 of those shares were authorized to trade publicly, according to Cynk’s transfer agent, Pacific Stock Transfer. About $12 million of stock changed hands during the past month, according to data compiled by Bloomberg. The low volume meant that market-makers couldn’t find shares to cover their short positions, Laresca said.
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Kevin Kelly, chief investment officer at Recon Capital Partners LLC, which manages about $150 million and issues exchange-traded funds, said Laresca took a risk by shorting Cynk even if he thought it was sketchy.“He should know that markets can stay irrational longer than you can stay solvent,” Kelly said. “He’s a professional.”
The video interview makes one thing clear: he’s got a great accent!
It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 14bp, FixedResets off 11bp and DeemedRetractibles gaining 4bp. Volatility was nothing special, but comprised entirely of FixedReset losers. Volume was 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 | 3.16 % | 3.15 % | 21,887 | 19.34 | 1 | 0.0000 % | 2,516.0 |
| FixedFloater | 4.17 % | 3.39 % | 29,402 | 18.66 | 1 | 0.0000 % | 4,163.9 |
| Floater | 2.84 % | 2.93 % | 45,714 | 19.92 | 4 | 0.1897 % | 2,788.1 |
| OpRet | 4.01 % | -5.66 % | 79,751 | 0.08 | 1 | -0.3124 % | 2,723.2 |
| SplitShare | 4.26 % | 3.97 % | 46,694 | 4.03 | 6 | -0.0067 % | 3,112.4 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.3124 % | 2,490.1 |
| Perpetual-Premium | 5.52 % | -3.89 % | 78,949 | 0.09 | 17 | 0.0462 % | 2,429.7 |
| Perpetual-Discount | 5.23 % | 5.07 % | 109,540 | 15.21 | 20 | 0.1364 % | 2,583.2 |
| FixedReset | 4.38 % | 3.59 % | 197,727 | 4.75 | 76 | -0.1062 % | 2,563.4 |
| Deemed-Retractible | 4.97 % | 0.12 % | 124,614 | 0.09 | 43 | 0.0407 % | 2,553.0 |
| FloatingReset | 2.66 % | -0.95 % | 96,187 | 0.09 | 6 | 0.0917 % | 2,528.9 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| SLF.PR.I | FixedReset | -1.32 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2016-12-31 Maturity Price : 25.00 Evaluated at bid price : 26.20 Bid-YTW : 2.32 % |
| MFC.PR.F | FixedReset | -1.19 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.29 Bid-YTW : 4.04 % |
| BAM.PR.X | FixedReset | -1.12 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-07-16 Maturity Price : 21.76 Evaluated at bid price : 22.01 Bid-YTW : 4.01 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| CM.PR.M | FixedReset | 100,633 | Called for redemption July 31. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-08-30 Maturity Price : 25.00 Evaluated at bid price : 24.98 Bid-YTW : 5.18 % |
| ENB.PR.F | FixedReset | 65,318 | RBC crossed 55,000 at 24.70. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-07-16 Maturity Price : 23.13 Evaluated at bid price : 24.63 Bid-YTW : 4.04 % |
| BMO.PR.S | FixedReset | 61,067 | TD crossed 35,000 at 25.72. YTW SCENARIO Maturity Type : Call Maturity Date : 2019-05-25 Maturity Price : 25.00 Evaluated at bid price : 25.72 Bid-YTW : 3.57 % |
| ENB.PR.Y | FixedReset | 55,882 | Desjardins crossed blocks of 17,500 and 32,500, both at 24.27. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-07-16 Maturity Price : 22.89 Evaluated at bid price : 24.28 Bid-YTW : 4.00 % |
| GWO.PR.S | Deemed-Retractible | 48,590 | Scotia crossed 40,000 at 25.65. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.56 Bid-YTW : 5.10 % |
| BNA.PR.F | SplitShare | 40,027 | Recent new issue. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2021-10-08 Maturity Price : 25.00 Evaluated at bid price : 24.20 Bid-YTW : 5.07 % |
| There were 26 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| BAM.PR.R | FixedReset | Quote: 25.56 – 25.78 Spot Rate : 0.2200 Average : 0.1418 YTW SCENARIO |
| RY.PR.L | FixedReset | Quote: 26.51 – 26.75 Spot Rate : 0.2400 Average : 0.1842 YTW SCENARIO |
| IFC.PR.A | FixedReset | Quote: 24.20 – 24.42 Spot Rate : 0.2200 Average : 0.1670 YTW SCENARIO |
| SLF.PR.I | FixedReset | Quote: 26.20 – 26.45 Spot Rate : 0.2500 Average : 0.2000 YTW SCENARIO |
| RY.PR.H | FixedReset | Quote: 25.35 – 25.55 Spot Rate : 0.2000 Average : 0.1510 YTW SCENARIO |
| GWO.PR.I | Deemed-Retractible | Quote: 22.81 – 23.00 Spot Rate : 0.1900 Average : 0.1430 YTW SCENARIO |