Jim Hamilton of Econbrowser points out that increased regulation of bankers’ pay mean increased risk of regulatory capture. While supporting the principle, he recommends:
Openness and transparency. Details of all regulations should always be extremely transparent and public, with high-profile communication of any proposed changes. I was unable to locate a public release of the specifics of the Fed’s proposal, but gather that the WSJ story was based on off-the-record statements from “people familiar with the matter”. I think one of the best disinfectants for preventing regulatory capture is to keep as bright a light as possible shining on all details of the regulatory process.
Simplicity and uniformity. The goal here is to be very clear about the basic principles we’re trying to implement and make sure they’re applied broadly, fairly, and consistently. Although the Fed is used to thinking in terms of preserving its discretion, it’s important that these regulations be implemented in a transparently uniform way.
The first, at least, of these principles is anathema to Canada’s OSFI.
Scott Sumner of Bentley University writes a provocative column on VoxEU, Misdiagnosing the crisis: The real problem was not real, it was nominal arguing that monetary policy was too tight in late 2008, and that this is what caused the awful events of 4Q08:
Woodford (2003) emphasised how expectations of future monetary policy and aggregate demand impact current demand. An explicit price level or nominal GDP trajectory going several years forward would have helped stabilise expectations in late 2008. Because the Fed failed to set an explicit target path (level targeting), expectations became very bearish in late 2008. Contrary to what many economists assumed, tight money was already sharply depressing the economy by August 2008. After the failure of Lehman most economists simply assumed that causation ran from financial crisis to falling demand. This reversed the primary direction of causation – as in the Great Depression, economic weakness worsened bank balance sheets and intensified the financial crisis in late 2008.
A recent Vox column by Carmassi, Gros, and Micossi expressed the widely held view that the roots of this crisis lay in overly accommodative Fed policy during the housing bubble. Policy was a bit too easy during that period, as nominal GDP growth was slightly excessive, but if we are going to take market efficiency seriously then the primary cause of the severe worldwide recession should have occurred when the markets actually crashed. Yes, the tech and housing bubbles showed that markets are not always efficient. But that is no reason to ignore market signals.
The preferred share market advanced today, with PerpetualDiscounts gaining 15bp while FixedResets were up 6bp. Floaters gained strongly, claiming the top three spots on the performance table to take that very volatile, small, BAM dominated index up 159bp, perhaps helped by Jonathan Chevreau’s endorsement of the asset class (hat tip: Assiduous Reader MP):
Floating Rate Preferred Shares pay a dividend based on the prime rate and provide tax-efficient income for non-registered portfolios. Compared to pure interest income, such preferred shares are taxed far less harshly because of the dividend tax credit. If the Bank of Canada boosts the prime rate and banks increase their prime rate in response, the dividend income on these shares will rise, as will its capital value. Palombi’s current favorite is the BCE Preferred Series, which pay 100% of the prime rate.
Volume was good.
| 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 | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 1.5938 % | 1,498.5 |
| FixedFloater | 5.72 % | 3.98 % | 52,690 | 18.62 | 1 | 0.0000 % | 2,683.1 |
| Floater | 2.45 % | 2.08 % | 30,576 | 22.24 | 4 | 1.5938 % | 1,872.0 |
| OpRet | 4.85 % | -13.38 % | 134,712 | 0.09 | 15 | -0.1119 % | 2,293.3 |
| SplitShare | 6.41 % | 6.54 % | 897,028 | 4.03 | 2 | 0.1106 % | 2,063.9 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.1119 % | 2,097.0 |
| Perpetual-Premium | 5.75 % | 5.64 % | 152,941 | 2.53 | 12 | 0.0395 % | 1,885.5 |
| Perpetual-Discount | 5.70 % | 5.77 % | 207,919 | 14.20 | 59 | 0.1492 % | 1,802.3 |
| FixedReset | 5.47 % | 3.98 % | 457,803 | 4.06 | 40 | 0.0635 % | 2,116.0 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| ENB.PR.A | Perpetual-Premium | -1.16 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2009-10-21 Maturity Price : 25.00 Evaluated at bid price : 25.50 Bid-YTW : -14.43 % |
| CU.PR.B | Perpetual-Premium | -1.02 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2012-07-01 Maturity Price : 25.00 Evaluated at bid price : 25.35 Bid-YTW : 5.62 % |
| CL.PR.B | Perpetual-Premium | 1.21 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2009-10-21 Maturity Price : 25.50 Evaluated at bid price : 25.85 Bid-YTW : -11.95 % |
| TRI.PR.B | Floater | 1.66 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-09-21 Maturity Price : 19.01 Evaluated at bid price : 19.01 Bid-YTW : 2.06 % |
| BAM.PR.K | Floater | 2.34 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-09-21 Maturity Price : 13.12 Evaluated at bid price : 13.12 Bid-YTW : 2.99 % |
| BAM.PR.B | Floater | 3.11 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-09-21 Maturity Price : 13.25 Evaluated at bid price : 13.25 Bid-YTW : 2.97 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| CIU.PR.B | FixedReset | 115,000 | RBC crossed 110,000 at 28.25. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-07-01 Maturity Price : 25.00 Evaluated at bid price : 28.25 Bid-YTW : 3.84 % |
| BMO.PR.O | FixedReset | 68,375 | Nesbitt crossed 50,000 at 28.00. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-06-24 Maturity Price : 25.00 Evaluated at bid price : 28.00 Bid-YTW : 3.89 % |
| GWO.PR.H | Perpetual-Discount | 56,562 | Nesbitt crossed 25,000 at 20.83. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-09-21 Maturity Price : 20.90 Evaluated at bid price : 20.90 Bid-YTW : 5.83 % |
| BAM.PR.B | Floater | 44,874 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-09-21 Maturity Price : 13.25 Evaluated at bid price : 13.25 Bid-YTW : 2.97 % |
| MFC.PR.D | FixedReset | 44,033 | Desjardins crossed 25,000 at 27.90. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-07-19 Maturity Price : 25.00 Evaluated at bid price : 27.90 Bid-YTW : 4.00 % |
| MFC.PR.C | Perpetual-Discount | 32,000 | RBC crossed 21,000 at 19.19. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-09-21 Maturity Price : 19.15 Evaluated at bid price : 19.15 Bid-YTW : 5.92 % |
| There were 40 other index-included issues trading in excess of 10,000 shares. | |||