March 2, 2010

Nice piece in the WSJ on the Goldman/Greece thing, Swapping Blame over Athens:

Greece was not alone in using creative accounting to massage its numbers ahead of euro entry. It’s been known for years that Italy and Portugal also took advantage of derivatives contracts to dress up their budget numbers in the late 1990s. And as Allister Heath of the CityAM newspaper reminded us, even France “bought” long-term pension obligations from France Telecom in exchange for an upfront payment of £4.7 billion ($7.1 billion) that helped pave its entry into the single currency.

There’s no small irony in the fact that the same governments that once took advantage of derivatives peddled by international financiers to help conceal their true financial condition are now claiming to be the victims of the same banks’ dealings in the derivatives market. But the blame-the-bankers theme in the nascent sovereign-debt panic is of a piece with the banker-baiting that came in the wake of the 2008-2009 financial crisis.

Once again, our political class has been all too eager to find someone else to blame for its own economic mismanagement

Another WSJ article Europe’s Original Sin asks the question: What’s a Grecian Earn?:

Europeans are blaming financial transactions arranged by Wall Street for bringing Greece to the brink of needing a bailout. But a close look at the country’s finances over the nearly 10 years since it adopted the euro shows not only that Greece was the principal author of its debt problems, but also that fellow European governments repeatedly turned a blind eye to its flouting of rules.

Though the European Commission and the U.S. Federal Reserve are examining a controversial 2001 swap arranged with Goldman Sachs Group Inc., Greece’s own budget moves, in clear breach of European Union rules, dwarfed the effect of such deals.

Those revisions far exceed the impact of controversial derivative transactions Greece used to help mask the size of its debt and deficit numbers. The 2001 currency-swap deal arranged by Goldman trimmed Greece’s deficit by about a 10th of a percentage point of GDP for that year. By comparison, Greece failed to book €1.6 billion ($2.2 billion) of military expenses in 2001—10 times what was saved with the swap, according to Eurostat, the EU’s statistics authority.

Naturally, the episode is being used to promote various hobby-horses (I mean, besides Goldman-bashing):

Greece would have been dissuaded from using swaps to obscure the country’s deficit if the $605 trillion derivatives industry were properly regulated, U.S. Commodity Futures Trading Commission Chairman Gary Gensler said.

“Derivatives reform would have made it more difficult for Greece to hide their embedded loan,” Gensler said in a speech to be delivered today to Women in Housing and Finance, a Washington-based professional society.

Derivatives rules proposed in the U.S. would have required Greece to post collateral against its derivatives transactions, “thus canceling out the embedded loan and discouraging the country from entering into such a transaction in the first place,” he said. New York-based Goldman Sachs Group Inc. was at least one of the banks involved in swaps transactions with Greece.

Assiduous Readers will note that since the deal was uncollateralized, Goldman – and the ultimate buyer of the package – also bought a CDS on Greece; this is similar to their actions with uncollateralized exposure to AIG.

Australia’s hiked rates again:

Reserve Bank of Australia Governor Glenn Stevens increased the benchmark overnight cash rate target to 4 percent from 3.75 percent in Sydney today, as forecast by 14 of 19 economists surveyed by Bloomberg News. The rest predicted no change.

The biggest jobs boom in more than three years and a surge in business confidence suggest Australia’s economy is already growing at or close to trend, after escaping recession during the global crisis, Stevens said. “It’s appropriate for interest rates to be closer to average,” which he last week signaled may be another 75 basis points higher than the current rate.

PrefBlog’s Piggies-at-the-trough Department reports that cellulosic ethanol will be immensely profitable, if subsidized enough:

The industry insists the ethanol-from-waste technology will soon be commercially viable with the proper government incentives, including a some sort of price on carbon dioxide emissions that makes fossil fuels more expensive.

If the government really wanted economic ethanol, they’d fund academics with $50-million with the objective of developing something that, you know, actually works rather than forking over $500-million to the industrial smiley-boys, but Spend-Every-Penny is contemptuous of anything that smacks of schoolwork. So don’t hold your breath.

Some nice volume on a good day for the market, with PerpetualDiscounts gaining 5bp while FixedResets gained 14bp, taking yields on the latter down to 3.54%. Still a very well-behaved market, with only two entries in the Performance Highlights table.

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 2.75 % 2.89 % 38,099 20.52 1 0.2934 % 2,006.8
FixedFloater 5.28 % 3.38 % 41,117 19.72 1 -0.7229 % 2,994.9
Floater 1.93 % 1.67 % 47,883 23.39 4 -0.0368 % 2,380.1
OpRet 4.87 % 1.57 % 105,534 0.24 13 -0.0623 % 2,311.0
SplitShare 6.42 % 6.63 % 130,399 3.72 2 -0.2870 % 2,125.8
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0623 % 2,113.2
Perpetual-Premium 5.87 % 5.78 % 133,104 6.90 7 -0.0960 % 1,897.4
Perpetual-Discount 5.86 % 5.89 % 181,214 14.05 70 0.0501 % 1,802.0
FixedReset 5.41 % 3.54 % 322,771 3.73 42 0.1361 % 2,191.4
Performance Highlights
Issue Index Change Notes
TD.PR.P Perpetual-Discount -1.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-03-02
Maturity Price : 23.21
Evaluated at bid price : 23.39
Bid-YTW : 5.67 %
HSB.PR.D Perpetual-Discount 1.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-03-02
Maturity Price : 21.97
Evaluated at bid price : 22.10
Bid-YTW : 5.76 %
Volume Highlights
Issue Index Shares
TRP.PR.A FixedReset 123,669 Desjardins crossed 20,600 at 26.00, then another 25,000 at the same price. Nesbitt crossed 50,000 at the same price again.
Maturity Type : Call
Maturity Date : 2015-01-30
Maturity Price : 25.00
Evaluated at bid price : 26.00
Bid-YTW : 3.62 %
POW.PR.D Perpetual-Discount 104,973 Nesbitt crossed 25,000 at 20.80; RBC crossed blocks of 36,500 and 37,100 at the same price.
Maturity Type : Limit Maturity
Maturity Date : 2040-03-02
Maturity Price : 20.75
Evaluated at bid price : 20.75
Bid-YTW : 6.13 %
BNS.PR.T FixedReset 89,714 RBC crossed 25,000 at 28.00; Desjardins bought 25,000 from National at 28.03. Desjardins crossed 23,900 at 28.03.
Maturity Type : Call
Maturity Date : 2014-05-25
Maturity Price : 25.00
Evaluated at bid price : 28.04
Bid-YTW : 3.34 %
MFC.PR.D FixedReset 87,209 RBC crossed 25,000 at 28.05; Desjardins crossed 42,600 at 28.05.
Maturity Type : Call
Maturity Date : 2014-07-19
Maturity Price : 25.00
Evaluated at bid price : 28.00
Bid-YTW : 3.58 %
PWF.PR.L Perpetual-Discount 78,725 RBC crossed 72,700 at 21.45.
Maturity Type : Limit Maturity
Maturity Date : 2040-03-02
Maturity Price : 21.33
Evaluated at bid price : 21.33
Bid-YTW : 6.06 %
SLF.PR.F FixedReset 73,589 Nesbitt crosse 65,000 at 27.50.
Maturity Type : Call
Maturity Date : 2014-07-30
Maturity Price : 25.00
Evaluated at bid price : 27.50
Bid-YTW : 3.45 %
There were 45 other index-included issues trading in excess of 10,000 shares.

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