PrefBlog

There is one problem with directing tax revenue to debt reduction: it means you can’t spend it. EU plans are running into roadblocks:

Greece joined Italy in objecting to annual numerical debt-reduction targets in a fresh challenge to the German-led drive for tougher economic safeguards to underpin the euro.

Greece, the first deficit-riddled euro country to fall back on financial aid, says the proposed rule would force it to make impossibly large cuts once its support package runs out in 2013, according to a draft of European Union legislation.

“All member states except two already accepted the proposal,” said an EU briefing note obtained by Bloomberg News before next week’s debate among finance ministers. “Italy and Greece have a reserve on the numerical benchmark.”

Greece or Italy alone could veto the rule, undercutting the tougher enforcement demanded by Germany as a condition for beefing up the 750 billion-euro ($1 trillion) rescue fund for distressed states.

Assiduous Readers will remember it was France and Germany who scuttled the 3% deficit rule when it was no longer convenient to them.

The Fannie & Freddie problem is lurching towards the limelight:

U.S. Treasury Secretary Timothy F. Geithner presented Congress with a set of options for weaning the $11 trillion mortgage market from its dependence on the government, while calling for changes to be phased in “responsibly and carefully” to avoid economic disruptions.
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The options suggest differing degrees of government involvement in the system. The most dramatic would involve a “privatized” system of housing finance, with a government role to help “narrowly targeted” low-income and veteran buyers.

A middle ground would replace Fannie and Freddie with a system that helps low-income and veteran buyers in normal times and also provides an expanded guarantee that the government could ramp up in a crisis. The paper suggests using high-priced guarantee fees or restricted amounts of public insurance to achieve this goal.

A third option has the biggest government role and would hew closest to the current system. It would impose more regulation and give the government a role in “catastrophic reinsurance behind significant private capital,” so as to provide a backstop in times of crisis.

We have a wee bit of xenophobia happening:

Ontario Finance Minister Dwight Duncan has turned up the heat in the political debate surrounding the proposed transatlantic stock-exchange transaction, saying he does not want a “strategic asset” owned by the Middle East.

“We do business with the Middle East,” Mr. Duncan told reporters at Queen’s Park on Friday. “I am just not sure I want them owning our stock exchange.”

Then buy it yourself – jerk. He doesn’t even have the “finite natural resource” excuse. Seems to me that if a foreign-owned TMX stops doing its job properly, then there are a few Alternative Trading Systems that would be pleased to pick up the slack. Or somebody will write the code to start up a new one. But I guess Duncan thinks Canadians are too stupid to do that.

It was a quiet day on the Canadian preferred share market, with PerpetualDiscounts up 1bp, FixedResets down 6bp and DeemedRetractibles gaining 5bp. Volatility was small and volume was muted.

There’s always a new wrinkle:

ETFs have emerged as a possible mechanism for maximizing gains in one stock while potentially masking trading patterns, people familiar with the matter say.

In one scenario, a trader could learn information about a company, buy an ETF that includes the company’s stock, and short sell the other stocks in the ETF.

The practice, known as ETF-stripping, would allow the trader to benefit from movements in the company’s share price without directly buying or selling that stock.

It was a good day in the Canadian preferred share market as PerpetualDiscounts gained 4bp, FixedResets were up 2bp and DeemedRetractibles leapt ahead by 21bp. Not much volatility, with ony four entries on the Performance Highlights table. Volume remained well above average.

Choose your partners! Now it looks like Deutsche Bourse will purchase Euronext:

Deutsche Boerse AG is in advanced talks to buy NYSE Euronext in an all-stock transaction that would create the world’s biggest exchange operator, accelerating a day of takeovers that began with London Stock Exchange Group Plc’s acquisition of TMX Group Inc.

NYSE and Deutsche Boerse said they will produce 300 million euros ($410 million) in cost savings, according to a statement. Duncan Niederauer, New York-based NYSE Euronext’s chief executive officer, will hold the same job at the combined company. Frankfurt-based Reto Francioni, CEO of Deutsche Boerse, will be chairman. Deutsche Boerse will own about 59 percent to 60 percent of the joined corporation.

A new generation of Goldman Sachs guys has learned a lesson:

Goldman Sachs was “buying more illiquid assets than we probably should have,” Viniar, 55, said today at a conference in Miami hosted by Credit Suisse Group AG, his eighth consecutive appearance at the annual event. “It was a good lesson learned.”

“Less liquid assets” increased at a 39 percent compound annual growth rate between the start of 2005 and the start of 2008, compared with 24 percent growth in liquid assets, according to a slide Viniar included in his presentation. Since the first quarter of 2008, the firm has reduced holdings of such investments at an 18 percent compound annual rate, while liquid assets are down 9 percent.

The assets included mortgage-backed and other asset-backed securities, loans, high-yield debt, emerging-market stocks and bonds and investments in funds and private equity, the slide showed. They totaled $172 billion in the first quarter of 2008, or 14 percent of the firm’s balance sheet, up from $65 billion, or 11 percent, three years earlier.

An IMF report titled IMF Performance in the Run-Up to the Financial and Economic Crisis: IMF Surveillance in 2004-07 bears the message:

This evaluation assesses the performance of IMF surveillance in the run-up to the global financial and economic crisis and offers recommendations on how to strengthen the IMF’s ability to discern risks and vulnerabilities and to warn the membership in the future. It finds that the IMF provided few clear warnings about the risks and vulnerabilities associated with the impending crisis before its outbreak. The banner message was one of continued optimism after more than a decade of benign economic conditions and low macroeconomic volatility. The IMF, in its bilateral surveillance of the United States and the United Kingdom, largely endorsed policies and financial practices that were seen as fostering rapid innovation and growth. The belief that financial markets were fundamentally sound and that large financial institutions could weather any likely problem lessened the sense of urgency to address risks or to worry about possible severe adverse outcomes. Surveillance also paid insufficient attention to risks of contagion or spillovers from a crisis in advanced economies. Advanced economies were not included in the Vulnerability Exercise launched after the Asian crisis, despite internal discussions and calls to this effect from Board members and others.
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The IMF’s ability to detect important vulnerabilities and risks and alert the membership was undermined by a complex interaction of factors, many of which had been flagged before but had not been fully addressed. The IMF’s ability to correctly identify the mounting risks was hindered by a high degree of groupthink, intellectual capture, a general mindset that a major financial crisis in large advanced economies was unlikely, and inadequate analytical approaches. Weak internal governance, lack of incentives to work across units and raise contrarian views, and a review process that did not “connect the dots” or ensure follow-up also played an important role, while political constraints may have also had some impact.

There will doubtless be some who find it surprising that Holy Regulators are no less fallible than Evil Bonus-Hunters.

It was a mixed day in the Canadian preferred share market, with PerpetualDiscounts basically flat, FixedResets gaining 15bp and DeemedRetractibles down 1bp. Volume was heavy.

PerpetualDiscounts now yield 5.61%, equivalent to 7.99% interest at the standard equivalency factor of 1.4x. Long Corporates now yield 5.6%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 240bp. Note that this figure is not really comparable to anything that has ever been reported here before: it seems fair to speculate that recent figures have been pushed downwards by speculation that banks’ (and, perhaps, eventually, other regulated issuers) PerpetualDiscounts would have their call probability determined by other than economic factors – as has in fact happened. With the recent transfer of these issues to the DeemedRetractibles index, the PerpetualDiscount index has had its composition changed dramatically: it is now comprised of two layers of a single conglomerate (PWF and POW, 9 issues), utility-equivalents (W, CIU and FTS, 4 issues) and a thing-a-majig (BAM, 2 issues).