PrefBlog

It will be interesting to learn all the unintended consequences:

As France begins collecting its financial-transactions tax this month, it is becoming evident that President Francois Hollande’s levy is hitting all but the people it was aimed at: speculators.

Hollande, who called finance his “main adversary” during his election campaign, pushed through in August a 0.2 percent transaction tax on share purchases, making France the first and only country so far in Europe to have such a levy. Many investors have been escaping the tax using so-called contracts for difference, or CFDs, offered by prime brokers that let them bet on a stock’s gain or loss without owning the shares.

“The target was supposed to be finance with a capital F, which is sort of a black box,” said Jacques Porta, who helps manage $627 million at Ofi Patrimoine in Paris. “Instead, we are punishing small investors who aren’t to blame and already are frightened off by losses in the market.”

How about an update on bank bonds?

Case in point: a new report from Moody’s Investors Service found that bank debt issues around the world have been chopped in half since the onset of the financial crisis. After peaking at roughly $2.4-trillion (U.S.) a quarter in 2007, banks globally are now issuing unsecured debt that amounts to just half that.

First it was North American issues – chiefly the U.S. – that plummeted in 2008 and 2009, and more recently it’s been European banks, particularly those on the periphery of the euro zone. The only area of the world seeing an uptick in issuance right now is Asia, where long-term bank debt issues are up 6 per cent over the 12 months ended Sept. 30. (Canada on its own is also faring well.)

The drop-off has a few implications. Chiefly, it affects how much money the banks can lend. For that reason, it’s sparked a push for deposits as a cheap source of funds.
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The slowdown also gives the banks an incentive to ramp up their covered bond offerings.
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To understand just how much covered bond spreads have tightened, making them more favourable, in 2009 they blew out to roughly 240 basis points in the U.K. Now they’re back to about 60 basis points.

With the election out of the way, the Keystone pipeline of TCA and TRP is in the news again:

Environmentalists are reviving their noisy 2011 anti-pipeline campaign, with a demonstration scheduled for Sunday outside the White House, and they have pointed to the decision on the Keystone pipeline as a key test of the President’s resolve to battle climate change during his second term. Former U.S. vice-president Al Gore this week urged Mr. Obama to kill the Keystone XL project.
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On Thursday, TransCanada got a boost when the Building & Construction Trades and the American Petroleum Institute each called on Mr. Obama to move quickly to approve the controversial project, which will carry 1.1-million barrels per day of oil-sands bitumen from Alberta and lighter oil from North Dakota’s Bakken fields to the U.S. Gulf Coast.

Julie Dickson gave a speech titled Substance over Form at the 2012 Life Insurance Invitational Forum, but there wasn’t much in it:

Just as many now recognize that it was a mistake to believe that low rates would be a short-term, transitory phenomenon, it would also be a mistake to assume that we could never again be faced with very high interest rates.

Insurers will remember what happened in the 1980s, when rates spiked to historically high levels and the insurers’ business model came under pressure, as policyholders found life policies with savings features unattractive and decided to turn to banks for savings products. (You may recall that this led to the expression, “Buy term and invest the rest.”)
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Let me switch to banking for a minute to expand on this point. Lately, I have seen a number of articles suggesting that Basel III is too complex and that Basel III capital calculations cannot be relied upon. I think such thinking is misguided. OSFI’s view is that Basel III can be relied upon – if proper risk management and governance at financial institutions is in place, and if supervisors are active and diligent in their work of overseeing Basel III implementation. Combined with a leverage ratio, Basel III, properly implemented, will fundamentally enhance financial stability. It might be better for people to focus more on the quality of supervision, and focus less on Basel III complexity.

As we point out in the Life Insurance Regulatory Framework, OSFI expects to consult significantly with industry over the coming years so that major regulatory capital changes can be implemented by 2015. Risk management will form a big part of that consultation.

Naturally, future employment prospects of OSFI personnel are not forgotten:

OSFI recognizes that small- to medium-sized companies, or those of less complexity with predictable and diversifiable risk, may not be able to afford a dedicated CRO to lead the risk management function. In these cases, we accept that the individuals responsible for risk management can also be performing other functions. But even in small, less complex businesses, we want to see a risk management process on which the board of directors, the CEO, senior management team, and policyholders can rely. As an example, we would want the board to meet in camera with the person who owns the risk management role as part of his or her responsibilities.

It was another mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 2bp, FixedResets off 2bp and DeemedRetractibles down 5bp. Volatility was low. Volume was low.

There’s an interesting straw in the wind for junk bonds:

Investors yanked a record volume of cash from BlackRock Inc.’s exchange-traded fund that buys junk bonds as the notes lose value for the first month since May.

The $16.3 billion fund reported an outflow of 2.4 million shares yesterday, equal to about $218.9 million, according to data compiled by Bloomberg. That’s the biggest daily withdrawal in the five-year history of the iShares iBoxx High Yield Corporate Bond Fund, the largest of its kind.

The five largest junk-bond ETFs, which allow investors to speculate on the securities without actually owning them, have lost $1.97 billion of assets since Sept. 20 as investors wager that a four-year rally in the debt is running out of steam. High-yield bonds in the U.S. are losing 0.14 percent this month after posting 12.9 percent returns this year through October, according to Bank of America Merrill Lynch index data.

Regulation is wonderful:

Since 1998, ABS [the non-profit American Bureau of Shipping] has hired four former Coast Guard admirals as executives. They include retired Admiral Robert Kramek, who led the Coast Guard as commandant from 1994 to 1998. It was Kramek who signed an agreement with ABS in 1995 that expanded the nonprofit’s powers to inspect independently owned ships on the Coast Guard’s behalf.

In June 1998, three years after Kramek signed that inspection agreement, ABS hired him as president of its Americas division.

Jack Devanney, a retired executive of companies that own ships that used ABS services, says this revolving door is bad for ship safety.

“When you give Kramek a nice job, you’re sending a message to all the Coast Guard guys that they’ve got a second career at ABS,” says Devanney, who has a Ph.D. in management science from the Massachusetts Institute of Technology. “If you rock the boat, that opportunity’s not going to be available to you.”

S&P has released a fascinating report titled A Tale Of Two Countries: U.S. And Canadian Banks’ Contrasting Profitability Dynamics:

Profit dynamics for a company or an industry are highly sensitive to shifting operating and regulatory conditions and, as a result, are likely to change over time. Profits are important because they can be a significant generator of capital–for the companies that retain them in a meaningful amount. A careful review of bank profitability in both the U.S. and Canada indicates that Canadian banks have been more profitable than their U.S. counterparts in recent years. This gap has widened in the postcrisis years. This is partly because of Canadian banks’ higher leverage that largely arises from structural differences. We also note that the leverage ratio gap between the U.S. and Canada is sensitive to definition. Alternative definitions of leverage ratio for U.S. banks, for example using Standard & Poor’s adjusted common equity to adjusted assets, also show that U.S. banks have lower leverage than Canadian banks, but the gap is much smaller.
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As for Canada, the Office of the Superintendent of Financial Institutions (OSFI) will issue a new Basel III capital guideline before the end of 2012–for implementation in the first fiscal quarter of 2013. Of the 29 G-SIBs that the Financial Stability Board (FSB) identified in November 2011, none were Canadian banks. However, there are plans to identify domestic systemically important banks (D-SIBs) and recommend that a capital surcharge be applied to them. But Canadian banking regulators have not offered any detailed views on this yet. Therefore, we anticipate Canadian banks, on average, will continue to have higher leverage than U.S. banks, particularly the largest and most complex. We believe that at least part of the tolerance for higher leverage may be due to the accumulation of relatively low-risk weighted assets, like government-insured mortgages

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It was another mixed day for the Canadian preferred share market, with PerpetualPremiums up 3bp, FixedResets gaining 2bp and DeemedRetractibles off 1bp. Volatility was non-existent. Volume was low.

PerpetualDiscounts now yield 4.91%, equivalent to 6.38% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.2%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 220bp, a slight (and perhaps spurious) increase from the 215bp reported November 7.

Today’s inspiring photograph has been taken from the website of a company owned by a distant relative.

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It was another mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 1bp, FixedResets off 5bp and DeemedRetractibles gaining 3bp. Volatility was low. Volume was relatively heavy, with quite a few issues breaking the 100,000 barrier as the RBC desk did land-office business.

Bloomberg has an interesting bit of gossip about algorithmic trading:

Wall Street’s credit-derivatives traders, who before the financial crisis commanded $2 million of annual pay, are being replaced by machines as banks cut costs and heed new regulations.

UBS AG (UBSN), Switzerland’s biggest bank, fired its head of credit-default swaps index trading, David Gallers, last week, with no plan to fill the position, according to two people familiar with the matter. Instead, the bank replaced Gallers with computer algorithms that trade using mathematical models, said the people, who asked not to be identified because moves are private.

UBS joins Barclays Plc (BARC), Credit Suisse Group AG (CSGN) and Goldman Sachs Group Inc. (GS) in using computer programs to trade financial instruments that once generated some of their biggest fees. With regulators preparing rules under the 2010 Dodd-Frank financial reform that will push swaps toward exchange-like systems to improve transparency, credit dealers are going digital as automated trading makes humans too expensive.

What makes the trend so interesting is that there should be an equilibrium reached at some point. Most – not all – traders know nothing about the markets and they’re not paid to know anything about the markets. They’re paid to know lots of people who trade and who will give good old Bob the order because Bob made a really good point about that story in Wall Street Journal the other day.

But one thing that’s happening is the buy-side culture is shifting – slowly – to electronic execution. So the old-line salesmen are losing clients to the electronic execution vendors. There will be some disruption as all this plays out, but sales (as opposed to technical wizardry) will be as important in the future as it has been in the past.

I’ve complained in the past that the concept of “first mover advantage” as it relates to hedge fund returns is a red herring … there’s at least one guy who agrees with me:

Investors and other industry observers say that for perhaps the first time since the phrase hedge fund entered the lexicon, hot or gimmicky strategies aren’t worth investing in at all. It’s the manager that counts.

“It’s a return to the roots of the hedge-fund industry, when it was a small group of highly talented stockpickers and fundamental investors,” says John Bailey, founder and chief executive of Spruce Private Investors, which invests in 30 different hedge funds for foundations and endowments.

It’s not so much “first mover advantage” in this or anything else, really: it’s more that some smart guys found a niche, made stupid amounts of money … and were promptly copied by every glib smiley-boy in town.

It was stunning when European corporates started trading through sovereigns. This is gobsmackery on a grand scale:

Bonds of Exxon Mobil and Johnson & Johnson are trading with yields below those of comparable Treasurys, a sign that investors perceive them as a safer bet. It is a rare phenomenon that some market observers said could be the beginning of a new era for debt markets. It could ultimately mean some companies will borrow at lower rates than the U.S. government.

For now, just a handful of relatively short-term bonds yield less than comparable Treasury bonds.

The banks’ role as secret policemen is causing problems:

U.S. banks in Colorado and Washington state, where voters last week legalized recreational marijuana use, shouldn’t disregard federal laws that consider pot sales criminal, a bank regulator said today.

“I think institutions have to protect themselves,” said Daniel Stipano, acting chief counsel of the Office of the Comptroller of the Currency, at an anti-money laundering conference today run by the American Bankers Association. “The problem is that it remains a crime under federal law.”

The Bank Secrecy Act requires banks to file suspicious- activity reports if they suspect customer’s involvement in federal crimes. It’s meant as a protection against U.S. financial institutions being used to launder illegal gains from criminal activity.

It was another mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 7bp, FixedResets up 6bp and DeemedRetractibles off 6bp. Volatility picked up a little, with IAG on the downside (although both issues made the “Wide Spreads” report and all trades were well above the closing bid) and PWF on the upside. Volume was ridiculously pathetic.