{"id":19871,"date":"2012-10-02T03:32:03","date_gmt":"2012-10-02T07:32:03","guid":{"rendered":"http:\/\/www.prefblog.com\/?p=19871"},"modified":"2012-10-02T03:32:03","modified_gmt":"2012-10-02T07:32:03","slug":"october-1-2012","status":"publish","type":"post","link":"https:\/\/prefblog.com\/?p=19871","title":{"rendered":"October 1, 2012"},"content":{"rendered":"

Here’s a good example of why government agencies should not regulate Credit Rating Agencies<\/a>:<\/p>\n

Now, incredibly, Egan-Jones is the sole rater that the SEC has decided to attack. The trouble for the firm started on July 16, 2011, when Egan-Jones downgraded the U.S.\u2019s sovereign debt by one notch, to AA+ from AAA. Egan-Jones cited \u201cthe relatively high level of debt and the difficulty in significantly cutting spending.\u201d Two days later, the SEC\u2019s Office of Compliance Inspections and Examinations contacted the firm seeking information about its rating decision. (The next month, S&P also downgraded the U.S.\u2019s sovereign debt, but neither Moody\u2019s nor Fitch did.)<\/p>\n

Then, on Oct. 12, Egan-Jones received a call from the SEC notifying the firm of a Wells Notice, an indication that it was being investigated. On April 5 of this year, Egan-Jones again downgraded the U.S. sovereign debt, to AA from AA+. On April 19, leaks started emanating from the SEC that it had voted to start an \u201cadministrative law proceeding\u201d against the firm. And on April 24, the SEC filed its complaint.<\/p>\n

Just what does the SEC object to so vehemently about Egan- Jones? The commission claims that on its 2008 supplemental application to be a \u201cnationally recognized\u201d ratings firm, Egan- Jones \u201cfalsely stated\u201d that it had already rated the credit of 150 asset-backed securities and of 50 sovereign-debt issues. The SEC claims Egan-Jones \u201cwillfully made these misstatements and omissions to conceal the fact that it had no experience issuing ratings on ABS or government issuers.\u201d The SEC intends to fine Egan-Jones and to possibly censure Sean Egan — neither move would be good for business.
…<\/b>
His lawyer, Alan S. Futerfas, told the Wall Street Journal that the SEC knows that Egan did rate the securities in question but it is \u201csaying he didn\u2019t disseminate it publicly.\u201d Futerfas continued: \u201cIt\u2019s a very technical argument the SEC is using; it\u2019s not substantive. There\u2019s nothing in this complaint that suggests or alleges that any rating was without integrity or was not accurate or was not predictive.\u201d<\/p>\n

If he is right, that raises a question: Is the SEC retaliating against Egan and his firm for downgrading the U.S. sovereign debt?<\/p><\/blockquote>\n

Regulation of CRAs inevitably leads to a very tiresome discussion of conspiracy theories. There are certainly problems with “Issuer pays”; “Issuer regulates” is worse.<\/p>\n

Is QE3 inflationary? Who cares<\/a>?<\/p>\n

Investors initially increased their inflation expectations on the Fed\u2019s plan. The gap between yields on 10-year notes and same-maturity Treasury Inflation-Protected Securities, or TIPS, widened to 2.73 percentage points on Sept. 17, the highest level since May 2006. The so-called break-even rate, which measures how much traders anticipate consumer prices will rise over the life of the debt, narrowed last week to 2.42 percentage points.<\/p><\/blockquote>\n

In a startling new development, the SEC has hired somebody with a clue<\/a>:<\/p>\n

The U.S. Securities and Exchange Commission, stung by criticism that it lacks the knowledge to analyze the computerized trading that has come to dominate American stock markets, is planning to catch up.<\/p>\n

Initiatives to increase the breadth of data received from exchanges and to record orders from origination to execution are at the center of the effort. Gregg Berman, who holds a doctorate in physics from Princeton University, will head the commission\u2019s planned office of analytics and research.
…<\/b>
Berman, who studied experimental and nuclear physics, developed trading strategies in commodities and stocks at a hedge fund and became a founding member of RiskMetrics Group Inc. in 1998 when JPMorgan Chase & Co. spun off the company. He writes programming code and did some of the flash-crash modeling when the SEC examined how trade requests were withdrawn from exchange order books that day.<\/p>\n

The analytics and research office plans to hire traders from banks and hedge funds as well as financial engineers and individuals with quantitative and analytical skills. It\u2019s looking for programmers in the C++ computer language and \u201cUNIX gurus who really know how to get under the hood and in former lives may have written trading programs and now are going to write analytical programs,\u201d Berman said.<\/p><\/blockquote>\n

Traditionalists will be relieved to learn that the new Office of Analytics and Research comes under the Division of Trading and Markets<\/a>, which is headed by a lawyer<\/a>.<\/p>\n

He also served as counsel to Chairman Schapiro on issues involving the Division of Trading and Markets, including the agency\u2019s analysis and response to the Flash Crash on May 6, 2010, and numerous other market structure and Dodd-Frank related rulemakings, studies, and programs.<\/p><\/blockquote>\n

Readers will remember that the agency’s response to the Flash Crash was a highly politicized put-up job.<\/p>\n

Moody’s believes that the Spanish stress test was insufficiently conservative<\/a>:<\/p>\n

Spain\u2019s banks face a capital shortfall that could climb to 105 billion euros ($135 billion), almost double the estimate the government provided last week, according to Moody\u2019s Investors Service.<\/p>\n

The nation\u2019s lenders may need infusions of 70 billion euros to 105 billion euros to absorb losses and still keep capital ratios above thresholds outlined in legislation last year, Moody\u2019s analysts wrote yesterday in a report. That compares with the 53.7 billion euro shortfall found last week after officials commissioned a stress test designed to lift doubts about the financial industry\u2019s ability to withstand losses.<\/p>\n

\u201cThe recapitalization amounts published by Spain are below what we estimate are needed for Spanish banks to maintain stability in our adverse and highly adverse scenarios,\u201d the analysts, Maria Jose Mori and Alberto Postigo, said in the report. \u201cIf market participants are skeptical about the stress test, negative sentiment could undercut the government\u2019s efforts to fully restore confidence in the solvency of Spanish banks.\u201d
…<\/b>
While many assumptions in the stress test were conservative, some may be questioned, Moody\u2019s said. The test used a 6 percent core capital ratio under a stressed scenario, while the ratings firm assumed capital ratios of 8 percent to 10 percent, according to the report. The rate used by Ireland for its test, including a buffer, was 9 percent.<\/p><\/blockquote>\n

What makes this interesting is that it continues to reflect one of the big problems of the Credit Crunch: bank capital is supposed to ensure that unexpected losses will bankrupt the company only once in 1,000 years<\/a> (insert jokes about recent experience here).<\/p>\n

The confidence level is fixed at 99.9%, i.e. an institution is expected to suffer losses that exceed its level of tier 1 and tier 2 capital on average once in a thousand years. This confidence level might seem rather high. However, Tier 2 does not have the loss absorbing capacity of Tier 1. The high confidence level was also chosen to protect against estimation errors, that might inevitably occur from banks\u2019 internal PD, LGD and EAD estimation, as well as other model uncertainties.<\/p><\/blockquote>\n

But! In demanding that the banks maintain capital above the regulatory minimum even after experiencing these 1,000-year losses, we are demanding that they remain solvent even after experiencing 1,000 year losses in successive years (which is probably not a million-year two-year-loss; it will depend on the correlation between successive years). I don’t think anybody knows how to deal with this. The concept of a buffer is helpful, but it remains to be seen what will happen to a bank in times of great stress when it has used up its buffer.<\/p>\n

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums down 4bp, FixedResets gaining 2bp and DeemedRetractibles up 11bp. There weren’t many volatile issues, but they made up in energy what they lacked in numbers. Volume was low.<\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n\n
HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices<\/strong>
Values are provisional and are finalized monthly<\/td>\n<\/tr>\n
Index<\/td>\nMean
Current
Yield
(at bid)<\/td>\n		Median
YTW<\/td>\n		Median
Average
Trading
Value<\/td>\n		Median
Mod Dur
(YTW)<\/td>\n		Issues<\/td>\nDay’s Perf.<\/td>\nIndex Value<\/td>\n<\/tr>\n
Ratchet<\/td>\n0.00 %<\/td>\n0.00 %<\/td>\n0<\/td>\n0.00<\/td>\n0<\/td>\n-0.0190 %<\/td>\n2,449.1<\/td>\n<\/tr>\n
FixedFloater<\/td>\n4.40 %<\/td>\n3.78 %<\/td>\n35,425<\/td>\n17.71<\/td>\n1<\/td>\n0.5119 %<\/td>\n3,619.7<\/td>\n<\/tr>\n
Floater<\/td>\n2.99 %<\/td>\n3.02 %<\/td>\n57,351<\/td>\n19.71<\/td>\n3<\/td>\n-0.0190 %<\/td>\n2,644.3<\/td>\n<\/tr>\n
OpRet<\/td>\n4.65 %<\/td>\n2.77 %<\/td>\n35,186<\/td>\n0.73<\/td>\n4<\/td>\n0.1549 %<\/td>\n2,554.3<\/td>\n<\/tr>\n
SplitShare<\/td>\n5.45 %<\/td>\n4.93 %<\/td>\n70,809<\/td>\n4.55<\/td>\n3<\/td>\n-0.1586 %<\/td>\n2,817.5<\/td>\n<\/tr>\n
Interest-Bearing<\/td>\n0.00 %<\/td>\n0.00 %<\/td>\n0<\/td>\n0.00<\/td>\n0<\/td>\n0.1549 %<\/td>\n2,335.7<\/td>\n<\/tr>\n
Perpetual-Premium<\/td>\n5.28 %<\/td>\n2.11 %<\/td>\n90,829<\/td>\n0.39<\/td>\n27<\/td>\n-0.0423 %<\/td>\n2,298.9<\/td>\n<\/tr>\n
Perpetual-Discount<\/td>\n4.99 %<\/td>\n4.85 %<\/td>\n105,942<\/td>\n15.77<\/td>\n4<\/td>\n0.5440 %<\/td>\n2,592.7<\/td>\n<\/tr>\n
FixedReset<\/td>\n4.97 %<\/td>\n2.98 %<\/td>\n176,061<\/td>\n4.02<\/td>\n73<\/td>\n0.0175 %<\/td>\n2,437.1<\/td>\n<\/tr>\n
Deemed-Retractible<\/td>\n4.94 %<\/td>\n3.52 %<\/td>\n122,108<\/td>\n1.11<\/td>\n46<\/td>\n0.1138 %<\/td>\n2,378.4<\/td>\n<\/tr>\n<\/table>\n\n\n\n\n\n\n
Performance Highlights<\/strong><\/td>\n<\/tr>\n
Issue<\/td>\nIndex<\/td>\nChange<\/td>\nNotes<\/td>\n<\/tr>\n
IGM.PR.B<\/td>\nPerpetual-Premium<\/td>\n-2.97 %<\/td>\nYTW SCENARIO
\nMaturity Type : Call
\nMaturity Date\t: 2018-12-31
\nMaturity Price : 25.00
\nEvaluated at bid price : 26.15
\nBid-YTW : 4.98 %<\/td>\n<\/tr>\n
BAM.PR.N<\/td>\nPerpetual-Discount<\/td>\n1.44 %<\/td>\nYTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2042-10-01
\nMaturity Price : 24.21
\nEvaluated at bid price : 24.70
\nBid-YTW : 4.81 %<\/td>\n<\/tr>\n
GWO.PR.N<\/td>\nFixedReset<\/td>\n2.59 %<\/td>\nYTW SCENARIO
\nMaturity Type : Hard Maturity
\nMaturity Date\t: 2022-01-31
\nMaturity Price : 25.00
\nEvaluated at bid price : 23.80
\nBid-YTW : 3.62 %<\/td>\n<\/tr>\n<\/table>\n\n\n\n\n\n\n\n\n\n\n
Volume Highlights<\/strong><\/td>\n<\/tr>\n
Issue<\/td>\nIndex<\/td>\nShares
Traded<\/td>\n		Notes<\/td>\n<\/tr>\n
BAM.PR.X<\/td>\nFixedReset<\/td>\n212,857<\/td>\nNesbitt crossed 201,400 at 25.15.
\nYTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2042-10-01
\nMaturity Price : 23.23
\nEvaluated at bid price : 25.15
\nBid-YTW : 3.24 %<\/td>\n<\/tr>\n
CU.PR.C<\/td>\nFixedReset<\/td>\n105,667<\/td>\nNesbitt crossed 48,900 at 26.10; RBC crossed 51,500 at the same price.
\nYTW SCENARIO
\nMaturity Type : Call
\nMaturity Date\t: 2017-06-01
\nMaturity Price : 25.00
\nEvaluated at bid price : 26.10
\nBid-YTW : 3.08 %<\/td>\n<\/tr>\n
ENB.PR.P<\/td>\nFixedReset<\/td>\n41,357<\/td>\nRecent new issue<\/a>.
\nYTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2042-10-01
\nMaturity Price : 23.11
\nEvaluated at bid price : 25.05
\nBid-YTW : 3.71 %<\/td>\n<\/tr>\n
ENB.PR.N<\/td>\nFixedReset<\/td>\n34,715<\/td>\nTD crossed 16,300 at 25.37.
\nYTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2042-10-01
\nMaturity Price : 23.21
\nEvaluated at bid price : 25.34
\nBid-YTW : 3.80 %<\/td>\n<\/tr>\n
BNS.PR.X<\/td>\nFixedReset<\/td>\n32,437<\/td>\nScotia crossed 29,200 at 26.55.
\nYTW SCENARIO
\nMaturity Type : Call
\nMaturity Date\t: 2014-04-25
\nMaturity Price : 25.00
\nEvaluated at bid price : 26.52
\nBid-YTW : 1.95 %<\/td>\n<\/tr>\n
SLF.PR.F<\/td>\nFixedReset<\/td>\n32,000<\/td>\nRBC crossed 26,000 at 26.48.
\nYTW SCENARIO
\nMaturity Type : Call
\nMaturity Date\t: 2014-06-30
\nMaturity Price : 25.00
\nEvaluated at bid price : 26.44
\nBid-YTW : 2.65 %<\/td>\n<\/tr>\n
There were 21 other index-included issues trading in excess of 10,000 shares.<\/td>\n<\/tr>\n<\/table>\n\n\n\n\n\n\n\n\n\n
Wide Spread Highlights<\/strong><\/td>\n<\/tr>\n
Issue<\/td>\nIndex<\/td>\nQuote Data and Yield Notes<\/td>\n<\/tr>\n
IGM.PR.B<\/td>\nPerpetual-Premium<\/td>\nQuote: 26.15 – 26.90
\nSpot Rate : 0.7500
\nAverage : 0.4477<\/p>\n

YTW SCENARIO
\nMaturity Type : Call
\nMaturity Date\t: 2018-12-31
\nMaturity Price : 25.00
\nEvaluated at bid price : 26.15
\nBid-YTW : 4.98 %<\/td>\n<\/tr>\n

TCA.PR.Y<\/td>\nPerpetual-Premium<\/td>\nQuote: 51.90 – 52.21
\nSpot Rate : 0.3100
\nAverage : 0.1878<\/p>\n

YTW SCENARIO
\nMaturity Type : Call
\nMaturity Date\t: 2014-03-05
\nMaturity Price : 50.00
\nEvaluated at bid price : 51.90
\nBid-YTW : 2.54 %<\/td>\n<\/tr>\n

CU.PR.E<\/td>\nPerpetual-Premium<\/td>\nQuote: 26.20 – 26.48
\nSpot Rate : 0.2800
\nAverage : 0.1587<\/p>\n

YTW SCENARIO
\nMaturity Type : Call
\nMaturity Date\t: 2021-09-01
\nMaturity Price : 25.00
\nEvaluated at bid price : 26.20
\nBid-YTW : 4.33 %<\/td>\n<\/tr>\n

BNS.PR.O<\/td>\nDeemed-Retractible<\/td>\nQuote: 26.51 – 26.87
\nSpot Rate : 0.3600
\nAverage : 0.2553<\/p>\n

YTW SCENARIO
\nMaturity Type : Call
\nMaturity Date\t: 2013-04-26
\nMaturity Price : 26.00
\nEvaluated at bid price : 26.51
\nBid-YTW : 1.08 %<\/td>\n<\/tr>\n

POW.PR.C<\/td>\nPerpetual-Premium<\/td>\nQuote: 25.62 – 25.92
\nSpot Rate : 0.3000
\nAverage : 0.2111<\/p>\n

YTW SCENARIO
\nMaturity Type : Call
\nMaturity Date\t: 2012-10-31
\nMaturity Price : 25.00
\nEvaluated at bid price : 25.62
\nBid-YTW : -25.03 %<\/td>\n<\/tr>\n

BAM.PR.X<\/td>\nFixedReset<\/td>\nQuote: 25.15 – 25.39
\nSpot Rate : 0.2400
\nAverage : 0.1584<\/p>\n

YTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2042-10-01
\nMaturity Price : 23.23
\nEvaluated at bid price : 25.15
\nBid-YTW : 3.24 %<\/td>\n<\/tr>\n<\/table>\n","protected":false},"excerpt":{"rendered":"

Here’s a good example of why government agencies should not regulate Credit Rating Agencies: Now, incredibly, Egan-Jones is the sole rater that the SEC has decided to attack. The trouble for the firm started on …<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[15],"tags":[],"class_list":["post-19871","post","type-post","status-publish","format-standard","hentry","category-market-action"],"_links":{"self":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/19871","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=19871"}],"version-history":[{"count":0,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/19871\/revisions"}],"wp:attachment":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=19871"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=19871"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=19871"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}