January 24, 2011

The SEC has released its Study on Investment Advisers and Broker-Dealers:

This Study outlines the Staff’s findings and makes recommendations to the Commission for potential new rulemaking, guidance, and other policy changes. These recommendations are intended to make consistent the standards of conduct applying when retail customers receive personalized investment advice about securities from broker-dealers or investment advisers. The Staff therefore recommends establishing a uniform fiduciary standard for investment advisers and broker-dealers when providing investment advice about securities to retail customers that is consistent with the standard that currently applies to investment advisers. The recommendations also include suggestions for considering harmonization of the broker-dealer and investment adviser regulatory regimes, with a view toward enhancing their effectiveness in the retail marketplace.

I think it’s nuts. Stockbrokers are salesmen. Their job is to sell new issues – full stop. The only regulatory change required is a requirement that the only title allowable for those with a license is “Salesman”, and that this title – and no other – be displayed on all communications beside the salesman’s name.

Two Commissioners basically agree with me:

Two examples from the Study illustrate its shortcomings.

First, a basic premise of the Study’s recommendation to impose a uniform fiduciary duty on broker-dealers and investment advisers is concern that investors are confused about the differences between a broker-dealer and an investment adviser and the duties owed by each. Such confusion is a serious matter. However, the practical consequences resulting from that confusion for those very investors have not been sufficiently studied or documented. Moreover, the Study does not address the possibility that the Study’s own recommendations will not resolve or eliminate investor confusion and may in fact create new sources of confusion.

Second, the Study, in our view, does not appropriately account for the potential overall cost of the recommended regulatory actions for broker-dealers, investment advisers, and retail investors. The Study unduly discounts the risk that, as a result of the regulatory burdens imposed by the recommendations on financial professionals, investors may have fewer broker-dealers and investment advisers to choose from, may have access to fewer products and services, and may have to pay more for the services and advice they do receive. Any such results are not in the best interests of investors; nor do they serve to protect them.

The EFSF may morph into the European Fix-Everything Fund:

European Central Bank Executive Board member Juergen Stark said measures to strengthen the region’s rescue fund could include purchases of government bonds or injecting cash into commercial banks.

“I could imagine the” European Financial Stability Facility “recapitalizing banks or buying sovereign debt,” Stark said in an interview with Dutch newspaper Het Financieele Dagblad published today, according to an e-mailed transcript from the Frankfurt-based central bank. “But this issue has to be decided at the political level.”

Spanish Cajas need a lot of money:

Spain said Monday its banks will need €20-billion ($27-billion U.S.) in new capital to meet new reserve requirements aimed at strengthening their finances.

Finance Minister Elena Salgado said a government fund that has been pouring money into mergers among troubled cajas, or savings banks, might eventually buy stakes in the entities that cannot meet the new criteria by raising capital on the open market.

European banks are issuing samurais:

Debt sold in Japan by overseas issuers yield an average 90 basis points more than government debt, while euro-denominated financial company notes yield 236 more than benchmark German securities, according to indexes compiled by Nomura Securities Co. and Bank of America Merrill Lynch. It costs 315 basis points less in yield for lenders to sell debt in Japan than in Europe, the biggest difference since the gap reached 319 in March 2009.

Barclays Plc and Credit Suisse Group AG led European lenders that raised a record 835.5 billion yen ($10.1 billion) from Samurai bonds last year, according to data compiled by Bloomberg. The growing advantage to issuing bonds in Japan may help Europe’s financial companies refinance 765 billion euros ($1.04 trillion) of debt Barclays estimates matures this year.

“Europe’s top banks may need to pay more spread than last year to sell Samurai bonds, but there’s a difference between investors in Japan and Europe,” said Yasuhiro Matsumoto, head of credit research at Shinsei Securities Co. in Tokyo. While European investors are increasingly cautious amid their region’s financial crisis, for Japanese investors “Samurai bonds are the only option” to get yield, he said.

Econbrowser’s James Hamilton discusses The Fed’s new policy tools:

Let me begin with a little background. Prior to the fall of 2008, the focus of monetary policy was to choose a target for the fed funds rate, which is the interest rate banks charge each other for overnight loans of Federal Reserve deposits. In normal times, this rate was extremely sensitive to the quantity of those deposits created by the Fed, enabling the Fed to achieve its target for the fed funds rate with relatively modest additions or withdrawals of reserves. But by the end of 2008, the Fed had driven the fed funds rate essentially to zero and began paying interest on reserves. Since then, banks have been content to hold an arbitrarily large amount of excess reserves, and the overnight rate has been as low as it could go. In other words, the traditional tools of monetary policy have become completely irrelevant in the current setting.

Meanwhile, Jim Hamilton’s World of Securities Regulation contrasts the differences between US and EU proposals for winding down failed banks:

The proposed EU legislation and the Dodd-Frank Act both provide for a resolution framework for systemic institutions at group level. Both the EU and the US are accordingly working to develop mechanisms which should be capable of resolving or winding down failing financial institutions. The US approach intends to address systemic risk by taking failing institutions into receivership by the FDIC, under which their business will be transferred or wound down and the failed institution will be liquidated.

The EU framework would also allow authorities to put firms into an orderly resolution in which their essential services could be preserved while the failed institution itself was ultimately wound down. However, in the cases where an institution is too large, complex or interconnected to be wound down in an orderly manner, the Commission is also considering equipping authorities with ambitious additional tools which would, under stringent conditions, allow a troubled firm to continue as a going concern, through write down of its debt, in order to preserve its economically important functions and buy time for authorities to sell or wind down its business in an orderly manner. In order to prevent moral hazard, there would need to be strict conditions accompanying any such approach, including the dilution of shareholders, changes to management, haircutting of creditors, and re-structuring so as to ensure that the surviving entity was viable.

A key power for regulators under this regime would be to write down debt. The consultation seeks views on two broad approaches to achieving this objective. The first approach would involve a broad statutory power for authorities to write down or convert unsecured debt, including senior debt, subject to possible exclusions for classes of senior debt that may be necessary to preserve the proper functioning of credit markets. It is not envisaged that such a power would apply to existing debt that is currently in issue, as that could be disruptive. The second approach would require financial firms to issue a fixed amount of “bail-in’’ debt that could be written off or converted into equity on a specified trigger linked to the firm’s failure. This requirement would be phased in over an appropriate period and, again, it is not envisaged that any existing debt already in issue would be subject to write down.

The Irish government has collapsed, but the budget might pass anyway:

Finance Minister Brian Lenihan will meet today lawmakers from the Green Party, which withdraw from the coalition yesterday, and opposition parties in Dublin to discuss a timetable for passing the Finance Bill. The plan would enact 6 billion euros ($8.2 billion) of tax increases and spending cuts.

James Reilly, deputy leader of Fine Gael said yesterday the bill can be passed this week. The Labour Party said it will table a confidence motion this week if the government doesn’t commit to passing the law by Jan. 28.

Bank valuations are still low:

Valuations for U.S. financial stocks have fallen so far, it’s like the rebound from the worst crisis since the 1930s never happened.

Banks, insurers and asset managers in the Standard & Poor’s 500 Index trade at 12.3 times estimated earnings, close to the lowest level since the bull market began in March 2009, according to data compiled by Bloomberg. The group is the second-cheapest among 10 industries in the gauge even as analysts say profits will rise 18 percent this year, exceeding the S&P 500, data compiled by Bloomberg show.

This is the sort of thing that usually corrects after a takeover or two, but somehow I think that a takeover of an undervalued, yet healthy, bank will not be particularly popular with the regulators these days.

Still, some have done all right anyway:

Paulson & Co., the $35.9 billion hedge fund run by John Paulson, told clients that it made more than $1 billion on its Citigroup Inc. investment in the last 18 months.

Citigroup was the fund’s most profitable bank holding last year, Paulson said in a letter to clients this month. The stock surged 43 percent in 2010.

But the banks aren’t out of the woods yet:

Bank of America Corp., the biggest U.S. lender, may book an $8.5 billion charge on costs to resolve disputes over faulty mortgages, a figure at the upper end of the range the company gave last week, according to Oppenheimer & Co.

The cost to settle demands from private investors on home loans could be as low as zero and the upper end is $7 billion to $10 billion, the firm said last week in a slide show. The bank may take a charge in this year’s fourth quarter, and costs may expand with lawyers “smelling blood in the water,” Christopher Kotowski, an Oppenheimer analyst, said yesterday in a note.

It would be interesting to take apart the projected earnings that give rise to the “low valuation” claim. Typically, such forecasts are based on analyst-defined ‘core business’, with special charges treated as a mere bagatelle.

National Bank has issued covered bonds:

The wait finally ended Monday morning with the launch of a $1-billion (U.S.) offering. The deal comes just a few weeks after rating agency DBRS assigned a provisional triple-A to the bank’s covered bonds. That rating was given on top of a cover pool worth $1.565-billion, with the vast majority of mortgages located in Quebec.

Barclays, Citi, Morgan Stanley and National Bank Financial are co-lead managers for the offering, which is still being priced near 35 basis points over mid-swaps.

DBRS has made a Quarterly Split Share Market Report available to subscribers.

As Assiduous Readers of the comments will know, I have been advised that La Presse had a piece recommending low-coupon bank preferreds about a month ago, on the grounds that the author believed Basel III will force redemption. I can’t find the link! Any help would be appreciated, acknowledged and rewarded.

The Canadian preferred share market declined slightly today, with PerpetualDiscounts down 4bp and FixedResets losing 9bp. Volume was very healthy.

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 0.5470 % 2,358.5
FixedFloater 4.78 % 3.47 % 27,989 19.17 1 0.1761 % 3,561.0
Floater 2.54 % 2.30 % 42,448 21.53 4 0.5470 % 2,546.6
OpRet 4.81 % 3.41 % 67,601 2.28 8 0.0096 % 2,389.5
SplitShare 5.30 % 1.49 % 449,275 0.87 4 0.1201 % 2,467.1
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0096 % 2,185.0
Perpetual-Premium 5.64 % 5.16 % 142,268 5.02 20 0.1557 % 2,035.0
Perpetual-Discount 5.32 % 5.29 % 257,160 14.97 57 -0.0410 % 2,080.6
FixedReset 5.25 % 3.44 % 283,419 3.04 52 -0.0895 % 2,271.9
Performance Highlights
Issue Index Change Notes
CM.PR.K FixedReset -1.73 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 26.16
Bid-YTW : 3.91 %
IAG.PR.C FixedReset -1.43 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-30
Maturity Price : 25.00
Evaluated at bid price : 26.80
Bid-YTW : 3.80 %
PWF.PR.E Perpetual-Discount -1.13 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-01-24
Maturity Price : 23.38
Evaluated at bid price : 24.55
Bid-YTW : 5.57 %
PWF.PR.I Perpetual-Premium 1.15 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2011-02-23
Maturity Price : 25.50
Evaluated at bid price : 25.60
Bid-YTW : -0.46 %
GWO.PR.F Perpetual-Premium 1.49 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2011-02-23
Maturity Price : 25.50
Evaluated at bid price : 25.86
Bid-YTW : -6.59 %
Volume Highlights
Issue Index Shares
Traded
Notes
TD.PR.M OpRet 77,455 Nesbitt crossed 50,000 at 25.77 and 25,000 at 25.70.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2011-05-30
Maturity Price : 25.50
Evaluated at bid price : 25.69
Bid-YTW : 2.23 %
TRP.PR.C FixedReset 56,128 Nesbitt crossed 30,000 at 25.45.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-02-29
Maturity Price : 25.00
Evaluated at bid price : 25.36
Bid-YTW : 4.07 %
TD.PR.C FixedReset 55,900 Nesbitt crossed 50,000 at 26.60.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-02
Maturity Price : 25.00
Evaluated at bid price : 26.61
Bid-YTW : 3.36 %
CM.PR.I Perpetual-Discount 48,300 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-01-24
Maturity Price : 23.07
Evaluated at bid price : 23.27
Bid-YTW : 5.06 %
HSB.PR.E FixedReset 43,440 RBC crossed 40,000 at 27.60.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-30
Maturity Price : 25.00
Evaluated at bid price : 27.55
Bid-YTW : 3.70 %
CM.PR.H Perpetual-Discount 31,645 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-01-24
Maturity Price : 23.56
Evaluated at bid price : 23.83
Bid-YTW : 5.05 %
There were 38 other index-included issues trading in excess of 10,000 shares.

2 Responses to “January 24, 2011”

  1. [...] PrefBlog Canadian Preferred Shares – Data and Discussion « January 24, 2011 [...]

  2. [...] get hate mail whenever I write about the fiduciary responsibility issue – such as January 24 – so all I can suggest is: if you want a fiduciary, hire one. I’m a Portfolio Manager, [...]

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