IIROC has gotten away with another shake-down, this time of Deutsche Bank. I’m sure every morally upright person will be shocked – shocked! – at their misconduct:
In late July and early August 2007, the Respondent failed to engage Compliance with emerging issues in the ABCP market.
That’s it. That’s the complete section titled “The Respondent’s Misconduct”. One part of the firm didn’t talk to another. No third parties were harmed – or even affected – in any manner whatsoever.
Aquiescing to this parody of justice were The Honourable Patrick Galligan and Mr. Michael Walsh. But there’s another million smackers in IIROC’s slush fund; I’m sure the folks at FAIR Canada will be pleased.
There’s a proposal for made-in-USA DSIBs:
The bill by [U.S. Representative John] Campbell would require banks with at least $50 billion in assets to hold an additional layer of capital in the form of subordinated long-term bonds totaling at least 15 percent of consolidated assets. If an institution were to fail, the long-term bondholders would be guaranteed at no more than 80 percent of the face value of the debt. As a result, banks would face pressure to reduce their balance sheets.
The extra layer of capital would be in addition to higher levels required as part of the Basel III international regulatory accords. The goal is to protect taxpayers from bailouts and equalize the competitiveness between large and small institutions, which face higher costs of capital, Campbell said.
Campbell also proposed using credit default swaps to help gauge when regulators should step in and assess a bank’s
riskiness. Under his bill, if the price of a bank’s credit default swaps increases more than 50 basis points, the Fed would
have to take steps to assess the banks’ soundness.“We want this layer of debt to effectively be the canary in the coal mine,” Campbell said.
His legislation would also repeal Dodd-Frank’s heightened standards for systemic institutions and its ban on proprietary trading, known as the Volcker rule. Campbell said that with additional capital requirements, a ban on proprietary trading would be unnecessary.
The Governor Jeremy C. Stein gave a speech titled Overheating in Credit Markets: Origins, Measurement, and Policy Responses:
Let me suggest three factors that can contribute to overheating. The first is financial innovation. … The second closely related factor on my list is changes in regulation. …
The third factor that can lead to overheating is a change in the economic environment that alters the risk-taking incentives of agents making credit decisions. For example, a prolonged period of low interest rates, of the sort we are experiencing today, can create incentives for agents to take on greater duration or credit risks, or to employ additional financial leverage, in an effort to “reach for yield.”11 An insurance company that has offered guaranteed minimum rates of return on some of its products might find its solvency threatened by a long stretch of low rates and feel compelled to take on added risk. A similar logic applies to a bank whose net interest margins are under pressure because low rates erode the profitability of its deposit-taking franchise.
Moreover, these three factors may interact with one another. For example, if low interest rates increase the demand by agents to engage in below-the-radar forms of risk-taking, this demand may prompt innovations that facilitate this sort of risk-taking.
…
One reason is that your view of the underlying mechanism shapes how you think about measurement. Consider this question: Is the high-yield bond market currently overheated, in the sense that it might be expected to offer disappointing returns to investors? What variables might one look at to shape such a forecast? In a primitives-driven world, it would be natural to focus on credit spreads, on the premise that more risk tolerance on the part of households would lead them to bid down credit spreads; these lower spreads would then be the leading indicator of low expected returns.On the other hand, in an institutions-driven world, where agents are trying to exploit various incentive schemes, it is less obvious that increased risk appetite is as well summarized by reduced credit spreads. Rather, agents may prefer to accept their lowered returns via various subtler nonprice terms and subordination features that allow them to maintain a higher stated yield.
…
It is interesting to think about recent work by Robin Greenwood and Sam Hanson through this lens.14 They show that if one is interested in forecasting excess returns on corporate bonds (relative to Treasury securities) over the next few years, credit spreads are indeed helpful, but another powerful predictive variable is a nonprice measure: the high-yield share, defined as issuance by speculative-grade firms divided by total bond issuance. When the high-yield share is elevated, future returns on corporate credit tend to be low, holding fixed the credit spread. Exhibit 1 provides an illustration of their finding. One possible interpretation is that the high-yield share acts as a summary statistic for a variety of nonprice credit terms and structural features.
…
As can be seen in exhibit 2, issuance in both of these markets has been very robust of late, with junk bond issuance setting a new record in 2012. In terms of the variables that could be informative about the extent of market overheating, the picture is mixed. On the one hand, credit spreads, though they have tightened in recent months, remain moderate by historical standards. For example, as exhibit 3 shows, the spread on nonfinancial junk bonds, currently at about 400 basis points, is just above the median of the pre-financial-crisis distribution, which would seem to imply that pricing is not particularly aggressive.15On the other hand, the high-yield share for 2012 was above its historical average, suggesting–based on the results of Greenwood and Hanson–a somewhat more pessimistic picture of prospective credit returns.
…
Putting it all together, my reading of the evidence is that we are seeing a fairly significant pattern of reaching-for-yield behavior emerging in corporate credit.
…
… one lesson from the crisis is that it is not just bad credit decisions that create systemic problems, but bad credit decisions combined with excessive maturity transformation. A badly underwritten subprime loan is one thing, and a badly underwritten subprime loan that serves as the collateral for asset-backed commercial paper (ABCP) held by a money market fund is something else–and more dangerous.
This article on plastic bag bans deserves wide distribution – particularly in Toronto:
Warning of disease may seem like an over-the-top scare tactic, but research suggests there’s more than anecdote behind this industry talking point. In a 2011 study, four researchers examined reusable bags in California and Arizona and found that 51 percent of them contained coliform bacteria. The problem appears to be the habits of the reusers. Seventy-five percent said they keep meat and vegetables in the same bag. When bags were stored in hot car trunks for two hours, the bacteria grew tenfold.
That study also found, happily, that washing the bags eliminated 99.9 percent of the bacteria. It undercut even that good news, though, by finding that 97 percent of people reported that they never wash their bags.
Jonathan Klick and Joshua Wright, who are law professors at the University of Pennsylvania and George Mason University, respectively, have done a more recent study on the public-health impact of plastic-bag bans. They find that emergency-room admissions related to E. coli infections increased in San Francisco after the ban. (Nearby counties did not show this increase.) And this effect showed up as soon as the ban was implemented. (“There is a clear discontinuity at the time of adoption.”) The San Francisco ban was also associated with increases in salmonella and other bacterial infections. Similar effects were found in other California towns that adopted such laws.
It was a mixed day for the Canadian preferred share market, with PerpetualPremiums flat, FixedResets up 14bp and DeemedRetractibles off 6bp. Volatility was normal. Volume was low, with a notable presence of ENB FixedResets, which go ex-Dividend on Wednesday.
| 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 | -0.0098 % | 2,573.8 |
| FixedFloater | 4.19 % | 3.52 % | 25,760 | 18.29 | 1 | -0.0441 % | 3,877.5 |
| Floater | 2.58 % | 2.89 % | 71,329 | 19.97 | 5 | -0.0098 % | 2,779.0 |
| OpRet | 4.74 % | 1.70 % | 36,993 | 0.30 | 5 | 0.1757 % | 2,613.1 |
| SplitShare | 4.55 % | 4.20 % | 36,806 | 4.26 | 2 | 0.2576 % | 2,930.3 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1757 % | 2,389.4 |
| Perpetual-Premium | 5.24 % | -1.10 % | 85,445 | 0.12 | 29 | -0.0007 % | 2,356.0 |
| Perpetual-Discount | 4.84 % | 4.89 % | 140,147 | 15.64 | 4 | -0.0203 % | 2,649.0 |
| FixedReset | 4.89 % | 2.76 % | 272,570 | 3.53 | 78 | 0.1363 % | 2,494.9 |
| Deemed-Retractible | 4.87 % | 2.26 % | 147,452 | 0.38 | 45 | -0.0628 % | 2,434.1 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| PWF.PR.A | Floater | -2.11 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-02-11 Maturity Price : 22.98 Evaluated at bid price : 23.25 Bid-YTW : 2.22 % |
| NA.PR.M | Deemed-Retractible | -1.26 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2013-05-15 Maturity Price : 26.00 Evaluated at bid price : 26.68 Bid-YTW : -4.60 % |
| TRI.PR.B | Floater | 1.02 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-02-11 Maturity Price : 23.58 Evaluated at bid price : 23.85 Bid-YTW : 2.19 % |
| FTS.PR.H | FixedReset | 1.25 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-02-11 Maturity Price : 23.83 Evaluated at bid price : 26.00 Bid-YTW : 2.76 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| ENB.PR.H | FixedReset | 131,523 | Nesbitt crossed blocks of 74,900 and 50,000, both at 25.67. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-02-11 Maturity Price : 23.33 Evaluated at bid price : 25.66 Bid-YTW : 3.45 % |
| ENB.PR.N | FixedReset | 78,998 | Nesbitt crossed 75,000 at 25.81. YTW SCENARIO Maturity Type : Call Maturity Date : 2018-12-01 Maturity Price : 25.00 Evaluated at bid price : 25.88 Bid-YTW : 3.49 % |
| ENB.PR.T | FixedReset | 67,873 | Nesbitt crossed 50,000 at 25.72. YTW SCENARIO Maturity Type : Call Maturity Date : 2019-06-01 Maturity Price : 25.00 Evaluated at bid price : 25.72 Bid-YTW : 3.64 % |
| TD.PR.I | FixedReset | 56,725 | RBC crossed 50,000 at 26.55. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-07-31 Maturity Price : 25.00 Evaluated at bid price : 26.53 Bid-YTW : 2.15 % |
| TRP.PR.A | FixedReset | 40,794 | RBC crossed 12,800 at 25.70; TD crossed 19,000 at 25.72. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-12-31 Maturity Price : 25.00 Evaluated at bid price : 25.83 Bid-YTW : 3.08 % |
| BNA.PR.C | SplitShare | 36,584 | TD bought blocks of 15,000 and 19,700 from anonymous, both at 24.70. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2019-01-10 Maturity Price : 25.00 Evaluated at bid price : 24.65 Bid-YTW : 4.81 % |
| There were 23 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| TCA.PR.Y | Perpetual-Premium | Quote: 52.45 – 52.98 Spot Rate : 0.5300 Average : 0.3385 YTW SCENARIO |
| GWO.PR.J | FixedReset | Quote: 26.09 – 26.57 Spot Rate : 0.4800 Average : 0.2938 YTW SCENARIO |
| PWF.PR.A | Floater | Quote: 23.25 – 23.75 Spot Rate : 0.5000 Average : 0.3635 YTW SCENARIO |
| NA.PR.M | Deemed-Retractible | Quote: 26.68 – 26.90 Spot Rate : 0.2200 Average : 0.1441 YTW SCENARIO |
| TD.PR.P | Deemed-Retractible | Quote: 26.35 – 26.55 Spot Rate : 0.2000 Average : 0.1353 YTW SCENARIO |
| TD.PR.G | FixedReset | Quote: 26.29 – 26.45 Spot Rate : 0.1600 Average : 0.0988 YTW SCENARIO |