March 23, 2023

Stephen Poloz Named Bank of Canada Governor

Incoming Bank of Canada Governor Stephen Poloz, 57, worked at the central bank for 14 years earlier in his career. But he has spent the last 14 years at Export Development Canada.

Poloz takes over as central bank chief on June 3 when Mark Carney leaves, a surprise for markets, which had tipped Carney’s senior deputy Tiff Macklem as the most likely choice. Carney becomes governor of the Bank of England on July 1.

In his debut with reporters, Poloz was careful not to contradict the views that Carney and the central bank expressed in their quarterly economic report last month.

“We are in a recovery that is not as vigorous as would normally be expected and … I think it will be necessary to nourish it, I don’t know for how long,” Poloz said in an introductory news briefing in Ottawa.

Canada’s economy recovered well from the 2008-09 recession thanks to aggressive government spending, tax cuts and record-low interest rates. But growth stalled last year, with the economy recording its slowest two quarters of growth since the crisis.

The Bank of Canada has kept its key rate on hold at what it describes as a stimulative 1 percent since 2010. But it has signalled for the past year that the next move will be a rate hike, not a cut. ID: nL2N0D40HM

Poloz said exports now needed to fuel the Canadian economy, and he believed this was already starting to happen. Canada unexpectedly recorded a trade surplus in March, the first monthly surplus after a year of deficits.

“In my judgment, it’s looking promising. I hope you agree with that,” he said, turning to Carney, who smiled broadly: “Yes, absolutely,” Carney replied.

Analysts do not expect Poloz to rethink central bank policies, especially because of his experience working there earlier in his career. The bank, which guards its independence jealously, targets inflation of 2 percent, but has said it will be flexible with the timeline for reaching that target in difficult economic times.

“The move was a surprise, but I don’t look for any change in monetary policy,” said Craig Wright, chief economist at Royal Bank of Canada.

Unlike the U.S. Federal Reserve or the Bank of England, there are no discernible “hawks” or “doves” among the Bank of Canada’s six governing council members because the council reaches decisions by consensus and takes pains to speak from a common script at public appearances.

Poloz will serve a seven-year term.

In a Reuters poll on April 10, Poloz was seen as the second most likely candidate to get the job after Macklem.

Poloz appeared upbeat about signs of gradual cooling of the once-hot Canadian housing market and a slowing in record-high household debt levels in Canada – both top concerns of Finance Minister Jim Flaherty.

“Of course it’s a concern in the sense of where we are,” Poloz said. “However, the evolution appears to be constructive, and I think that’s great, for us to continue to watch that and to, if you like, nurture that process of a return to more normal conditions.”

Economists have said Poloz has the credentials to succeed as governor and that he was viewed as a governor-in-waiting in his previous period at the central bank.


He is a good communicator, described by one person as “folksy” in his speeches but also whip-smart. He worked at a private-sector financial research firm in Montreal for five years after leaving the central bank.

Poloz joined EDC, a quasi-independent organization that provides loans to importers of Canadian goods, in 1999 as its chief economist and became president of the agency in 2010.

One possible strike against him was the perception among some market players that he may be more sympathetic than his predecessors to exporters’ complaints about the strong Canadian dollar and lean towards a weaker currency.

RBC assistant chief economist Paul Ferley dismissed that notion.

“This would do a disservice to Poloz’s early career at the central bank where the priority is to set monetary policy to achieve an appropriate rate of inflation,” he said.

Poloz will have only about a month to transition to his new role, much shorter than the four months Carney had between his appointment in October 2007 and his first day of work in February 2008.

This is the third time in a row that the top job at the Bank of Canada has gone to an outside candidate rather than to the most senior internal policymaker, in this case Macklem.

Macklem said in a statement that he would stay with the bank and looked forward to working with Poloz.

(Reporting by David Ljunggren and Louise Egan; Editing by Janet Guttsman, Peter Galloway and Paul Simao)

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Bits Blog: RIM Shares Drop, and Analysts Warn of Further Trouble

Research in Motion’s already depressed shares fell sharply on Wednesday after the company unexpectedly warned that it would probably post a loss for its first quarter, and several analysts predicted worse is yet to come.

Although RIM had stopped giving investors financial forecasts, largely because it consistently failed to meet them over the last year, it took the unusual step of issuing a statement late Tuesday saying that it might lose money in the quarter, which ends Saturday.

RIM’s shares fell 88 cents, or 7.8 percent, to $10.35.

While many analysts had said they expected that RIM, which makes the BlackBerry, might start to lose money this fiscal year, none had predicted it would do so in the first quarter. RIM reported a loss for its previous quarter but it was caused by exceptional charges. Before the announcement Tuesday, the consensus of analysts was that the company would earn 42 cents a share in the first quarter, with the most pessimistic forecast at 16 cents.

Unlike many of his colleagues, Kris Thompson of National Bank Financial did not have to lower his target price for RIM’s shares after the announcement. He has predicted since last December that it would fall to $8 a share.

He shares the growing concern that RIM’s decline may reach a stage where a new line of phones and the new BlackBerry 10 operating system — which will appear this year — will not be enough to turn the company around.

In a note to investors, Mr. Thompson compared buying RIM’s shares to “going to the casino.” He added, “If you’re feeling lucky, this stock might be worth a dice-roll under $10.”

He wrote that RIM’s announcement Tuesday that it had hired J.P. Morgan Securities and RBC Capital Markets, a unit of the Royal Bank of Canada, to conduct a strategic review was a signal that RIM was for sale.

But Ehud Gelblum of Morgan Stanley offered a different analysis in his note to investors.

“We do not believe RIMM is actively looking to sell the company despite the hiring of bankers to explore alternatives,” Mr. Gelblum wrote, using the company’s stock symbol. Instead, he wrote that it was more likely that RIM would sell only a part of itself, or turn over the operation of its unique global network, which provides corporate BlackBerrys with a high level of security, to another company under contract.

While Thorsten Heins, president and chief executive of RIM, has said it would review licensing BlackBerry software to other companies, Mr. Gelblum wrote that this might actually harm the company because it “would just invite others to beat RIM” using its own operating system.

He forecast that RIM’s shares could drop to as low as $6 or, if BlackBerry 10 is a success and the company’s business outside North America accelerates, rise to as high as $20. A year ago, RIM traded at more than $43.

Mark Sue, of RBC Capital Markets, cut his forecast for RIM’s share price to $11 from $13. He again warned that RIM’s market share could fall below 5 percent. That level “is the realm of subscale operations, razor-thin profits and decreasing odds of a turnaround,” he said.

He said RIM’s deteriorating finances could hamper the BlackBerry 10 phone introduction and accelerate the move by high-end BlackBerry users in the United States to iPhones and phones based on Google’s Android operating system.

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Stocks Surge on Action by Central Banks

Stocks in the United States surged nearly 4 percent on Wednesday, with the Dow Jones industrial average up more than 400 points, after central banks took action to address growing concern about the debt crisis in the euro zone.

The Federal Reserve, the Bank of England, the European Central Bank, the Bank of Japan, the Bank of Canada and the Swiss National Bank all moved to bolster financial markets by increasing the availability of dollars outside the United States.

The jump in stocks was an extension of the turmoil and volatility that have weighed on global markets concerned about sovereign debt pressures in Europe for more than a year.

Yet analysts noted that sharp gains have often failed to stick. Even with Wednesday’s jolt, the Standard Poor’s 500-stock index was down 1.4 percent for November so far and down more than 1.6 percent for the year to date. In afternoon trading, the Dow was up more than 419 points, or more than 3.6 percent. The S.P. 500 and the Nasdaq composite index each rose more than 3.5 percent.

“The markets are breathing a sigh of relief,” said Stanley A. Nabi, chief strategist for the Silvercrest Asset Management Group.

But the coordinated action also signaled that the problem had reached a crisis point, he said, and that the central banks recognized there was a “lot of danger” in letting the current situation continue.

Still, he questioned the lasting effects of the action if not followed up with steps to address the roots of the sovereign debt problems in countries like Greece and Italy. The yield on the 10-year Treasury note, which moves in the opposite direction of its price, rose 6 basis points, to 2.054 percent, from 1.99 percent late on Tuesday.

Ralph A. Fogel, head of investment strategy for Fogel Neale Wealth Management, said rates would probably remain very low in the bond markets.

But in equities, Mr. Fogel added, the “fear is off that there is going to be any sort of tremendous move down like there was in 2008.”

Investors and traders were also treated to a swath of economic news on Wednesday in two of the most sensitive sectors, housing and jobs. Statistics from the payroll processing company ADP showed that the economy added 206,000 jobs in November, more than consensus forecasts, while pending home sales rose 10.4 percent in October from the previous month.

Still, the economic news was considered a sideshow in the markets.

“It is all about the central banks,” Mr. Fogel said.

Steven Ricchiuto, chief economist for Mizuho Securities USA, said the economic reports provided a fresh example of how data could be inconsistent as the economy bounces along a shallow growth path.

“The apparently decisive turn in the data follows an equally decisive turn to the downside this past summer, which proved to be only temporary,” he wrote an e-mailed commentary, “and I can see no fundamental reason why the current upside breakout will be any different. Instead, I see this upturn as just one more in a series of false starts.”

The Euro Stoxx 50 closed up at 4.3 percent, and the CAC 40 in Paris ended up 4.2 percent, while the DAX index in Germany was up almost 5 percent. The FTSE 100 in London rose 3.16 percent.

On Wall Street, shares of banks, energy companies and materials providers all powered ahead by more than 4 percent.

Bank of America shares, which on Tuesday fell more than 3 percent, to $5.08, their lowest closing level since March 2009, were up more than 3 percent, at $5.24, on Wednesday.

Financial shares have come under particular pressure as the euro crisis has dragged on, and after the market closed on Tuesday, the Standard Poor’s ratings agency reduced its outlook on several big banks, including JPMorgan Chase and Bank of America.

The dollar fell against an index of major currencies. The euro rose to $1.3460 from $1.3317.

Binyamin Appelbaum contributed reporting from Washington.

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Regulators Defend Extra Capital Buffer for Banks

The Basel Committee on Banking Supervision and the Financial Stability Board said their joint study group estimated that a one percentage point buffer on the top 30 banks over eight years would cut economic growth by less than 0.01 percent a year during the phase-in period, but “the benefits from reducing the risk of damaging financial crises will be substantial.”

Both bodies have approved the bank capital surcharge plan that leaders of the world’s top 20 economies are set to endorse in November.

A surcharge of 1 to 2.5 percent — the amount depending on five factors like complexity and international reach — will be introduced from 2016 over three years. Banks including JPMorgan Chase, HSBC, Barclays and Deutsche Bank are almost certain to be included.

The surcharge comes on top of a minimum of 7 percent capital buffers that all banks must hold under the global Basel III accord being phased in from 2013.

The aim is to avoid taxpayers’ having to bail out banks again in the next crisis. It is part of a wider effort to tackle “too big to fail” lenders by ending market assumptions that governments will not allow them to collapse.

JPMorgan Chase’s chief executive, Jamie Dimon, has described the surcharge as anti-American and has clashed with the Bank of Canada governor, Mark Carney, who will take over at the Financial Stability Board in November. The banking industry warns that piling capital requirements on lenders will crimp their ability to aid growth, but regulators say banks fail to calculate the benefits of tougher standards.

The two bodies estimated that the Basel III proposal combined with the capital surcharge “contribute a permanent annual benefit of up to 2.5 percent of G.D.P. — many times the costs of the reforms in terms of temporarily slower annual growth.”

The Basel III rules and surcharge combined will lower economic growth by an estimated 0.34 percent at the point of peak impact, the regulators said.

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Fair Game: 5 Wisconsin School Districts and 3 Ill-Fated Securities

UNEARTHING the story of the financial crisis is like conducting an archaeological dig. New shards keep emerging from the dust.

Here’s an interesting find. The Securities and Exchange Commission has sued Stifel Financial, a regional brokerage firm in St. Louis, accusing it of fraud in connection with complex debt securities it recommended to five Wisconsin school districts in 2006. Rather than settle with the commission, as many firms do, Stifel is defending the matter.

The S.E.C. sued Stifel on Aug. 10 because the firm advised the school districts to buy the three ill-fated securities, which the regulator said were unsuitably risky for unsophisticated investors. David W. Noack, the firm’s sales representative, misled school district officials when he told them that the deals, involving corporate bonds and rated AA-minus, were nearly as safe as United States Treasuries, the S.E.C. said. The Wisconsin school districts lost tens of millions of dollars on a $200 million investment, most of which was borrowed.

Stifel earned $1.6 million in commissions. But it did not create the securities — and this is where the case gets murky and interesting. Royal Bank of Canada built the failed investments, using parameters set out by Stifel and secretly profiting on the deal, Stifel said. The S.E.C. has not sued the bank.

In a lawsuit against Royal Bank of Canada, Stifel points to internal bank documents indicating a $5.4 million profit on two of the Wisconsin deals. Stifel also maintains that Royal Bank of Canada hid these and the third deal’s profits and had undisclosed conflicts as the deals’ originator. As such, RBC failed to abide by the contract with the school districts requiring “complete expense and fee transparency and disclosure,” Stifel said.

Kevin Foster, a Royal Bank of Canada spokesman, called Stifel’s allegations meritless and said the firm was trying to deflect blame to others for its central role in the troubled investments. “We never misrepresented our estimated profit to Stifel or the districts,” Mr. Foster said in a statement. “Stifel’s math is flat-out wrong and based on erroneous assumptions. The transactions were not profitable to RBC.”

Stifel and a lawyer for Mr. Noack declined to comment.

Here’s a short history of the transactions. In 2005, the school districts faced $400 million in unfunded health care and other non-pension guarantees for retired workers. Mr. Noack had been financial adviser to the districts for decades; he suggested they borrow money and invest in securities rated AA-minus that would generate more in yield than they had to pay in interest.

This becomes maddeningly complex: The bank from which the school districts borrowed — Depfa, of Ireland — told Stifel that it preferred collateralized debt obligations as the securities against which it would lend money to the districts. Stifel asked for proposals from banks. Royal Bank of Canada won the assignment and began to construct synthetic collateralized debt obligations linked to about 100 corporate bonds. It worked with ACA Management and UBS to select the underlying portfolios.

Depfa lent the money to the districts on a “nonrecourse” basis, meaning that the districts would not have to repay the loan if the securities bought with the borrowed funds defaulted. This arrangement, Stifel argues, shows that Depfa, a sophisticated institution, believed that the investment was not high-risk. Under the deal’s terms, Depfa could seize the collateral if the security’s asset values fell to 95 cents on the dollar and did not return to $1.01 within 30 days.

It didn’t take long for the deals to go south, and for the school districts to lose their $37 million investment. Depfa seized the underlying collateral supporting its $163 million loan. Lawsuits began flying.

Once again, we see the same toxic ingredients that have appeared repeatedly in the aftermath of the crisis: collateralized debt obligations, credit default swaps, ruinous leverage, an overreliance on credit ratings, greed and extreme naïveté.

But the case raises questions about a largely unexplored part of the collateralized debt obligation mania — whether Wall Street firms putting together these deals knew how to game the ratings agency models and profited by selecting debt issues to suit their purposes.

If, for example, a firm was designing an instrument to be used to bet against the underlying collateral — Goldman Sachs’s famous Abacus deal was created so the hedge fund manager John Paulson could short risky mortgages — a firm could assign debt issues to the deal that carried overly optimistic or misplaced ratings. Later, when reality intervened and the ratings were cut, those betting against the underlying collateral would prosper.

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DealBook: PNC to Buy R.B.C. Unit for $3.5 Billion

Jim R. Bounds/Bloomberg

The PNC Financial Services Group announced on Monday that it had signed an agreement to buy the American retail business of the Royal Bank of Canada for $3.45 billion.

The deal, which is priced at a $112 million discount to tangible book value, will allow PNC to expand into the Southeast. The Royal Bank of Canada unit has 424 branches in North Carolina, Florida, Alabama, Georgia, Virginia and South Carolina, and roughly $25 billion of assets.

Once the acquisition is complete, PNC will be the fifth-largest bank in the United States, as measured by branches. PNC predicted that the deal would increase earnings by 2013.

Royal Bank of Canada is selling a business that has struggled as a result of the housing crisis. The Canadian bank acquired the unit, then named Centura Banks, for $2.2 billion in 2001. But the group has struggled to gain market share, even after acquisitions.

Royal Bank of Canada is among several Canadian banks that looked to the United States for growth with varying degrees of success. The BMO Financial Group, the parent of Bank of Montreal, agreed in December to buy Marshall Ilsley, a bank based in Milwaukee, for $4.1 billion. The TD Bank Financial Group, based in Toronto, bought Commerce Bancorp of New Jersey for $8.6 billion in 2008, and last year bought three failed banks in Florida.

Bank of America Merrill Lynch and the law firm Wachtell, Lipton, Rosen Katz advised PNC. RBC Capital Markets, JPMorgan Chase and Sullivan Cromwell worked with Royal Bank of Canada.

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