Posted by Larry Doyle on September 16th, 2009 11:42 AM |
A number of banking institutions have repaid Uncle Sam’s TARP funds. The truth be told, a few of these institutions never wanted Uncle Sam’s money in the first place. Now we learn that the biggest financial beneficiary of Uncle Sam’s largesse, that being Citigroup, wants to begin discussions for Uncle Sam’s exit.
Be mindful that Uncle Sam (that’s you and me, boys and girls) owns upwards of 40% of Citi and that this giant would be dead and buried without Sam’s bailout. If I am Citi, I would also like to get out from under the grand old Uncle’s watch. The Wall Street Journal highlights this story in writing, Citigroup Explores Bid to Pare U.S. Stake:
Citigroup Inc., eager to shed the stigma of being a ward of the state, is working on a plan to reduce the U.S. government’s 34% stake.
Top Citigroup executives have been devising plans for a possible multibillion-dollar stock offering in which the New York company would issue new shares to the public, while the Treasury Department would sell at least a portion of its Citigroup holdings, according to people familiar with the matter.
Citigroup hasn’t held in-depth talks with the government. Over the weekend, Citigroup called a Treasury official and said the company wanted to start talking about paring down the Treasury investment, according to people familiar with the matter. On the call, Citigroup officials said they planned to raise outside capital in order to repay the outstanding bailout funds. Treasury officials responded to Citi that they didn’t object to the company paying back Washington as long as Citi first raised offsetting capital, these people said.
It is regrettable that the WSJ did not juxtapose this story of Citigroup’s grand vision to regain its independence with the fact that Citigroup continues to milk Uncle Sam via the FDIC-backed debt program. What is that?
The FDIC-backed debt allows Citigroup to issue debt which is effectively government guaranteed. In the process, Citi generates a significant cost savings because this debt falls into the ‘heads we win, tails you lose’ category. How much of this ‘milk’ did Citi just suck? Try a nice steady stream totalling $5 billion. The Financial Times sheds some light on this ‘stall’ in writing, Citi Raises $5 Billion in Bail-Out Bonds:
People close to the situation said Citi was in early talks with the US Treasury over a plan that would enable the company to raise capital by selling shares and enable the authorities to pare their holding.
But Citi’s decision to sell two and three-year bonds backed by the Federal Deposit Insurance Corporation could reinforce the perception that the bank, which has received $45bn in federal aid, is still not back to full health.
The hypocrisy of it all is par for the course, but for Citi, this milk tastes Mmmm…Mmmmm good!!
Posted by Larry Doyle on September 16th, 2009 9:26 AM |
What does one do when your bank is the largest mortgage originator in the country, has outsized exposure to an array of toxic mortgage loans (pay-option ARMs and the like), and is located in the heart of the weakest real estate market nationwide? Call Ghostbusters . . . that is, call on Washington to further tap the wards of the state known as Freddie and Fannie in an attempt to offload this risk and future risk on the American taxpayer. Of whom do I speak? Wells Fargo, led by CEO John Stumpf, called for just such actions in a recent interview with the Financial Times, Wells Fargo Urges U.S. to Boost Mortgage Market.
The FT writes:
The US government should help revive the moribund market for big mortgages by getting Fannie Mae and Freddie Mac to buy large home loans from banks, the chief executive of the lender Wells Fargo urged on Tuesday.
In an interview with the Financial Times, John Stumpf, whose bank originates a quarter of all US mortgages, called for an increase in the size of loans purchased by Fannie and Freddie, the troubled finance groups controlled by the authorities.
Mr Stumpf said such a move would help reduce the interest rates charged by banks on so-called “jumbo” mortgages and revive a market for higher-end housing that has been devastated by the credit crunch.
Fannie and Freddie can currently buy or guarantee mortgages worth up to $417,000. The stimulus plan approved last year set the companies higher limits of up to $729,750 in certain high-cost areas such as California until the end of 2009. Congress has to approve any extension of those higher limits.
Be mindful that Freddie and Fannie have already been approved to purchase conforming loans with loan-to-value ratios of up to 125% and are also purchasing jumbo mortgage product in certain regions of the country. The simple fact is our domestic mortgage finance market can now be defined as nothing short of socialized finance.
CEO Stumpf’s call for a further extension of this socialized housing finance is nothing more than a veiled attempt to offload risk from Wells Fargo onto the American taxpayer. In the process, risk based pricing for Jumbo mortgages will not be properly aligned and the American taxpayer will eat larger losses now and in the future.
At what point will capitalism actually be given a chance?
Posted by Larry Doyle on September 15th, 2009 3:23 PM |
On the heels of President Obama’s speech on Wall Street in which he called for meaningful financial regulatory reform, I welcome submitting to him and the American public the following video clips. These clips are from Fox Business News “America’s Nightly Scoreboard” with David Asman on September 3rd.
While President Obama and Congress may believe financial regulatory reform needs to focus on the SEC, the Federal Reserve and assorted other governmental agencies, I would remind the President and his Congressional colleagues that Wall Street is regulated not only by the SEC but to a great extent by the self-regulatory organization known as FINRA (Financial Industry Regulatory Authority).
This discussion on “America’s Nightly Scoreboard” is separated into two parts.
Highlights from the videos include:
1. Richard Greenfield, an attorney representing Amerivet Securities, makes the claim that FINRA under the leadership of Mary Schapiro failed to protect investors.
2. Former SEC chair Harvey Pitt defends Shapiro and FINRA
3. Greenfield indicates that a FINRA insider claims FINRA invested in Madoff!!
4. In Part II of the video clips, your host here at Sense on Cents joins the panel and provides details as to why FINRA, via its parent the NASD, did have responsibility to oversee Madoff. I also comment on the nature of the relationship between Wall Street and Washington, FINRA’s investment and timely liquidation of its Auction-Rate Securities position, and the need for total transparency at FINRA.
4. Head of the Madoff Victims Coalition for Investor Protection, Ronnie Sue Ambrosino, weighs in that the entire regulatory structure from the SEC to FINRA to SIPC (Securities Investor Protection Corporation) have failed to protect investors.
In my humble opinion, the conclusion of this show highlights the screaming need for FINRA to open its books and records for a full and thorough independent analysis and review. In so doing, hopefully investors specifically and the American public at large can regain a degree of confidence in the badly shattered Wall Street regulatory process.
If you care about the markets and our country, I beseech you to watch this 18 minute video in its entirety.
Thoughts, comments, questions always welcome and appreciated.
Posted by Larry Doyle on September 15th, 2009 12:44 PM |
Will the ruling highlighted in my initial post this morning, “Judge Jed Rakoff Indicts the Wall Street-SEC Incest”, ultimately pit one arm of Uncle Sam against another, or to coin a phrase, pit Uncle Sam vs. Aunt Samantha? How so? Would Bank of America CEO Ken Lewis under oath put former Secretary of Treasury Hank Paulson and Fed Chair Ben Bernanke on the hot seat and implicate them as the driving forces behind the BofA takeover of Merrill?
If Lewis plays that card under oath, Judge Jed Rakoff may be put in a position to adjudicate on the culpability of Paulson and Bernanke in this financial fiasco vs. the judgment of the SEC in imposing the $33 million fine against BofA.
You know that every party involved in this mess, with the exception of BofA shareholders, is cringing at the prospect of this case going to trial.
Now the SEC is in a jam, said Peter Henning, a former SEC attorney who teaches law at Wayne State University in Detroit. Regulators could dismiss a case in which the bank is accused of breaking the law. They could try the case and risk that the bank has strong defenses. Or they could file a new lawsuit against individual executives or lawyers after saying earlier that they lacked sufficient evidence to do so.
“In a sense, the SEC has painted itself into a corner,” Henning said in an interview.
Human nature dictates that individuals backed into a corner will often resort to desperate measures. How desperate is the SEC to save face rather than upholding its mission to protect investors? Bloomberg offers more grist:
“The parties’ submissions, when carefully read, leave the distinct impression that the proposed consent judgment was a contrivance designed to provide the SEC with the façade of enforcement and the management of the bank with a quick resolution of an embarrassing inquiry,” Rakoff wrote.
Rakoff rejected the bank’s arguments yesterday, saying he still doesn’t know why executives or their lawyers weren’t sued. He said a trial in the case, which neither side wants, would start on Feb. 1.
“The judge’s not-so-implicit message is that he wants people named and he wants those people to pay the penalties,” Anthony Sabino, a business-law professor at St. John’s University in New York, said in an interview. “The bottom line is that there have been very pertinent and important questions asked and the answers have not been very forthcoming.”
Could this scenario play out that Mary Schapiro as Aunt Samantha is compelled to make a case which implicates Hank Paulson and Ben Bernanke as Uncle Sam for improperly compelling a bank executive, Ken Lewis, to violate shareholder rights?
The twists and turns on this stretch of our economic landscape are getting ever more interesting.
Posted by Larry Doyle on September 15th, 2009 9:24 AM |
Will the American public ever truly know what happened in December 2008 when Bank of America shareholders’ interests were neglected by BofA’s management in completing its takeover of Merrill Lynch? Capitalism took a back seat to the supposed needs of financial expediency as defined by then Treasury Secretary Hank Paulson and Fed Chair Ben Bernanke.
How could the SEC pretend to uphold its mission and protect the BofA shareholders’ interests which were clearly violated last December? The SEC imposed a $33 million fine against BofA in hopes that the courts and American public could once again be duped in the process. The $33 million fine is chicken feed for an institution such as BofA that had received $40 billion in taxpayer bailout money.
Against this backdrop, I wholeheartedly commend and endorse U.S. District Judge Jed Rakoff for throwing out this contrived agreement between the SEC and BofA. The Wall Street Journal provides further details this morning in writing, Judge Tosses Out Bonus Deal:
A federal judge threw out the Securities and Exchange Commission’s proposed settlement with Bank of America over its disclosure of controversial bonuses paid to Merrill Lynch employees, in an unusual ruling that casts doubts about how the agency handles probes of major U.S. companies.
The order, by U.S. District Judge Jed Rakoff, came as the New York State attorney general was weighing civil-fraud charges against Bank of America Corp. executives. Charges could be brought against the bank’s chief executive, Kenneth Lewis, and Chief Financial Officer Joseph Price, according to a person familiar with the investigation.
The Rakoff ruling undermines one of the most high-profile cases against alleged corporate wrongdoing conducted under SEC chief Mary Schapiro, who took the job in January. It puts new pressure on the agency to show it is fighting for investors in the wake of the controversies over its policing of the financial industry during the Wall Street boom and its failure to catch Bernard Madoff’s massive fraud despite several red flags.
In a rare scuttling of an SEC settlement, Judge Rakoff said the $33 million fine levied on Bank of America “does not comport with the most elementary notions of justice and morality” (LD’s highlight) because the company’s shareholders — the victims of the alleged misconduct — are the same people being asked to pay the fine. He set a trial date for Feb. 1.
While Wall Street professionals, government regulators, and even media analysts would define this particular case as a ‘one off’ or ‘dealing with exceptional circumstances,’ I beg to differ. I strongly believe this case is a perfect example of the incestuous relationship between Wall Street and those charged with protecting investors, namely the SEC and FINRA. How often are investors’ interests neglected at the expense of the financial industry? More often than investors could possibly imagine.
The Wall Street Journal’s editorial, Rakoff Rakes the SEC, strikes a similar chord in writing:
The judge had other complaints, but broadly the deal “suggests a rather cynical relationship between the parties: the SEC gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger; the Bank’s management gets to claim that they have been coerced into an onerous settlement by overzealous regulators. And all of this is done at the expense, not only of the shareholders, but also of the truth.” The parties will go to trial in February.
We look forward to it, especially in light of the recent news that Fed and Treasury knew all about these bonuses and stayed mum. Judge Rakoff has done a public service by exposing the political point-scoring that drives far too many regulatory actions. (LD’s highlight)
America needs more judges with the courage and integrity of Jed Rakoff. I salute him.
Posted by Larry Doyle on September 14th, 2009 2:41 PM |
When I hear financial industry insiders opine that they need vehicles and procedures which allow them to ‘smooth earnings,’ I get very suspicious. Why? That very thought process was the business model which led to the failures of Freddie Mac and Fannie Mae.
The financial results that companies give investors are supposed to paint a picture of how things are. Banks and their regulators want to turn that notion on its head so they can spin a smooth tale of how they would like things to be.
Sadly, some accounting rule makers may be ready to appease banks and the politicians who back them. If that happens, financial results will change from a vital tool for investors to a vehicle catering to managers, regulators and employees.
The practical result of such approaches would be to allow banks to report smoother results that supposedly reflect their long-term prospects. For banks, smoother profits would presumably lead to higher share prices. For regulators, less volatile results would supposedly make it easier to maintain financial stability.
Make no mistake, these accounting procedures are merely a formula for the continuation of a ‘heads we win, tails you lose’ approach which was so prevalent in causing this crisis in the first place.
Investors should not be so naive as to think otherwise. If these procedures are fully implemented, then rigorous risk management will go right out the window and prospects for real, long term economic prosperity along with it.
Regrettably, I have little confidence that the ‘wizards in Washington’ have the intellectual capacity, the moral fortitude and unquestioned integrity to take this issue on and truly protect the American public.
Posted by Larry Doyle on September 14th, 2009 10:06 AM |
Eliot Spitzer
Say what you want about Eliot Spitzer, but in his pursuit of financial chicanery he took very few, if any, prisoners. Regrettably, his personal failings caused his demise at a time when the American public truly needed an advocate to unearth the failings in our financial regulatory structure.
Spitzer is slowly regaining his stature. He pulls no punches in taking on the many holes in our financial regulatory framework as he writes in The New Republic, Better Regulate Than Never. I commend Spitzer as he calls out the Wall Street self-regulatory oversight in writing:
We know markets are still the best way to allocate resources and to set prices and wages. But the first and essential corollary to any theory of markets should hold that they are fragile and must be protected. No matter how frequently large swaths of the world loudly shout, “We love the market!,” virtually nobody does. In the absence of rigorous enforcement of rules, market players seek monopoly power and unfair advantages; they take risks at the undisclosed expense of others, or violate fiduciary duty. None of this means these actors are “evil” or “immoral.” But their actions demonstrate that self-interest, unbridled by enforcement of rules, will destroy the very market so many people so ostentatiously claim to adore.
So, we can now dispose of that old canard that self-regulation preserves the integrity of markets. There is essentially no evidence that any self-regulatory entity–from the Securities Industry Association to the New York Stock Exchange–ever revealed or resolved a single structural flaw in the market place.Rather, they papered over and rationalized away all the bad behavior they witnessed. (LD’s highlight)
I totally concur. As much as financial self-regulatory organizations would promote that they are aggressively moving forward to clean up the industry, their historical track record belies that fact.
I would point out that Spitzer’s reference to the Securities Industry Association (SIFMA) is misplaced. SIFMA is merely a de facto trade organization rather than a real cop. Spitzer should have targeted FINRA (Financial Industry Regulatory Authority), which is supposed to be the ‘tough cop.’ That said, I commend him for raising this topic.
Will our media and government pick up on Spitzer’s premise, elevate the debate, and serve the public interest? We have yet to witness any real concerted efforts by the media or the government on this front. Why? The media and the government serve at the behest of the financial industry to a far greater extent than they serve at the behest of the American public.
Spitzer sheds further light on this point by writing:
Our market has been–and will continue to be–undermined by regulators who are intellectually or ideologically unwilling to confront powerful market players. Too many of our regulators have been tarnished by the culture of Washington, where the constant movement between government and the private sector has created a fear of disrupting the status quo. It is an environment where stringent enforcement–the very type we needed–jeopardizes future confirmations, alienates potential clients, and engenders social ire. This cozy world isn’t exactly corrupt. Rather, it perpetuates an insidious process of socializing the regulators and the regulated alike. Everyone emerges accepting a way of doing business that ultimately fails the public and the economy.
I totally agree with Mr. Spitzer. Perhaps he is a regular reader of Sense on Cents!!
In all seriousness, where do we go from here? Do we allow the media and the government to neglect their public duty and continue protect Wall Street vs. Main Street?
Keep reading Sense on Cents as I will continue to bang the drum. Readers can help by spreading the word.
Posted by Larry Doyle on September 14th, 2009 7:18 AM |
Whatever happened to the grand plans to implement real financial regulatory reform? Has Wall Street received the proverbial ‘get out of jail free card?’ Has our media been an unwitting enabler of lax regulatory oversight and limited transparency? Has Washington once again been ‘bought’ by Wall Street?
In my opinion, America continues to remain at real risk because the answers to all of the above questions is a resounding “Yes!!”
The Obama administration, in the persons of Tim Geithner, Joe Biden, and Larry Summers, is consistently declaring victory in the battle to ‘rescue’ the economy. The fact is, victory is not assured nor will it be enduring when the mechanisms which detonated our nation’s economy largely remain in place . . . and they do.
The administration is ‘selling’ a Fed-induced and Fed-nourished rally in the equity markets as reason for a victory lap. Who is holding them to account? Who is questioning the other ‘wizards in Washington’ as to what has been done and what will be done to prevent a similar meltdown in the future? Regrettably, the American public has allowed both Wall Street and Washington to frame both the debate and the outcome without a serious probe into the failures in policies and procedures which caused our economic crisis.
Today President Obama will make a campaign stop on Wall Street to promote his calls for financial regulatory reform. We will receive the standard platitudes. Obama will likely recruit a few high profile Wall Street executives to support his initiatives or lack thereof. The fact is, Wall Street has been working diligently to make sure that ultimately “business as usual” carries the day.
Will Obama be able to mandate that the largest banks significantly increase their capital ratios? Will Obama be able to mandate that ALL derivative transactions are reported and properly exposed? Will Obama be able to mandate that the regulatory bodies, specifically the Wall Street self-regulatory organization FINRA, are totally transparent? Will Obama be able to mandate that Wall Street compensation is fully aligned with the accompanying risks embedded within these financial behemoths? Will Obama be able to mandate that the reform of the ratings process on Wall Street have real substance?
The answers to these questions will very likely be seriously diluted by the massive Wall Street money machine which largely owns Washington. In order for the American public to receive real regulatory reform, we need legislators and regulators unshackled from the Wall Street lobby.
The American public does not need campaign stops, photo ops, and platitudes on this topic of financial regulatory reform.
Will the media give the Wall Street, Washington, and regulatory triumvirate a pass as they pander about sufficiency when in fact the real regulatory question is one of transparency? In my opinion, the very future of capitalism and free markets lie in the wake.
My feelings and opinions on this topic are even stronger today.
Sad but true, as we enter the Brave New World of the Uncle Sam economy, investors need to remain diligent and should not assume that regulators are necessarily protecting them.
In my commentary that day, I specified shortcomings at the SEC and FINRA.
This morning, I am both heartened and dismayed by Gretchen Morgenson’s article in the Sunday New York Times Business section. Ms. Morgenson writes, But Who Is Watching Regulators?
I commend Ms. Morgenson for addressing a topic which receives little focus by the media at large. As such, I strongly recommend reading it. Ms. Morgenson pens:
Senior regulators who stood idly by for years as financial firms built their houses of cards have been rewarded with even bigger jobs or are jockeying for increased responsibilities. The Federal Reserve Board, for example, wants to become the financial system’s uber-regulator, even though its officials did nothing as banks made deadly decisions to lend recklessly and leverage themselves to the max.
Awarding increased power to those who failed in their oversight duties flies in the face of all notions of accountability.
Additionally she asserts:
Yet those in the public sector ask us to believe that regulators who snoozed during the credit bubble will be alert to emerging problems on their beats when the next mania begins.
That’s asking a lot, isn’t it?
Here’s a novel thought. Instead of creating more regulations to try to prevent this kind of mess from recurring, why not figure out how to hold regulators accountable when they perform as poorly as they did in recent years?
I am with Ms. Morgenson and pulling for her to ‘finish the job’ and call out specific regulators and specific regulatory bodies. I was so hopeful that this was the article that would call out Mary Schapiro (current head of the SEC), and Richard Ketchum (current head of FINRA) and take them to task for not providing real transparency at FINRA (Financial Industry Regulatory Authority), the Wall Street self-regulatory organization. (more…)
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Eliot Spitzer Calls Financial Self-Regulation a Canard
Posted by Larry Doyle on September 14th, 2009 10:06 AM |
Eliot Spitzer
Say what you want about Eliot Spitzer, but in his pursuit of financial chicanery he took very few, if any, prisoners. Regrettably, his personal failings caused his demise at a time when the American public truly needed an advocate to unearth the failings in our financial regulatory structure.
Spitzer is slowly regaining his stature. He pulls no punches in taking on the many holes in our financial regulatory framework as he writes in The New Republic, Better Regulate Than Never. I commend Spitzer as he calls out the Wall Street self-regulatory oversight in writing:
I totally concur. As much as financial self-regulatory organizations would promote that they are aggressively moving forward to clean up the industry, their historical track record belies that fact.
I would point out that Spitzer’s reference to the Securities Industry Association (SIFMA) is misplaced. SIFMA is merely a de facto trade organization rather than a real cop. Spitzer should have targeted FINRA (Financial Industry Regulatory Authority), which is supposed to be the ‘tough cop.’ That said, I commend him for raising this topic.
Will our media and government pick up on Spitzer’s premise, elevate the debate, and serve the public interest? We have yet to witness any real concerted efforts by the media or the government on this front. Why? The media and the government serve at the behest of the financial industry to a far greater extent than they serve at the behest of the American public.
Spitzer sheds further light on this point by writing:
I totally agree with Mr. Spitzer. Perhaps he is a regular reader of Sense on Cents!!
In all seriousness, where do we go from here? Do we allow the media and the government to neglect their public duty and continue protect Wall Street vs. Main Street?
Keep reading Sense on Cents as I will continue to bang the drum. Readers can help by spreading the word.
LD
Tags: Better Regulate than Never by Eliot Spitzer in The New Republic, Eliot Spitzer article in The New Republic, Eliot Spitzer comments on relationship between Wall Street and Washington, Eliot Spitzer's personal failings came at a time when we needed advocate for financial regulatory reform, failings by financial self-regulators, financial self-regulators papered over bad behavior on Wall Street, government and media serve at behest of financial industry rather than at behest of American public, self-regulation preserves integrity of markets is a canard, Spitzer FINRA a canard, Spitzer rails on financial self-regulation, who will advocate for financial regulatory reform
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