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HomeMore Wall Street and Washington Incest
Posted by Larry Doyle on September 17th, 2009 1:15 PM |
The other day I saluted Judge Jed Rakoff for exposing the embedded hypocrisy and contrivance in the $33 million settlement paid by Bank of America to the SEC. Why don’t we have more judges with the courage and integrity to expose the incestuous nature of the Wall Street-Washington relationship? Great question. As an example of this incest, Bloomberg’s Jonathan Weil exposes the pathetic performance of Judge Robert Chatigny, from the U.S. District Court in Hartford, in his adjudication of a fraudulent accounting case brought by the SEC against General Electric. Weil writes, GE’s Fraud Case Could Use the Judge Gone Wild:
Finally a judge has dared say no to the once-venerable Securities and Exchange Commission and one of its cozy corporate settlements.
If that wasn’t novel enough, this fellow first had the nerve to ask the SEC a bunch of questions about the way it does its business. Turns out, he got a lot of embarrassing answers about the government’s investigation of Bank of America Corp that the SEC hadn’t planned to tell the rest of us about.
This jurist gone wild, now a folk hero of sorts, is U.S. District Judge Jed Rakoff. But before we go further, let me tell you a quick story about another judge, this one at the U.S. District Court in Hartford, Connecticut.
His name is Robert Chatigny. On Aug. 4, he was assigned a settled complaint the SEC filed that day against General Electric Co. Under the deal, GE agreed to pay $50 million of its shareholders’ money to resolve the agency’s claims that it had committed accounting fraud. The SEC didn’t name any actual people as defendants. We don’t know if it ever will. Chatigny approved the agreement six days later, with no hearing and no questions asked. GE neither admitted nor denied the allegations.
That’s how SEC cases usually go. And just think how much more we the public — and certainly GE shareholders — deserve to know about this supposed fraud. Who at the company committed it? Why hasn’t the SEC sued them? Doesn’t the SEC know who they are? Why aren’t they paying fines out of their own pockets? And why wasn’t Chatigny asking these kinds of questions?
I tried calling Chatigny yesterday to ask him. His law clerk said he couldn’t be reached for comment.
Why do firms such as GE or BofA commit these frauds or promote shoddy business practices? Because it is worth it. How so? The returns generated far exceed the potential fines or penalties imposed, so the practices continue.
The fact that Judge Chatigny or those of his ilk do not truly hold companies and individuals to account gives a quasi-green light for firms to continue to push the envelope. Who pays? Shareholders and the public at large. What are the real costs? The erosion of integrity and principle in the pursuit of profit. Who benefits? Individuals within these corporations and those in Washington who conveniently look the other way as these frauds play out.
I commend Jonathan Weil for once again shedding light into another dark, dank, dismal corner of American finance. We need more judges like Jed Rakoff and we need more journalists like Jonathan Weil.
LD
Judge Jed Rakoff Indicts the Wall Street-SEC Incest
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.
LD
NoQuarter Radio’s Sense on Cents with Larry Doyle Interviews Head of Bernard Madoff Victims Coalition, Sunday Night at 8PM
Posted by Larry Doyle on August 15th, 2009 5:04 PM |
UPDATE: The show has concluded, but you can listen to a recording in its entirety by clicking the Play button on the audio player below. Once the playback has started, you can forward or rewind to any portion of the show by clicking at any point along the play bar. My interview with Ronnie Sue Ambrosino was extremely interesting, touching upon elements of investor protection that concern us all. For your reference, I’d like to provide two important websites that my guest mentioned: Bernie Madoff Victims Coalition and an online petition to show a unified support for investors to receive fair and legal treatment by the Securities Investor Protection Corp (SIPC).
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Has our government ever failed us to the extent involved in the regulatory oversight connected to the Bernard Madoff Ponzi scheme? How could these failures have perpetuated for such an extended period? How are these failures and their impact on the victims being handled? Is insult being added to injury?
Can the victims possibly receive real justice in terms of restitution and retribution? Where did the system falter? How are the victims of this travesty being treated by the powers that be on Wall Street, Washington, and in the media?
I am thrilled to address all these issues on my weekly program, No Quarter Radio’s Sense on Cents with Larry Doyle, this Sunday evening August 16th from 8-9pm as I welcome Ronnie Sue Ambrosino, head of the Bernard Madoff Victims Coalition.
As a sneak preview, Ms. Ambrosino was interviewed by Charlie Rose on June 29th, the day Bernard Madoff was sentenced to 150 years in prison. Ms. Ambrosino appears in the video clip at the 3 minute, 5 second mark.
The issues I will address with Ms. Ambrosino run well beyond the immediate concerns of the Madoff victims. The integrity and transparency of our financial regulatory system and legal process remain very much in question.
Don’t miss this important discussion Sunday evening on NQR’s Sense on Cents with Larry Doyle.
LD
Related Sense on Cents Commentary:
Madoff Victim Makes Impassioned Plea (August 12, 2009)
SEC Complaint vs. Frank DiPascali, Jr. (August 13, 2009)
How Courageous Is Mary Schapiro?
Posted by Larry Doyle on June 4th, 2009 11:57 AM |
Does SEC chair Mary Schapiro have the personal courage to lead a new and emboldened financial regulatory regime?
Ms. Schapiro has always been viewed as being far too cozy with the financial industry. Sense on Cents first crossed paths with current SEC chair Mary Schapiro this past January at the time of her exceptionally easy confirmation hearing. At that point and since, the Wall Street Journal, Bloomberg and others have weighed in that Ms. Schapiro is “no regulatory heavyweight.”
Let’s check back and see if Ms. Schapiro is breaking off the Wall Street shackles. The Washington Post does us the favor of reporting this morning, SEC Chief Strives to Rebuild Regulator:
Schapiro is working to step up enforcement efforts, pushing cases linked to the financial crisis and freeing investigators to more vigorously pursue financial wrongdoing. She is also pursuing regulations to govern hedge funds, derivatives, short-selling, money managers, corporate disclosures and governance.
I am heartened by Ms. Schapiro’s aggressive posture. That said, I am not about to accept purely on face value that Ms. Schapiro is “changing her game.”
On the heels of the financial fiasco on Wall Street, there is doubtless lots to clean up. However, Ms. Schapiro has to appreciate that many question her courage in taking on this task. Why? Very simply, her track record as head of Finra saw an unprecedented drop in sanctions and fines. As the WSJ highlighted this past January:
Fines collected and sanctions assessed by Finra under Ms. Schapiro’s leadership dropped by 73% (in 2005, prior to Ms. Schapiro assuming leadership, Finra collected $150 million in fines. In 2006, Schapiro assumed the leadership reins and that number moved to $75mm. It dropped further to $50mm in 2007, and $35-40mm in 2008).
Against that backdrop, Ms. Schapiro has a lot of work to do to change her own image along with that of the SEC. The WaPo reports that Schapiro is aware of this fact. Schapiro states as much:
“I wanted to be very clear almost from my first day — not just with words, which are pretty easy to string together, but with actions — that this is a new SEC that is moving in a decidedly different direction and at a decidedly different pace,”
Additionally, Schapiro comments,
“Our markets are vulnerable if we’re not able to restore confidence,” Schapiro said. What investors “need to see is that the rules that are in place and will be in the future are enforced and aggressively enforced. If they don’t see that, their reluctance to engage the capital markets will be pretty significant.”
The media continues to rail on Schapiro, the SEC, and Finra for having missed the Madoff scam. Those protests are totally justified. It has been almost 7 months since Bernie turned himself in to authorities and little progress is provided to the public on the investigation.
In my opinion, though, Ms. Schapiro has other dirty laundry that needs a full and public airing.
The U.S. attorney in Brooklyn along with the SEC are currently investigating former executives from Lehman for potentially front running the Auction Rate Securities market in 2007. I call upon Ms. Schapiro to release information regarding Finra’s liquidation of its own Auction Rate Securities holdings in the same time period. Full details on this story are included in U.S. Attorney and SEC Investigate Lehman’s Auction Rate Securities Sales; They Should Also Investigate FINRA’s.
Ms. Schapiro may have to recuse herself in the process of a full and thorough investigation of Finra and its ARS sale. As with any real leader, if she has absolutely nothing to hide, then she should have no problem recusing herself. As she herself said, “our markets are vulnerable if we’re not able to restore confidence.”
Does Ms. Schapiro have the courage to investigate Finra and her own tenure in an attempt to restore that confidence?
LD
All The King’s Horses and All The King’s Men . . .
Posted by Larry Doyle on May 6th, 2009 11:37 AM |
Can Barack Obama’s horses and men in the persons of Ben Bernanke, Tim Geithner, Larry Summers, Paul Volcker, Rham Emanuel, Sheila Bair, and their minions put Wall Street together again? The glue and putty in the form of trillions of dollars of taxpayer funds and commitments is still wet. Mr. “Humpty Dumpty” Wall Street is still on the ground.
Humpty’s most severe injury is the breakdown of the securitization process in which Wall Street promoted a pure “originate to distribute” model. Obama himself offered in the May 3rd Sunday New York Times Magazine:
. . . we’re going to have to figure out what we do with the nonbanking sector that was providing almost half of our credit out there. And we’re going to have to determine whether or not as a consequence of some of the steps that the Fed has been taking, the Treasury has been taking, that we see the market for securitized products restored.
I’m optimistic that ultimately we’re going to be able to get that part of the financial sector going again, but it could take some time to regain confidence and trust.
Time for the cement to harden and for Humpty to get back on his feet. Why will it take so much time? Very simply, Humpty was not an honest broker in the process of originating, securitizing, and distributing poorly written – if not fraudulently written – loans over the last 5 to 7 years. The Financial Times highlights this fact this morning in “Securitization Is Crucial for Revitalizing Lending.” The FT reports:
Securitisation is a way to raise money by repackaging securities based upon underlying assets such as mortgages.
The US government is seeking to restart this market with up to $1,000bn of funding for purchases of securitised debt. But the complexity and risks involved mean it remains difficult to replicate the scale of the market that collapsed under the weight of losses and the departure of leveraged investors.
Meredith Whitney, of Meredith Whitney Advisory Group, says about $2,200bn less in funds has been raised by means of the US capital markets since the start of the credit crunch in July 2007, with $2,700bn less money raised globally.
She said: “With debt issuance to date seeing year-on-year gains, it is suggestive to say that things aren’t getting much worse. They just aren’t getting any better.”
The US government’s programme to revive securitisation – the Term asset-backed securities loan facility (Talf) – has made some funds available and it has also led spreads on some asset classes to narrow, reducing the potential funding costs. The programme works by lending money to hedge funds, which can increase the returns on triple A rated securities by means of the cheap loans.
In a sign of a big pick-up in demand, the Federal Reserve said late yesterday that investors requested $10.6bn worth of loans in its most recent round of the programme. This included $2.2bn worth of requests for auto loan bonds and $5.5bn for bonds backed by credit card loans.
If we review those statistics, the government’s TALF (Term Asset-Backed Lending Facility) has facilitated $18.5 billion in sales since its launch in March. While the Fed views the demand as picking up, be mindful that the $18.5 billion figure represents approximately .008 of the total credit that has evaporated from the economy via the shadow banking system. In layman’s terms, we just gave Humpty a swab with a warm cloth while his limb is holding on by a thread.
My concern with the TALF is that the buyers will cherry pick bank assets and simply purchase those which have the most rigorous underwriting. The dregs will be left for the banks and taxpayers to absorb.
If Uncle Sam does get Humpty somewhat propped back up against the wall (note that I’m not even hinting at Humpty getting “on the wall”), how do we make sure Humpty does not once again fall down and take us all with him?
We need to make sure Humpty plays by strict rules and regulations, both in terms of underwriting and business engagement. The FT addresses proposed underwriting rules in “Watchdog Proposes Strict Rules.” The FT reports,
Yesterday’s Iosco (International Organization of Securities Commissions) report called for minimum levels of due diligence by the originators and suggested mandating far greater disclosure to investors of what checks had been carried out. It also called for ongoing disclosure to investors of the performance of the underlying assets and for originators to be forced to hold on to some tranches of each deal.
Other proposals included imposing standards forcing originators to check that products were suitable for each investor and looking into developing alternative measures of assessing risk other than the credit ratings agencies that were relied on by investors previously.
Wow, you mean Humpty actually has to display a measure of integrity in his operations? What a novel idea! Who may be keeping an eye on Humpty to make sure he plays by the rules going forward? The SEC and FINRA (Financial Industry Regulatory Authority).
Hey, wait a second. When Humpty fell off the wall, we have very credible evidence that FINRA was actually one of his playmates. None other than Harry Markopolos said that FINRA was on the wall (“in bed”) with Humpty. I have highlighted issues within FINRA that still need to be addressed: FINRA Is Supposed To Police The Market.
President Obama, what do you prescribe for Humpty given his relationship with FINRA? Obama told the Times,
. . . the fact that we had such poor regulation means — in some of these markets, particularly around the securitized mortgages — means that the pain has been democratized as well. And that’s a problem. But I think that overall there are ways in which people have been able to participate in our stock markets and our financial markets that are potentially healthy. Again, what you have to have, though, is an updating of the regulatory regimes comparable to what we did in the 1930s, when there were rules that were put in place that gave investors a little more assurance that they knew what they were buying.
Putting Humpty back together is going to be very challenging. Sense on Cents will be monitoring the operation very closely.
LD
For newer readers who may want to more fully understand how Humpty “had a great fall,” I strongly recommend The Wall Street Model Is Broken….and Won’t Soon Be Fixed.
What Were Ms. Schapiro’s Hedge Fund Investments at FINRA?
Posted by Larry Doyle on May 4th, 2009 8:08 AM |
As Obama looks to send a message to the American public that he will clean up Wall Street, hedge funds are “under the microscope.” Who in Washington will be delegated to lead the charge? None other than SEC head, Mary Schapiro. Bloomberg reports, SEC Chief Schapiro Wants Authority to Make Hedge-Fund Rules.
Hedge funds have become dirty words. When Washington wants to convey excessive Wall Street greed, politicians and regulators now regularly slip “hedge funds” into their statement.
As with any industry, hedge funds run the gamut in terms of business practices and ethics. It is well documented, though, that Washington solicits and receives excessive campaign contributions from the hedge fund community.
I agree that the hedge fund industry deserves greater scrutiny. A trillion dollar industry unregulated is a breeding ground for problems.
Bloomberg reports:
“It’s probably not enough just to register hedge funds” with the SEC, Schapiro said in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” airing this weekend. “It may well be necessary to put in place particular kinds of rules.”
Treasury Secretary Timothy Geithner’s plan to overhaul financial oversight in response to the worst economic crisis since the Great Depression would force hedge funds to register with the SEC, subjecting firms to new disclosure requirements and inspections by agency staff. Schapiro said the SEC’s authority should be broader, so it can impose further restrictions on funds as “situations evolve.”
President Barack Obama yesterday blamed hedge funds that had lent Chrysler LLC money for triggering the automaker’s bankruptcy. Obama said the funds were “speculators” that refused the administration’s buyout offers because they were holding out for an “unjustified taxpayer bailout.”
Schapiro said “it’s certainly possible” that the SEC would consider forcing hedge funds to publicly disclose short- sale positions, imposing restrictions on leverage and restricting what the firms can invest in.
Does anybody have an issue with increased disclosure and oversight? Transparency is critically important in making sure the playing field for all investors is kept fair and level.
Ms. Schapiro does have experience with hedge funds prior to this engagement, though. As I have highlighted, Ms. Schapiro, as head of FINRA, oversaw investments within FINRA’s internal portfolio which included hedge funds, fund of funds, and private equity.
From the 2007 FINRA Annual Report:
FINRA also has investments in hedge funds and funds of hedge funds that it accounts for under the equity method and includes in other investments in the consolidated balance sheets. As of December 31, 2007, the Company had hedge fund investments of $431.2 million.
Ms. Schapiro should be compelled to share with the investing public in which hedge funds FINRA invested.
Will those funds withstand the rigor of newly proposed SEC regulation? At the very least we may learn whether Ms. Schapiro was a good steward of FINRA funds. Beyond that, we may learn a lot more.
If the Obama administration is serious about developing new regulations for Wall Street, let’s make sure the transparency includes Ms. Schapiro’s tenure at FINRA and details of FINRA’s investment portfolio!!
LD
Low Tide Will Reveal Rats Scurrying Amidst The Garbage
Posted by Larry Doyle on April 28th, 2009 9:09 AM |
Every exterminator will tell you that he never finds just one rat. Bernie Madoff has been exposed as an enormous rodent. Is Allen Stanford also a rat? Who else may be in the pack? Mary Schapiro, head of the SEC, revealed yesterday that the SEC is reviewing 150 other hedge funds to determine whether they also operated Ponzi schemes. Reuters reports, U.S. SEC Has About 150 Hedge Fund Probes.
Hedge funds are currently unregulated. How could the SEC have found potentially another 150 “rats” in the space of a mere three months since Ms. Schapiro has been on the job? My instincts lead me to believe the following:
1. Ms. Schapiro is trying to convey a sense of leadership and progress on fraud investigations after the abysmal performance on the Madoff scheme. The SEC needs to burnish its image and Ms. Schapiro is trying to address that with this news release.
2. I have no doubt that many other hedge funds did operate as Ponzi schemes and likely had money invested in Madoff knowing he was the largest rat. As investigators from the SEC have reviewed the list of Madoff investors, the info there has likely led to other hedge fund frauds.
Additionally, do not forget that many hedge funds suspended redemptions in the latter half of 2008. Ponzi schemes, like rats, only thrive given a steady source of food and water in the form new investments. Suspending redemptions is akin to a rat rationing its food supply. While plenty of those suspensions could be legitimate, it would be naive to think that all of them are.
3. We know that FINRA, the self-regulatory organization overseeing Wall Street, had investments in hedge funds, fund of funds, and private equity. That info was provided in the FINRA 2007 Annual Report. We are STILL waiting for the release of the FINRA 2008 Annual Report. Could FINRA have invested in Madoff? Could FINRA have invested in other hedge fund Ponzi schemes? Why by April 28th has FINRA still not released their Annual Report? (more…)
SEC Advisor Highlights Wall Street-Washington Incest
Posted by Larry Doyle on September 22nd, 2009 12:19 PM |
I have always held Bloomberg reporter Jonathan Weil in very high regard. I now regularly look for commentary by Bloomberg’s Susan Antilla, as well. Why? Ms. Antilla pursues truth and transparency in her writing and pulls no punches in the process.
This morning, Ms. Antilla calls for the SEC’s enforcement division to be rolled into the Department of Justice. She writes What the SEC Might Look Like If It Did Its Job:
Make no mistake, the ineffectiveness of the SEC is not merely reflected in its dismal performance on the Madoff fiasco. For a long time, the money from Wall Street has purchased cover in the halls of Washington. That cover is primarily in Congress with the resulting pressure applied on those within the SEC. Antilla engaged Barbara Roper for further details and highlights:
Ms. Roper’s use of the term “deference” is translated in financial layman’s terms as “incest.”
What does one do in any incestuous relationship? Keep the perpetrators as far away from the victims as possible. How would that be accomplished? Move the enforcement of financial rules and regulations outside of the purview of the SEC. Antilla nails it and writes:
Antilla further highlights the disparate treatment accorded the Wall Street power brokers relative to the ordinary American investor. Antilla writes:
Susan Antilla is to be commended for exposing the Wall Street-Washington incest at its core. I salute her. Where are the rest of her media colleagues? The interests of the American public will only be prioritized when our elected officials in Washington crawl out of the pockets of those on Wall Street.
LD
Related Sense on Cents Commentary:
Future Financial Regulation: Not a Question of Sufficiency but of Transparency and Integrity (May 18, 2009)
Tags: Barbar Roper comments on Wall Street relationship with Washington, Barbara Roper comments on deference paid by Washington to Wall Street ll, Barbara Roper comments on SEC IG Kotz's report, Barbara Roper of Consumer Federation of America, Barbara Roper of SEC Investor Advisory Committee, effectiveness or ineffectiveness of SEC and SEC enforcement, future of the SEC, how to break up Washington Wall Street incestuous relationship, Peter Henning calls for SEC enforcement to be part of DOJ, Peter Henning of Wayne State Law School comments on SEC, SEC hot line helped Wall Street but not investors, SEC OCIE hot line, SEC relationship with Wall Street, should enforcement division of SEC be placed into DOJ, should the SEC be broken up, Susan Antilla of Bloomberg, What the SEC Might Look Like if it Did its Job
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