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HomeReal Regulatory Review: “Gut Check”
Posted by Larry Doyle on May 20th, 2009 6:00 AM |
The Washington Post reports the “Administration Weighs Creating New Regulator for Financial Products.”
Will the new regulator merely address the effects of lax oversights in certain targeted financial products, or will the public get some satisfaction and the regulator address the causes of the massive regulatory breakdowns? I am not optimistic, but I am adamant to address this topic. The Post offers:
The proposal, which remains fluid, would centralize the enforcement of laws that protect consumers of financial products. That task currently is spread out across a patchwork of agencies, many of whom regard consumer protection as a low priority. Some financial products are not regulated at all.
Any proposal could also trigger a major regulatory turf war, with agencies such as the Securities and Exchange Commission and the banking regulators fighting to preserve authority.
I am all for implementing effective regulation which levels the playing field and promotes free, fair, and equitable business practices. There is no doubt we need a thorough review of our existing regulations to see where they are sufficient and where they are delinquent. That said, as I wrote the other day, “Future Financial Regulations: Not a Question of Sufficiency, But Of Transparency And Integrity.”
In regard to housing finance, we need to develop effective oversight of the mortgage industry. We also need to accept the fact that our mortgage finance problems went a lot deeper than rogue mortgage brokers fraudulently underwriting unsuitable products to unsophisticated borrowers. If Obama and team really want to address the root causes, let’s return to the Congressional hearings throughout the 90s and up until 2006 and replay the testimony of the executives of Freddie Mac and Fannie Mae. The simple fact is the Clinton administration, with Congressional backing, promoted increased rates of homeownership without simultaneously implementing the necessary safeguards in the mortgage origination and underwriting process. (more…)
Navigating the “Murky Waters” of Financial Services
Posted by Larry Doyle on May 7th, 2009 7:57 PM |
I am thrilled to have Rick Johnson as my guest on NoQuarter Radio’s Sense on Cents with Larry Doyle this Sunday evening May 10th. As Forbes recently reported:
JACKSONVILLE, Fla., May 1 /PRNewswire/ — Rick Johnson, author of the book Keep Your Assets. Take My Advice, applauds the Financial Planning Coalition’s effort to establish an oversight board to regulate financial advisers. The Financial Planning Coalition,
according to a recent update emailed to Certified Financial Planners, is proposing an oversight board with fiduciary standards, training and ethics requirements for financial planning advice that favors consumers. FINRA is trying to influence the Securities and Exchange Commission in order to regulate registered investment advisers, as stated in a recent speech by Richard G. Ketchum, Chairman and CEO of FINRA, before the Committee on Banking, Housing and Urban Affairs. The Financial Planning Coalition “wants to preclude FINRA from consideration as the oversight body … ” as stated in their April 27, 2009 email update. “This is a battle between lobbying groups with consumers caught in the crossfire,” according to Johnson.
In an April 27th FINRA News Release, FINRA has proposed closing a glaring gap in their Broker Check system that previously allowed advisers with revoked licenses to have their backgrounds dropped from the FINRA Broker Check system after two years. In his book, Keep Your Assets Take My Advice, Johnson pointed out this exact problem.
The suggestion from Johnson’s book is to close the background check loopholes. As quoted, “We need one disciplinary disclosure system for all insurance agents, FINRA-registered representatives and investment adviser representatives of registered investment advisers.”
In his book, Johnson breaks down why the fiduciary standard of care is what all consumers should demand. “You cannot do what is in the best interest of the consumer and have a sales quota. It is impossible. As long as these sales quotas remain, there is no chance at a fiduciary standard of care,” says Johnson.
Johnson educates his readers about the fiduciary standard of care, how to do annual background checks on financial advisers and he provides unique financial planning ideas typically not found in recently published financial advice books. Readers of his book will be “armed to the teeth,” according to Johnson, to navigate the “murky waters” of financial services.
Who is looking out for you? Sense on Cents and Rick Johnson this Sunday evening on NoQuarter Radio.
LD
Mary Schapiro Meet Stump Merrill
Posted by Larry Doyle on April 16th, 2009 4:30 PM |
President Obama was elected primarily on one theme: change. Many private and public sectors need change, but perhaps none more than our banking and regulatory oversight. Barack said as much in late February:
Obama leveled a broad indictment of the industry, saying the current financial crisis occurred when “Wall Street wrongly presumed the markets would continuously rise and traded in complex financial products without fully evaluating their risks.” But he also blamed government regulators for not adequately protecting consumers.
Obama further offered:
“strong financial markets require clear rules of the road, not to hinder financial institutions, but to protect consumers and investors, and ultimately to keep those financial institutions strong.”
To this point, who could not agree with Barack’s assessment and designs. However, if we go back to mid-January, why did he select the head of the Wall Street self-regulatory organization, FINRA, to oversee the SEC? FINRA has been widely critiqued for being soft on overseeing the very institutions at the heart of our current economic disaster.
Again today, we hear about FINRA’s incompetence in a Bloomberg report on the investigation of Stanford Financial. Bloomberg reports: (more…)
Where’s Harry When We Really Need Him?!
Posted by Larry Doyle on April 15th, 2009 2:39 PM |
The ratings process for the securities industry has been an absolute joke. With all due respect to those who work at the rating agencies, the business model and massive conflicts of interest have been an unmitigated disaster.
Where were the authorities with the vision to throw on the flashing yellow light in the midst of the storm? Well, we can all take comfort that the SEC has been working on reviewing the rating agencies model since late 2006 and has made 5 rulings. Over and above that, Ms. Schapiro shares with us that the SEC has undertaken further studies over the last ten months. 2006? Ten months? When the need for dynamic movements is never greater, our government continues to move at a snail’s pace.
Let’s listen to Ms. Mary Schapiro, current head of the SEC. It’s a long clip (approximately 55 minutes), but you can fast forward along the way at any time. CSPAN did not provide an embed code for this clip, but by clicking on the image below you will be brought directly to the CSPAN site and the video will begin playing.
As I listen to Ms. Schapiro pontificate about the concepts of aligning interests, business models, users of ratings, conflicts, multiple ratings, and ending reliance on ratings agencies, I have one very clear cut image piercing through my mind.
That image is of Harry Markopolos providing chilling Congressional testimony this past January on the failures of the SEC in handling the Madoff scam. I learned more about the SEC in Harry’s testimony than I had over the course of my entire career on Wall Street.
Couldn’t we use a guy like Harry running the SEC right now?
LD
Bigger Than Madoff?
Posted by Larry Doyle on March 30th, 2009 7:56 PM |
Each and every time I read a review of the Auction Rate Preferred Securities market, I come away thinking it was one enormous Ponzi scheme. Let’s review the facts as reported from a just published Bloomberg story of a $4.7 BILLION Settlement by Citigroup and Wachovia with California Auction Rate Investors:
States, student-loan agencies and closed-end mutual funds were the primary issuers of the securities, long-term bonds with interest rates set at weekly or monthly auctions.
1. Issuers have long term projects funded by long term loans or preferred shares. Those loans or shares are the underlying collateral in an auction rate preferred transaction. While people investing in a pure Ponzi scheme believed they were investing in a legitimate money manager’s business, investors in ARPS believed they were investing in a money market fund. The key here is MISREPRESENTATION.
The debt, marketed by bankers as cash equivalents, offered investors yields of a quarter-percentage point or more above conventional money-market funds, indexes show.
2. In both a Ponzi scheme and ARPS, the allure of regular liquidity with solid returns draws new money into the game. With a Ponzi scheme, the returns are better than a benchmark index. With ARPS, the returns were better than other cash alternatives or money market funds. (more…)
Is the Party REALLY Over?
Posted by Larry Doyle on March 27th, 2009 11:58 AM |
There is NO doubt that our financial markets and financial firms will experience significant changes in regulation on a going forward basis. Turbo-Tim Geithner laid out those plans this week. President Obama is hosting the heads of the major banks at noon today to lay the groundwork for the universal acceptance of the new rules, amongst other topics.
Over the next few weeks and months, new regulations will be defined and a new division of responsibilities will be outlined amongst the various bodies (Fed, Treasury, SEC, FDIC, FINRA, CME). Rest assured, there will be some power grabs by the heads of these agencies and regulatory bodies in the process.
We have clearly just come through an ENORMOUS party on Wall Street, leaving our entire economy with a MASSIVE hangover. Do not forget, though, as with any good party, we need to review who was working the door, who got let in, who got the discount cover, who brought some attractive friends, and who was taking a little something on the side. I won’t dare venture as to who left together. (more…)
Will TARP Screw ARPS Even Tighter?
Posted by Larry Doyle on March 25th, 2009 1:37 PM |
I have written extensively how Wall Street perpetrated a multi-billion dollar scam in the name of Auction Rate Preferred Securities (ARPS). For our newer readers, ARPS are securities funded by longer maturity underlying loans or preferred shares but marketed as short term cash or money market surrogates. How would that work? Wall Street ran very regular (weekly, monthly) auctions to provide liquidity for ARPS holders. The scam worked well until the overall market hit the skids and the Wall Street dealers backed away from providing liquidity to these supposed short term cash/money market instruments.
In the process of reviewing the underlying loans backing these deals, investors became aware of the long term nature of that collateral and thus their investment. While there is overwhelming evidence supporting the gross mismarketing of these securities, the SEC and FINRA have dragged their feet in rectifying this situation. Why? Great question.
I have highlighted that FINRA actually owned $647 million of ARPS as of year end 2006. That news is shocking to whomever I inform. Did FINRA sell their bonds? If so, to whom? When? What price? Did they front run an imploding market?
Could taxpayers via the TARP (Troubled Asset Recovery Program) actually get stuck making investors whole for a scam perpetrated by Wall Street? This fraud gets more bizarre at every turn. Welcome to the world of finance 2009.
I thank PT for sharing with me a story that broke yesterday: (more…)
Goldman and AIG
Posted by Larry Doyle on March 21st, 2009 5:49 AM |
There has been extensive speculation that Goldman Sachs unjustifiably benefited from the weakness at AIG over the last 6 months. While conspiracy theorists can and will have a field day with this story, at its core I think Goldman did what any well run firm should always do — protect its shareholders.
While the stock values of Merrill Lynch, Morgan Stanley, and Bank of America flirted with total disaster, Goldman Sachs traded down but bottomed out at approximately $50 a share. That price does not strike me as indicative of a firm on the brink of bankruptcy. As Goldman now reveals, it had significant exposure to AIG but it also significantly hedged this exposure to AIG via other transactions. Thus, Goldman would have been negatively impacted by an AIG bankruptcy but not fatally impacted. (more…)
