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HomeFederal Reserve Fighting Transparency
Posted by Larry Doyle on August 27th, 2009 12:54 PM |
Given the enormous costs and burdens currently being borne by the American taxpayer during this financial crisis, are taxpayers supposed to blindly trust the Federal Reserve? Kudos to Bloomberg News for doggedly pursuing increased transparency on behalf of the Fed. Bloomberg reports, Federal Reserve Says Disclosing Loans Will Hurt Banks:
The Federal Reserve argued yesterday that identifying the financial institutions that benefited from its emergency loans would harm the companies and render the central bank’s planned appeal of a court ruling moot.
The Fed’s board of governors asked Manhattan Chief U.S. District Judge Loretta Preska to delay enforcement of her Aug. 24 decision that the identities of borrowers in 11 lending programs must be made public by Aug. 31. The central bank wants Preska to stay her order until the U.S. Court of Appeals in New York can hear the case.
“The immediate release of these documents will destroy the board’s claims of exemption and right of appellate review,” the motion said. “The institutions whose names and information would be disclosed will also suffer irreparable harm.”
The Fed’s “ability to effectively manage the current, and any future, financial crisis” would be impaired, according to the motion. It said “significant harms” could befall the U.S. economy as well.
The central bank didn’t say when it would file its appeal.
Fed lawyer Kit Wheatley told Preska in a conference call today that she did not know how long it would take for the Fed board to search the New York Fed for records.
“We really don’t know what’s in New York,” Wheatley said. “We don’t control the system of record-keeping in New York.”
The Standard
The Fed’s lawyer went on to say that she did not know what records would fall under a “delegated function,” which would be a task assigned to the New York Fed.
Preska interrupted Wheatley, saying that “Ms. Wheatley, I held that’s not the standard. You didn’t search under the regulation. You’re supposed to search under the regulation.”
Preska scheduled another conference call for 2:30 p.m. today to discuss the schedule for a search of the New York Fed.
“Nobody is going to deny you your right to an appeal,” Preska said on the call, “We’re going to do it expeditiously, not in a piecemeal fashion and hand it all off to the Second Circuit.”
The Fed has refused to name the financial firms it lent to or disclose the amounts or the assets put up as collateral under the emergency programs, saying disclosure might set off a run by depositors and unsettle shareholders.
Bloomberg LP, the New York-based company majority-owned by Mayor Michael Bloomberg, sued on Nov. 7 under the Freedom of Information Act on behalf of its Bloomberg News unit. (more…)
“Retired Securities Attorney Sues Nuveen Over Auction-Rate Shares”
Posted by Larry Doyle on August 27th, 2009 5:03 AM |
Wall Street can keep its arbitration hearings, it is time to sue banks and brokers over the frauds perpetrated in the sales and marketing of auction-rate securities. A securities arbitrator by the name of Howard Kastel is taking that very approach.
Every individual who opens a brokerage account typically signs a statement indicating that disputes will be addressed through an arbitration process. I find it fascinating that Kastel, a retired securities attorney who served as an arbitrator, has chosen to sue rather than arbitrate over his purchase of ARS.
You can’t make this stuff up!!
The Wall Street Journal highlights this case in reporting, Retired Securities Atty Sues Nuveen Over Auction-Rate Shares:
A retired securities attorney is suing Nuveen Investments and others in federal court over a $2 million investment in now-frozen auction-rate securities, contending that his case is too complex for arbitration.
Howard Kastel, 77, and his wife, Joan, filed suit Friday in the U.S. District Court for the Middle District of North Carolina against Deutsche Bank AG (DB), Nuveen Investments Inc. (JNC), Merrill Lynch & Co. and others. It alleges the couple were victims of a “fraudulent scheme” in which markets for the securities were manipulated.
I would maintain that Mr. and Mrs. Kastel should not be subjected to arbitration nor should any investor in auction-rate securities. I have yet to come across an ARS investor who was not a victim of the fraudulent scheme in which ARS were marketed and sold. The WSJ continues:
Investor complaints are generally handled in arbitration, but Kastel, who has been an arbitrator for years and still does some arbitration work, said that as a complex fraud case his complaint is inappropriate for arbitration. As a former securities attorney, Kastel said, he would also be an inappropriate plaintiff in a class-action lawsuit.
Arbitration is CLEARLY NOT the forum for any ARS investor. Who hosts arbitration hearings? FINRA. Yes, the same FINRA which owned and liquidated upwards of $647 million ARS from its own investment portfolio in 2007. Can you say, ‘conflict of interest?’ Do you think FINRA front-ran the market in the process of liquidating its ARS position? (more…)
High Frequency Trading: ‘Competitive Edge or Unfair Advantage?’
Posted by Larry Doyle on August 26th, 2009 6:04 PM |
There is no doubt that the 21st century will be driven by new and dynamic growth in technologies. Within the financial industry, Waters is a leading periodical focused on the intersection of finance and technology. From their own website, we learn:
Waters, now in its 15th year, looks at how technology is driving the securities industry and how the evolving market structure worldwide is driving technology.
Since its launch in 1993, Waters has been relied on by financial technology professionals worldwide for focused, in-depth coverage of financial market data and technology. The financial services industry spends more on technology than any other. Banks and investment banks — whether global or regional — rely on technology to help keep their traders ahead of the competition. As firms trade up their systems, Waters defines the challenges that the top global financial services confront, be they old school issues like trading room systems and operations or new business propositions like consortia portals and e-commerce spin-offs.
In the August issue of Waters, there is an interesting debate focused on the highly charged topic of high frequency trading. This article, “Waters Debate: Competitive Edge or Unfair Advantage?”, engages Kevin McPartland a senior analyst with the Tabb Group, Al Berkeley chairman of Pipeline, and a Wall Street veteran who writes at Sense on Cents.
For those interested in the topic, I strongly encourage you to read the entire piece. For those interested in the SparkNotes assessment, I provide the concluding paragraphs.
Mr. McPartland, a 10 year Wall Street veteran, writes in defense of high frequency trading under its current construct:
We live in a society based on and grown out of capitalism. Being smarter and faster than your competitors, whatever your business, has been a guiding principle of companies worldwide for decades. So why are these ideas suddenly thrown out when it comes to high-frequency trading models that have been around for nearly a decade? No one likes to lose, especially traders, and now that a small handful of relatively unknown firms are making profits in the billions, those not in the loop are crying foul. Am I unhappy that the guy next to me in the commuter lot has a Porsche and I don’t? Sure, but that doesn’t mean he didn’t earn it fair and square.
Mr. Berkeley, a 30 year Wall Street veteran, weighs in for changes in the structure of the equity markets:
There is a mismatch between the market structure the US has for equities and the market structure it needs. High-frequency trading is profitable because wholesale trades are being executed in a market designed for retail trades. The structure we have is good for small trades and retail trades but it is inappropriate for wholesale trades-the trades that institutions need to execute on behalf of millions of citizen-savers.
A market structure that addresses this problem is one that combines access to three distinct types of liquidity pools with three sets of rules of engagement, to meet the different circumstances in which institutional traders must operate. These include a wholesale facility for large orders, a facility that harvests liquidity in the retail markets without being seen, and a facility that allows investors with liquidity resident in their blotters-that is, not yet committed to trade-to trade together.
Early adopters are finding 30 percent to 40 percent reductions in total trading costs.
More importantly, a few sophisticated institutions recognize the value of supporting a counter-balance to the high-cost market structures that force institutions to pay too much for liquidity.
We believe these are highly disruptive innovations that threaten the traditional business models on Wall Street. They are unrecognized as such now, but this will not be the case in a few years.
Your resident host at Sense on Cents, a 23 year Wall Street veteran, opines that the equity markets should embrace a fixed income perspective to electronic trading:
Tradeweb allows fixed-income investors to engage Wall Street dealers across all of the aforementioned markets with trades executed within a matter of mere seconds. The playing field is completely level as dealers enter price levels, stand by them, and execute trades. If a Wall Street dealer is delinquent in responding to an investor inquiry, so be it.
Were Tradeweb to allow one dealer to see another dealer’s price level or allow dealers to instantaneously flash price levels without obligation of standing by their price, there would be hell to pay. Why? If dealers and investors knew that certain entities were provided preferential treatment by Tradeweb, then there is no doubt in my mind that Tradeweb would be out of business tomorrow. Make no mistake: The speed limit on the trade execution lane of the investment superhighway is extremely fast. How fast? Trades are executed within a matter of a few seconds. It works just fine for the hundreds of billions in daily volume compared to the relative odd lots traded in the equity market.
I strongly believe in and embrace technology. I also have a soft spot in my heart for fundamental fairness and integrity. I think all global equity exchanges should implement fixed-income trade practices. I believe they are the best of both worlds.
I thank Waters for the opportunity to add to the discussion and debate on the high frequency trading topic, which is certainly not going away.
LD
‘Banking Crisis Dwarfs Depression’ by John Lounsbury
Posted by Larry Doyle on August 26th, 2009 2:32 PM |
In the course of my writing, I have read the works of some very informed and enlightened individuals, and I’ve learned a lot in the process. I welcome sharing these insights and perspectives.
The other day I saw that John Lounsbury cross-referenced my work from August 20th, “Capitalism Without Failure is Like Religion Without Sin.” I was flattered by his referencing my work, so I started to read some of Mr. Lounsbury’s work. I am pleased to present as fine a piece of writing on the historical perspective of our current banking crisis as I have come across.
Mr. Lounsbury is a financial planner in North Carolina, writes his own blog (PiedmontHudson), and also writes for a few other outlets. He addresses our current financial crisis in comparison to the S&L crisis of the late 1980s and also in comparison to the Great Depression. Lounsbury reviews these periods from the standpoints of deposits, assets, number of bank failures and branch closings, the shadow banking system, all while adjusting for inflation.
I am more informed from having read this work. I applaud Mr. Lounsbury and think you will as well. I humbly submit Banking Crisis Dwarfs Depression.
LD
Sarkozy Ups the Ante on Banker Compensation
Posted by Larry Doyle on August 26th, 2009 9:26 AM |
French President Nicolas Sarkozy
How is it that the country that is supposed to be the bastion of capitalism and free enterprise is taking serious direction on the topic of banker compensation from none other than French President Nicolas Sarkozy? The fact that Sarkozy is elevating the banker compensation topic prior to the G-20 meeting in Pittsburgh in September is a clear indication that the powers that be in Washington and on Wall Street have failed miserably on this topic.
There is NO doubt those on Wall Street would like to return to ‘business as usual’ as quickly as possible. Little do the Wall Street wizards appreciate that the ‘usual business’ brought our country to its knees. Let’s address the ultimate motivator, that is, compensation.
Wall Street’s initial response to potential increased oversight of the compensation process has been to increase salaries as an overall percentage of compensation. From a productivity standpoint, I view this maneuver as counterproductive. Increased salaries will increase fixed costs and actually serve as a disincentive. The fact is compensation needs to be viewed in its entirety, both salary and bonus. The entire process should not be gamed by firms to appease regulators.
Bloomberg highlights French President Sarkozy’s approach toward banker compensation in writing, Sarkozy Threat to Shun Banks on Pay Draws U.S. Alarm:
Aug. 26 (Bloomberg) — French President Nicolas Sarkozy’s plan to shun bankers who don’t accept pay limits was met with alarm by analysts and investors in the U.S., where Citigroup Inc. and six other bailed-out companies are being grilled by the government on how they compensate top-paid executives.
I am definitely not for strict government control of private enterprise compensation; however, if the boards of these private enterprises are not performing to protect the industry, the franchises, and the shareholders, then those boards need to be exposed. From my standpoint, the boards are a large part of the problem. Why? The boards are in the pocket of the senior executives. The senior executives have shown themselves to be excessively greedy and disinterested in protecting the industry and, in turn, our country.
Moving right along, I have always maintained that Wall Street banks must be obligated to fully align compensation with returns generated and risks remaining on the books. What do I mean? (more…)
Goldman Calls ‘Huddle Up’
Posted by Larry Doyle on August 25th, 2009 4:20 PM |
Huddle up!!
Goldman’s play calling in regard to the dissemination of short term trading tips is receiving increased focus. The Wall Street Journal highlights Regulators Examine Goldman’s Trade Tips:
Securities regulators are examining weekly meetings at Goldman Sachs Group Inc. in which research analysts give tips to traders and then to big clients, as the Wall Street giant considers disclosing these so-called trading huddles to all its clients.
The Wall Street Journal reported Monday that analysts at Goldman sometimes shared with traders and key clients short-term trading tips that sometimes differed from the firm’s long-term research.
Examiners at the Financial Industry Regulatory Authority, the industry self-regulatory body known as Finra, and the Securities and Exchange Commission intend to ask Goldman for more information on these weekly get-togethers, people familiar with the matter said.
Internal documents show that at times, these short-term trading tips differed from Goldman’s long-term research. Critics complain that Goldman’s distribution of the trading ideas to Goldman traders and major clients hurts other Goldman customers who aren’t given the opportunity to trade on the information, and may be relying on the firm’s longer-term research to make investment decisions.
The huddles, and what is discussed during or after them, currently aren’t disclosed in Goldman’s long-term research. On Monday the firm internally discussed adding information about the service on its client Web site. Some firms, such as Morgan Stanley, also give stock ideas to clients, but disclose the service in their longer-term research and on its Web site.
My gut instinct tells me this business practice at Goldman may present regulatory issues at times but not necessarily always. The fact is there are times when a research analyst may feel a security is slightly overbought or oversold based on some short term technical dislocations. As such, he may share that assessment with traders and select clients.
However, there may be other times when a security is undergoing some fundamental changes and a research analyst is thinking about changing his call but does not immediately act upon it. The analyst will still highlight the short term mispricing.
Welcome to the very gray world of Wall Street research and trading.
Based on my experience on the fixed income side of the business, Goldman actually stopped publishing research around 2003 because they felt they were not being paid for it. Goldman actually had research analysts on the trading desk for the sole purpose of talking to clients. They did not publish written research.
At Bear Stearns in the mid 1990s, we would have weekly trading and research calls broadcast to all our clients. We screened clients from competitors by requiring clients to provide a passcode for the call. We still felt there were times when other Wall Street dealers accessed our calls.
Will any regulatory issues come from Goldman’s trading huddles? In my opinion, nothing big will develop. Goldman will likely post on its website a more explicit statement highlighting that short term trading tips are at times provided to capture market anomalies. The regulators will sign off on it and life will go on.
Be mindful, though, that Goldman is an aggressive short term trading shop. Given the lay of the land on Wall Street now, clients have to talk to Goldman whether they truly want to or not.
As is often said, if you are wondering who the pawn is, it’s probably you.
LD
BREAKING NEWS: Amerivet Complaint Against FINRA Alleges Madoff Investment
Posted by Larry Doyle on August 25th, 2009 10:47 AM |
Two weeks ago, Amerivet Securities filed a complaint against FINRA (Financial Industry Regulatory Authority), the Wall Street self-regulatory organization. This morning, Donna Mitchell of Financial Planning provides further insight on this complaint. Ms. Mitchell writes FINRA Rebuffs Amerivet’s Demand to Inspect Records. She reports:
The Financial Industry Regulatory Authority (FINRA) says it will not open its books and records to inspection by Amerivet Securities, the California brokerage firm which recently sued the regulator.
“We disclose a great deal of public information in our annual reports, far more than we are required to do,” says Herb Perone, a spokesman for FINRA. “Our records are not open for public examination.”
Sense on Cents questions why any financial self-regulatory organization mandated to protect investors would not be required to fully open all of its books and records for public review. Additionally, having extensively studied all of FINRA’s annual reports as well as those of its predecessor, the NASD, I echo the questions being raised by Amerivet. Does FINRA have any appreciation for the need for total truth and transparency in our markets and economy? The questions beg: why won’t FINRA fully open its books? are they trying to hide something? do they have reason to be concerned?
OPEN THE BOOKS!!!
Financial Planning continues:
The request for records is part of a civil suit filed Aug. 10 in the Superior Court of Washington, D.C., by Inglewood, Calif.-based Amerivet Securities. It stems from a July 23 letter sent to FINRA from Amerivet, in which the company initially asked to review FINRA’s documents.
In the lawsuit, Amerivet accuses FINRA of a litany of wrongdoings, from mismanaging the organization’s investment assets to placing substantial funds with Bernard L. Madoff Investment Securities, the former broker-dealer and investment advisory firm that was brought down amid a $65 billion Ponzi scheme.
WOW! The allegation of an investment by FINRA in Madoff is a BLOCKBUSTER. What information did Amerivet and its legal representation unearth to make this allegation? This information must be revealed and FINRA must open its books and records to address this charge. (Click on image to access copy of Amerivet complaint)
Financial Planning further reports:
Amerivet also alleges that FINRA failed to regulate and oversee the operations of large securities firms such as the former Bear Stearns & Co., the former Lehman Brothers, Merrill Lynch & Co., and Stanford Financial Group.
Amerivet also claims that FINRA overpaid its executives, sustained investment-related losses of $568 million and separately incurred substantial losses in the auction-rate securities market. “FINRA has failed in what it represents in its advertising to be its core function, i.e. the protection of investors,” Amerivet says in the lawsuit.
Is there any doubt that FINRA has failed to protect investors? Is there any doubt that senior executives at FINRA were paid handsomely?
In regard to the auction-rate securities allegation, is Amerivet maintaining that FINRA lost money on the ARS which it owned or is Amerivet referring to money lost by investors? Details of FINRA’s liquidation of ARS in 2007 must be released. Did FINRA front-run the market in the course of selling its own ARS?
OPEN THE BOOKS!!
Financial Planning gains a degree of insight from FINRA and reports:
FINRA would not comment about the lawsuit directly, but Perone said the organization had steered clear of investing with Madoff.
“As for any claim or question as to whether we had money invested with Madoff, we had no investments of any kind in Madoff or in any of its feeder funds,” Perone said.
The allegations and implications of the Amerivet complaint strike right at the core of our financial regulatory framework. Any credible media outlet should be running the Amerivet complaint as a lead story.
The American public deserves answers.
OPEN THE BOOKS!!
LD
Related Sense on Cents Commentary:
Amerivet Securities Files Complaint vs. FINRA for Release of Investment Information and More (August 17, 2009)
FINRA Must Play by Its Own Rules (August 19, 2009)
*****************************
UPDATE as of 11:20AM – Financial Planning has removed from its website the article referenced in this post. I am in the process of receiving the actual Amerivet complaint and will review it and comment later this afternoon.
UPDATE as of 12:05PM – I just received a copy of the Amerivet Securities vs. FINRA complaint. See pages 8-9, points #24-28 for details regarding the allegation that FINRA was invested with Bernie Madoff.
Getting the Board out of Management’s Pocket
Posted by Larry Doyle on August 26th, 2009 11:42 AM |
I strongly believe the failures in our economy are often the result of failed management. Who is charged with overseeing management? The board of directors. If management has failed, then certainly the boards have also failed.
I addressed this point in my commentary this morning, “Sarkozy Ups the Ante on Banker Compensation.” I wrote:
How have boards become so deeply entrenched with management? Is there anything that can truly be done to address this enormous problem? Continuing on this theme of the corporate governance responsibilities of boards of directors, The Wall Street Journal addresses the topic in writing, Fight Brews as Proxy Access Nears:
Why would management fight this? Control and power. New board members not aligned with current management will likely ask for increased exposure and transparency. What a novel concept.
We can always count on the heavy lobbying powers to weigh in to protect the status quo. A lot of good that has done us within our financial industry as I highlighted last March in writing, “How Wall Street Bought Washington.” The WSJ continues: (more…)
Tags: company board election process, factSet SharkWatch, Fight Brews as Proxy Access Nears, investors want access to board seats, John Finley of Simpson Thacher and Bartlett, lobbyists fighting proxy access rules, management wants control and power through board, Mary Schapiro, Mary Schapiro comments on proxy access rule, new board members will want increased exposure and transparency, proxy access rule, proxy access rule 14a-11, relationships between Wall Street boards and management, Sarkozy comments on banker pay, Wall Street boards, Wall Street management and boards
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