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HomeUncle Sam Winks Again at Citigroup’s Credit Card Fees
Posted by Larry Doyle on August 20th, 2009 3:14 PM |
When a company, which is a ward of the state, increases credit card fees can it be said to be the equivalent of a tax increase? I believe it can. In that vein, Citigroup is raising taxes on its credit cards by initiating annual fees. The Wall Street Journal highlights this development and reports Citigroup to Initiate New Annual Fees on Some Credit Cards:
Citigroup Inc. is instituting annual fees on some current credit-card accounts in an attempt to offset strict new legislation that could dent its profits.
The move comes on the heels of several warnings from the banking industry, which has said that issuers would be forced to rewrite the playbook on plastic because new credit-card laws would take a bite out of their income.
Rates of between 20% and 30% aren’t sufficient for income purposes? The fact is, current card holders are paying for the undisciplined lending practices of the bank over the last 5 years.
These laws include new limits on interest-rate increases on existing balances and greater disclosures.
The legislation was written to prevent abusive practices on the part of the banks. The fact that it allows for the implementation of practices such as these paints the legislation as the equivalent of a ‘show trial.’ (more…)
Book Review: House of Cards by William D. Cohan
Posted by Larry Doyle on August 20th, 2009 12:53 PM |
Was the failure of Bear Stearns a function of excessive greed, poor risk management, a weak Board, a lack of diversity in business lines, or all of the above?
Having worked at Bear Stearns from 1990-1996, I have a real appreciation for the depth of penetration William D. Cohan brings to this enormous failed enterprise in his book, House of Cards: A Tale of Hubris and Wretched Excess on Wall Street.
Cohan does an excellent job in capturing the culture of Bear. What were the key points within the culture? In my opinion . . .
1. Everything (including principles) was secondary to maximizing profits each and every day
2. Silo mentality promoted a lack of teamwork and allowed ‘people without principle’ to advance as long as they generated profits.
3. As people progressed and careers grew, senior management openly promoted individuals to ‘have at it’ in order to move forward.
4. The most senior management at Bear ultimately did not fulfill their responsibility of protecting shareholder interests. Why? They were totally consumed with maximizing their own wealth. On Wall Street, it is often said, there are bulls, bears, and pigs. At Bear Stearns, certain senior managers fell into the pig category. (more…)
“Capitalism Without Failure is Like Religion Without Sin”
Posted by Larry Doyle on August 20th, 2009 8:54 AM |
Did our markets and economy look into the abyss during the 1st quarter of this year only to be saved by the policies and programs of Uncle Sam? Are we on the road to recovery or have we merely papered over the problems embedded in a host of our larger institutions?
Thomas Hoenig, president of the Federal Reserve Bank of Kansas City
The decision to effectively bail out certain financial institutions deemed ‘too big to fail’ was not unanimous amongst the Federal Reserve governors. The head of the Kansas City Fed, Thomas Hoenig, believes the Fed, Treasury, and other members of Uncle Sam’s family should have allowed more institutions to fail.
Hoenig addressed this topic last Spring in writing Too Big Has Failed. I resubmit his review simply because I do not believe the underlying issues have changed or been effectively addressed. What are these issues?
1. Losses must be identified and realized.
2. Management must be replaced.
Until both these steps are taken, true health can not return to the system.
Hoenig discounts the systemic risk argument put forth by government officials and believes we have chosen a path of slow recovery with an increased cost borne by the American taxpayer. The powers that be are effectively transferring the losses from the institutions to the public. (more…)
Cash Register Closing on Clunkers
Posted by Larry Doyle on August 19th, 2009 2:17 PM |
The Wall Street Journal is reporting that the Cash for Clunkers program is soon winding down. It highlights this development in writing, White House Will Outline Plan to End ‘Cash for Clunkers.’
The Obama administration will release a plan this week to wind down its “cash for clunkers” incentive program, signaling that one of Washington’s fastest-acting stimulus programs is nearing an end.
Transportation Secretary Ray LaHood said Wednesday he would disclose within two days updated figures on the program, including how much of the $3 billion in funding was left. He said he would also offer a blueprint for how the administration will wind down the program to ensure all vouchers issued by dealers are reimbursed by the government before the money runs out.
“They’re going to get their money,” Mr. LaHood said, responding to dealers’ complaints of payment delays. “There will be no car dealer that won’t be reimbursed.”
He said the government has “more than 1,000 people processing paper 24-7,” to speed payments to dealers, and continues to add workers.
Mr. LaHood previously said that he expected the program to last through Labor Day, Sept. 7. He declined to say Wednesday whether he still expected the program’s budget to last that long. (more…)
FINRA Must Play by Its Own Rules
Posted by Larry Doyle on August 19th, 2009 11:21 AM |
Will the pressure being applied on FINRA compel this Wall Street self-regulatory organization to open its books and records? I am heartened and hopeful that the complaint filed by Amerivet Securities against FINRA will do just that.
High five to RS for sharing this complaint, Amerivet Securities v. Financial Industry Regulatory Authority.
Amerivet requests FINRA open its books for purposes of reviewing FINRA’s (and the NASD’s) engagement, oversight, and investment activities broadly speaking.
My major axe with FINRA remains its liquidation of Auction-Rate Securities in 2007. I would ask the judge who is hearing the Amerivet complaint to review a September 2008 document produced by FINRA in regard to the Auction-Rate Securities debacle. I submit Testimony by Susan L. Merrill, Executive Vice-President, Chief of Enforcement, Concerning Auction-Rate Securities Markets to Committee on Financial Services U.S. House of Representatives September 18, 2008.
Ms. Merrill promotes that as part of FINRA’s investigation of the ARS market, it would also focus on:
possible conflicts of interest where a firm may have been in possession of knowledge about ARS failures and liquidated their proprietary ARS positions by selling those positions to customers or ahead of customer liquidations.
Ms. Merrill, Ms. Schapiro, Mr. Ketchum, and members of the House Committee on Financial Services, Sense on Cents calls on all of you to hold FINRA to the same standard you would apply to every bank, broker-dealer, and money manager involved in the Auction-Rate Securities market.
I can only hope the judge handling the Amerivet complaint is able to review Ms. Merrill’s testimony.
FINRA must release all information regarding the liquidation of ARS from its investment portfolio in 2007.
What is good for the goose is good for the gander.
LD
Keep Your Friends Close and Your Enemies Closer
Posted by Larry Doyle on August 19th, 2009 7:15 AM |
The twists and turns while looking into FINRA keep getting more interesting.
While reviewing some FINRA material, I came across an invitation to a SIFMA (Securities Industry and Financial Markets Association) Breakfast in Los Angeles in August 2008.
For those interested in attending, please respond to . . . well, I won’t spoil it. Please read on:
Dear Industry Colleague,
On behalf of the SIFMA Compliance and Legal Division, I would like to invite you to our Los Angeles Topical Breakfast Seminar. Do not miss this opportunity to hear firsthand the examination agendas and findings of the SEC, FINRA and state regulators. This complimentary breakfast seminar will be hosted by Morgan Stanley. Sign up now, space is extremely limited.
When: Wednesday, August 13th, 2008
8:30 am – 10:30 amWhere: Morgan Stanley
335 North Maple Drive, Suite 150
Beverly Hills, CA 90210.Speakers:
Michael G. Rufino
Senior Vice President, Member Regulation, Sales Practice Review
Financial Industry Regulatory Authority (FINRA)Susan Axelrod
Senior Vice President, Office of Regulatory Operations
Financial Industry Regulatory Authority (FINRA)David A. Greene
Director, District 2
Financial Industry Regulatory Authority (FINRA)
(Southern California that part of the state south or east of the counties of Monterey, San Benito, Fresno, and Inyo),
southern Nevada (that part of the state south or east of the counties of Esmeralda and Nye) and the former U.S. Trust TerritoriesReservations:
If you are able to attend please RSVP to Shana Madoff at smadoff@madoff.com or call 212-230-2411. Space is limited so respond as soon as you can.Sincerely,
Shana Madoff
Executive Committee Member, SIFMA – Compliance & Legal Division
There is nothing here that is new news. That said, hearing how deeply ingrained the Madoff family was in the financial regulatory and trade organizatons is one thing, seeing it is quite another. Shana Madoff is Bernie’s niece.
No doubt that Bernie Madoff lived by the rule, “keep your friends close and your enemies closer.”
LD
Smoke and Mirrors Accounting Will Be Expensive for Our Kids
Posted by Larry Doyle on August 18th, 2009 2:31 PM |
Why will future generations be forced to pay an ever increasing cost for our current economic turmoils? Very simply, regulators and legislators have not only allowed but promoted the intentional mispricing of assets on financial company books.
There is no doubt that the regulators and legislators effectively forced the FASB to relax the mark-to-market accounting standard to alleviate pressure on capital ratios. Where, however, is the line drawn on this practice? How do we know that financial institutions are not utilizing this practice indiscriminately to support capital ratios and income statements?
I have little doubt we will see future frauds in the years ahead as a result of this practice. The Financial Times addresses the problems embedded in this practice by writing, Disclose the Fair Value of Complex Securities:
Markets function best when companies disclose valid information about the values of their assets and future cash flows. If companies choose not to disclose their best estimates of the fair values of their assets, market participants will make their own judgments about future cash flows and subtract a risk premium for non-disclosure. Good accounting should reduce such dead-weight losses.
Healthy markets and vibrant economies do not rely on opaque and fictitious accounting practices.
Our kids deserve better.
LD
Is Arthur Levitt an Unbiased Defender of High Frequency Trading?
Posted by Larry Doyle on August 18th, 2009 11:12 AM |
Former SEC chairman Arthur Levitt writes an editorial in today’s Wall Street Journal in defense of high frequency trading. Levitt pens, Don’t Set Speed Limits on Trading.
I welcome Levitt or any other individual highlighting the issues surrounding high frequency trading. Discussion and debate will hopefully bring a healthier marketplace for all. While Levitt provides the standard defense of high frequency trading in terms of providing liquidity, he offers brief remarks against the predatory nature of flash orders. Aside from that, though, Levitt largely skips the debate over the reality of front-running employed by certain aspects of high frequency trading.
I believe, however, the largest hole in Levitt’s editorial actually rests upon the shoulders of the Wall Street Journal itself. How so? Levitt is not only a former chair of the SEC, but he also happens to have a number of paid consulting and advisory roles. With whom? I’m glad you asked. (more…)
What Are the Credit Markets Telling Us?
Posted by Larry Doyle on August 18th, 2009 7:59 AM |
Are the credit markets sending us a warning signal about our economic landscape?
Recall that in 2008 all but the safest assets (U.S. Treasuries) declined significantly in value. In a similar fashion in 2009 risk-based assets, both equities and bonds, have experienced a healthy rebound, albeit of varying degrees. Are we starting to witness a disconnect in this lock-step relationship?
I highlighted yesterday the recent significant downward move within the high yield bond space in writing “Everybody Out of the Pool.” I pointed out:
Within specific market segments, the one sector that has outpaced almost every other is the high yield space within the bond market. An ETF which I reference for market performance is COY. Prior to the recent selloff, this specific fund had risen almost 50% on the year. It has given back approximately 6-7% over the last few days.
The Wall Street Journal picks up on this theme this morning and reports, Some Wobbles for the Financial Markets’ Tandem Ride:
Since the nadir in March, U.S. stocks have gained close to 50% and investment-grade credit spreads have halved.
The two asset classes have rallied in tandem as panic over a financial collapse has dissipated. But with the focus now on economic recovery, despite Monday’s global stock-market selloff, a disconnect is developing.
Credit-default-swap indexes that usually move in line with equities have begun to follow their own tune, one with a more downbeat tone on the outlook. U.S. stocks hit new 2009 highs last week before losing some ground, while the investment-grade Markit CDX and iTraxx indexes underperformed sharply.
Even with a 0.6% decline on the week, the S&P 500 closed off the week’s lows, while the 0.12 percentage point widening in the CDX took the index back to a level unseen since July 24.
Equity investors appear focused on the surprising resilience of earnings and the potential for punchy profits if revenues rebound. Credit Suisse forecasts a 20% rise in 2010 S&P 500 operating earnings, giving the market a price/earnings multiple of just 14 times, below the long-run average.
Credit investors seem more concerned about how sustainable any recovery might prove, and are inclined to require more proof that demand is picking up. Cash bond spreads are now comparable to levels seen in the 1981-1982 and 2001 recessions, rather than at 1930s Depression levels. But defaults still are climbing and credit deterioration continuing.
Credit markets are concerned about consumer demand. A key driver for last week’s credit selloff was the disappointing U.S. retail sales number for July. Stocks seemed to shrug off that data when it emerged, focusing instead on strong corporate earnings, even though many results are being driven by cost-cutting exercises; witness Wal-Mart’s profits holding up while it missed sales targets.
![[Markit CDX North American Investment Grade Index]](http://s.wsj.net/public/resources/images/MI-AY294_Credhe_NS_20090817183624.gif)
With all due respect to equity managers and investors, I have always viewed the credit markets as a better indicator of market health and direction. Why? The credit market operates on the premise of an entity’s ability to service debt. As such, the credit market puts a greater discount on the accounting smoke and mirrors that are utilized to raise equity capital.
Is the recent price action in the credit market forecasting a problem on our economic landscape?
Sense on Cents will be monitoring closely.
LD
Everybody Out of the Pool
Posted by Larry Doyle on August 17th, 2009 2:39 PM |
Were economists and market analysts realistic in thinking July retail sales were truly going to increase by .8%? The actual report came in last Thursday at -.1% and without the benefit of the promotions within the automotive space, the report would have generated an amazingly weak -.6% reading. Missing a piece of economic data of this importance by that magnitude is not only embarrassing, but also a statement on the current and future economic landscape.
Against the backdrop of this report, the equity markets have sold off approximately 3-4% over the course of the last few trading sessions. When working on a trading desk, we would often say on big down days in either the stock or bond markets, “everybody out of the pool.”
While the markets are down over the last few days, please do not forget the market has had close to a 15% run since early July. Based on what? Surprisingly strong earnings. Really? The earnings have been much more a function of expense reduction than increased sales. With the American consumer clearly ‘in the pain chamber’ in terms of economic outlook, sales will continue to lag. If sales lag, how can companies truly generate meaningful earnings? Smoke and mirrors only work for so long.
Within specific market segments, the one sector that has outpaced almost every other is the high yield space within the bond market. An ETF which I reference for market performance is COY. Prior to the recent selloff, this specific fund had risen almost 50% on the year. It has given back approximately 6-7% over the last few days.
Additionally, the bloom seems to be off the commodity index which is off approximately 5% over the last few days.
Add it all up and risks are very high with fundamental values seriously lacking. I believe investors should be very careful allocating money to the market at this level.
Perhaps I should also say, this entire period is an “Adult Swim Only.”
LD
