Posted by Larry Doyle on September 18th, 2009 9:25 AM |
Joe Saluzzi of Themis Trading deserves special recognition for yesterday’s announcement by the SEC that it will propose the banning of flash orders. Why? Joe had the character and courage of his conviction to publicly highlight the inherent inequity involved in this corner of our economic landscape.
I have highlighted Joe’s work extensively here at Sense on Cents. I do not speak for Joe, but I think he would agree that banning flash orders should only be the start to level the playing field on our equity exchanges. What other initiatives should be undertaken to promote a greater degree of transparency and integrity on our equity exchanges? I would promote the following:
1. Work with regulators overseas so that uniform measures are practiced across all global equity exchanges. The Europeans are certainly not bashful in highlighting shortcomings in American compensation practices within the financial industry. American regulators should work with these European central bankers so there is no ‘exchange arbitrage.’
2. Eliminate a ‘payment for order flow’ (otherwise known as rebates) for directing business to one exchange versus another. In layman’s terms, these rebates are known as ‘kickbacks.’ Be mindful that the London Stock Exchange stopped allowing rebates as of September 1st.
3. Eliminate ‘predatory algorithmic trading’ which also preys upon retail orders. Distinguish between qualified algorithmic trading versus predatory algorithmic trading.
4. Thoroughly review the integrity of dark pools which impacts liquidity.
In short, it is readily apparent that the SEC has allowed for the development and execution of a variety of trading practices which have not served the interests of EVERY investor. Why and how did this develop? The exchanges have become for profit enterprises. There is nothing inherently wrong with for profit exchanges. That said, there is plenty wrong with unfair trade practices promoted by exchanges and not properly overseen by the regulators.
I am baffled as to how trade practices, such as flash orders, do not seemingly have to withstand a rigorous review PRIOR to their being rolled out. Is the development and implementation of flash orders not the equivalent of a new drug hitting the market prior to being officially reviewed and approved by the FDA? What is wrong with this picture? In my opinion, once again the regulators have been exposed as more aligned with the financial industry than they are with fulfilling their mandate to protect investors.
These regulators should not be allowed to take a victory lap for banning flash orders without addressing the entire gamut of unfair trade practices currently polluting our equity exchanges.
Posted by Larry Doyle on September 17th, 2009 3:59 PM |
Did Uncle Sam get his pocket picked in the sale of AIG Asset Management to Hong Kong billionaire Richard Li’s Pacific Century Group? It would appear as if Uncle Sam was ‘picked off’ . . . or is there something else going on contingent to this transaction? Why should the American taxpayer care about this sale of AIG Asset Management to a Chinese entity? For the very simple reason that you, me and every other American taxpayer own 80% of AIG. Are the power brokers in Washington or the people they have put in charge at AIG protecting our interests? On this transaction, further questions need to be asked.
AIG Asset Management has approximately $89 billion in assets under management. Very credible sources whom I respect have shared with me that the assets consist of the following:
> $50 billion in equities which generate fees of 50 basis points per year or a total of $250 million
> $15 billion in private equity which generate fees of 2% per year and 20% of profits for a minimum of $300 million
> $5-$10 billion in fund of funds which generate fees of 1% per year and 10% of profits for a minimum of $50 million
> $15 billion of fixed income (bonds) which generate fees of approximately 65 basis points per year or a total of $97.5 million
Total it up and AIG generated a top line revenue of at least $700 million. My source indicates the top line was more likely between $800 million and $1 billion.
What did Hong Kong based Pacific Century pay for this cash flow? A mere $300 million with contingency fees based upon performance which may take the price up to $500 million. Thus, Pacific Century paid at most .7 times cash flow.
What does that price mean on a relative basis? Again in an attempt to be conservative, asset management businesses have traded for between 8-12 times cash flow. Even if I cut that estimate in half and said that AIG is a distressed seller and the premium for asset management business units has come down, 5 times cash flow would equate to a bare minimum price for this business of $3.5 billion.
What is going on? Why did AIG Asset Management trade so cheaply? Is this some form of payback that Uncle Sam is making to China? Is there a process in place to keep these sales honest? Where does one receive information and transparency on the sale of AIG’s assets?
Many people on Wall Street are scratching their heads on this transaction.
Recently appointed AIG CEO Robert Benmosche indicated that he was going to be patient and get fair value for AIG’s business units. If this transaction is any indication of Benmosche’s patience and measure of fair value, then he is clearly not the guy for the job.
In my opinion, though, the individual who needs to provide some answers here is Treasury Secretary Geithner. Recall that AIG was saved via TARP funds. Who oversees the TARP? Secretary Geithner. With sales such as this one, the American taxpayer will never get repaid for bailing out AIG.
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.
Posted by Larry Doyle on September 17th, 2009 9:31 AM |
Former Fed Chair, Paul Volcker
While the insiders on Wall Street and Washington pander about real financial regulatory reform, former Fed chair Paul Volcker yesterday hit ground zero on this hotly debated topic.
The heart of financial regulatory reform is centered on the implementation of leverage by our largest financial institutions. The leverage is exercised in a wide array of activities, both on and off-balance sheet. The capital utilized by the banks in these activities is credit that has not and will not flow directly through to the economy. Why? The banks believe that they will generate a greater return on the capital via proprietary activities rather than facilitating client business and addressing customer needs.
These proprietary activities, housed in balance sheet trading books and also in off-balance sheet SIV’s (structured investment vehicles), provided many nails in our economic coffin. While the Fed has provided the liquidity to refloat the markets (and to a lesser extent the economy), Wall Street banks are fighting hard to maintain as much of their proprietary activities as possible. Washington is largely dancing around the edges of the banks’ balance sheets in proposing financial regulatory reform. Until now. Paul Volcker hits Wall Street hard in promoting the end of the banks’ hedge fund like activities. The Wall Street Journal details Volcker’s bombshell in writing, Volcker Calls for Restricting Banks’ Risk, Trading Activity:
Former Federal Reserve Chairman Paul Volcker on Wednesday said banks should operate in a much less risky fashion, including not making trading bets with their own capital, comments that could provoke intensified debates over the future of financial regulation.
Mr. Volcker, who currently is chairman of the White House’s Economic Recovery Advisory Board, suggested banks should be restricted to trading on their client’s behalf instead of making bets with their own money through internal units that often act like hedge funds.
“Extensive participation in the impersonal, transaction-oriented capital market does not seem to me an intrinsic part of commercial banking,” he said in a speech to the Association for Corporate Growth in Los Angeles.
Mr. Volcker’s comments could put him at odds with the Obama administration’s proposal for new financial rules. The White House has called for more oversight of banks’ operations but doesn’t push such strict limits on what they do.
Believe me, the Wall Street lobby is working overtime to delay and dilute the impact of even the shallow regulatory reforms currently proposed by Washington. Volcker’s proposal would serve to dramatically change the very nature of how Wall Street operates. I welcome it on a number of fronts, as it would promote economic activity and financial intermediation, including: (more…)
Posted by Larry Doyle on September 16th, 2009 2:18 PM |
All aboard!!
As the U.S. Dollar Index makes new lows, equities make new highs and the momentum continues. Where is the ‘juice’ coming from? Is this cash that had previously exited the market now reentering? Is this people who had gone short now being forced to cover? Is this ‘new’ money finding value? Is this a pickup in short term day trading? The answer to all of these questions is yes, albeit to varying degrees. However, the most widely held belief for the rally in the market is the dollar ‘carry trade.’
Commentary: The decline in the value of the U.S. greenback by approximately 2% reminds me of the overused Wall Street phrase, ‘squeal like a pig…’
The fact is Big Ben Bernanke is not only funding the domestic economy with the Fed Funds rate at 0-.25%, he is also funding the spike in a number of markets around the world. How so? Investors around the world have entered and, given this week’s price action, continue to enter into the ‘positive carry‘ trade in which they borrow U.S. dollars to purchase higher risk assets.
This ‘positive carry’ trade was fed by the Japanese yen throughout the ’90s given the exceptionally low rates in that country.
Make no mistake, though, this ‘positive carry’ trade is nothing more than implementing leverage. Do not confuse leverage with brains when a market is rising because as I said the other day, leverage is death when that bull becomes a bear. As I think of market developments, I am convinced that this ultimate unwind of leverage trades currently being implemented is Jeff Gundlach’s reasoning for being bullish on the dollar. How will this work? Investors will look to exit their risk based investments (emerging market stocks and the like) and buy back the dollars which they have borrowed. In the process, the dollar may rally significantly. The timing of this unwind is the critical question.
For years, the yen was the currency of choice to fund international carry trades. But is the dollar starting to take its place?
Analysts say negligible US interest rates, its quantitative easing measures and little sign that the country is set to withdraw from its ultra-loose monetary policy anytime soon leaves it in a similar position to Japan at the start of the decade.
“This puts the dollar in exactly the same position as the yen back in 2001 and makes it naturally attractive as a carry trade funding currency,” says Simon Derrick at Bank of New York Mellon. “The dollar is the new yen.”
The carry trade strategy, in which low-yielding currencies are sold to finance the purchase of riskier, higher-yielding assets, was widely used in the years prior to the eruption of the financial crisis.
The FT further adds,
Speculative positioning data seem to back up the shift against the dollar, revealing the extent of recent deterioration in dollar sentiment.
According to figures from the Chicago Mercantile Exchange, which are often used as a proxy for hedge fund activity, aggregate bets against the dollar versus the euro, yen, Swiss franc, sterling and the Australian, New Zealand and Canadian dollars last week rose to their highest levels since July 2008, when the dollar hit a record low against the euro.
Is utilizing the dollar for funding purposes a harmless risk-free trade? Anything but. A weak dollar impacts all dollar-denominated assets and dollar-denominated transactions.
For those entering into these transactions, a sharp reversal in the dollar or in the assets being purchased can lead to tremendous losses. For now, though, traders, hedge funds, and speculators the world over are selling dollars to put this dollar carry trade on . . . in size!
What do our ‘wizards in Washington’ have to say about the plummeting dollar? You can hear a pin drop.
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.
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Dollar Carry Trade Drives Global Equity Markets
Posted by Larry Doyle on September 16th, 2009 2:18 PM |
As the U.S. Dollar Index makes new lows, equities make new highs and the momentum continues. Where is the ‘juice’ coming from? Is this cash that had previously exited the market now reentering? Is this people who had gone short now being forced to cover? Is this ‘new’ money finding value? Is this a pickup in short term day trading? The answer to all of these questions is yes, albeit to varying degrees. However, the most widely held belief for the rally in the market is the dollar ‘carry trade.’
I highlighted this trade last week in my September 12: Month to Date Review of the Markets. On that day, I wrote about the U.S. dollar:
This morning, the Financial Times weighs in with Dollar Lays Claim to Being Top Carry Trade Currency:
The FT further adds,
Is utilizing the dollar for funding purposes a harmless risk-free trade? Anything but. A weak dollar impacts all dollar-denominated assets and dollar-denominated transactions.
For those entering into these transactions, a sharp reversal in the dollar or in the assets being purchased can lead to tremendous losses. For now, though, traders, hedge funds, and speculators the world over are selling dollars to put this dollar carry trade on . . . in size!
What do our ‘wizards in Washington’ have to say about the plummeting dollar? You can hear a pin drop.
LD
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