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HomeJudge 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
Smoothing Out Earnings is Finance-Speak for ‘Cooking the Books’
Posted by Larry Doyle on September 14th, 2009 2:41 PM |
When I hear financial industry insiders opine that they need vehicles and procedures which allow them to ‘smooth earnings,’ I get very suspicious. Why? That very thought process was the business model which led to the failures of Freddie Mac and Fannie Mae.
I witness it again in Bloomberg’s commentary, Beware Bankers Spinning Story of Smooth Results:
The financial results that companies give investors are supposed to paint a picture of how things are. Banks and their regulators want to turn that notion on its head so they can spin a smooth tale of how they would like things to be.
Sadly, some accounting rule makers may be ready to appease banks and the politicians who back them. If that happens, financial results will change from a vital tool for investors to a vehicle catering to managers, regulators and employees.
The practical result of such approaches would be to allow banks to report smoother results that supposedly reflect their long-term prospects. For banks, smoother profits would presumably lead to higher share prices. For regulators, less volatile results would supposedly make it easier to maintain financial stability.
Make no mistake, these accounting procedures are merely a formula for the continuation of a ‘heads we win, tails you lose’ approach which was so prevalent in causing this crisis in the first place.
Investors should not be so naive as to think otherwise. If these procedures are fully implemented, then rigorous risk management will go right out the window and prospects for real, long term economic prosperity along with it.
Regrettably, I have little confidence that the ‘wizards in Washington’ have the intellectual capacity, the moral fortitude and unquestioned integrity to take this issue on and truly protect the American public.
LD
Sense on Cents Asks Again, “Who Regulates the Regulators?”
Posted by Larry Doyle on September 13th, 2009 11:25 AM |
On June 19th, in writing, Who Protects Investors from Regulators? I concluded,
Sad but true, as we enter the Brave New World of the Uncle Sam economy, investors need to remain diligent and should not assume that regulators are necessarily protecting them.
In my commentary that day, I specified shortcomings at the SEC and FINRA.
This morning, I am both heartened and dismayed by Gretchen Morgenson’s article in the Sunday New York Times Business section. Ms. Morgenson writes, But Who Is Watching Regulators?
I commend Ms. Morgenson for addressing a topic which receives little focus by the media at large. As such, I strongly recommend reading it. Ms. Morgenson pens:
Senior regulators who stood idly by for years as financial firms built their houses of cards have been rewarded with even bigger jobs or are jockeying for increased responsibilities. The Federal Reserve Board, for example, wants to become the financial system’s uber-regulator, even though its officials did nothing as banks made deadly decisions to lend recklessly and leverage themselves to the max.
Awarding increased power to those who failed in their oversight duties flies in the face of all notions of accountability.
Additionally she asserts:
Yet those in the public sector ask us to believe that regulators who snoozed during the credit bubble will be alert to emerging problems on their beats when the next mania begins.
That’s asking a lot, isn’t it?
Here’s a novel thought. Instead of creating more regulations to try to prevent this kind of mess from recurring, why not figure out how to hold regulators accountable when they perform as poorly as they did in recent years?
I am with Ms. Morgenson and pulling for her to ‘finish the job’ and call out specific regulators and specific regulatory bodies. I was so hopeful that this was the article that would call out Mary Schapiro (current head of the SEC), and Richard Ketchum (current head of FINRA) and take them to task for not providing real transparency at FINRA (Financial Industry Regulatory Authority), the Wall Street self-regulatory organization. (more…)
NoQuarter Radio’s Sense on Cents with Larry Doyle, Sunday at 8PM
Posted by Larry Doyle on September 12th, 2009 3:07 PM |
UPDATE: This episode of NQR’s Sense on Cents with Larry Doyle has concluded. You can listen to a recording of the episode in its entirety by clicking the play button on the audio player provided below. Once the audio begins, you can advance or rewind to any portion of the episode by clicking at any point along the play bar.
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Please join me this Sunday evening for NQR’s Sense on Cents with Larry Doyle as we dig deeper and work harder in navigating the economic landscape.
Bruce Carton will be joining me to discuss a wide range of securities litigation and enforcement issues which currently occupy center stage on our economic landscape. Bruce is uniquely qualified to discuss these topics. He is the editor of Securities Docket and the author of the SD Insider Column. Bruce is a former Senior Counsel with the SEC’s Division of Enforcement, as well as a former securities litigation partner with one of the world’s largest law firms. He is a featured columnist for Compliance Week on securities enforcement and litigation issues, and the author of Compliance Week’s Enforcement Action blog.
What is on your mind? What would you like to address? Please share your questions and thoughts by calling in to (347) 677-0792, and also join our live chat room, which I’ll start up about 10 minutes before the show begins.
As a reminder, all of my radio shows are archived and can be listened to right here at Sense on Cents by clicking on the NoQuarter Radio tab located under the page header. (FYI, I keep an audio player of my most recent episode in the right sidebar). In addition, all NoQuarter Radio programming is available as a free podcast on iTunes. From the iTunes Store, type “NQR podcasts” in the search window.
Many thanks to Larry Johnson and the rest of the team at NoQuarterUSA blog for providing such a vibrant media vehicle as NoQuarter Radio. I look forward to having you join me Sunday evening as we collectively navigate the economic landscape!!
LD
September 12, 2009: Month to Date Review of Markets
Posted by Larry Doyle on September 12th, 2009 8:17 AM |
Investors continue to race to put cash to work. Across virtually every market segment, asset values continued to increase. This is great. Or is it? Do the markets reflect a recovering economy or merely excess liquidity? Do the markets foresee a recovery in employment, housing, and personal consumption? The wizards in Washington, in true political fashion, are declaring victory in terms of rescuing the economy. Is that premature? Let’s read the market’s tea leaves for September’s month-to-date returns…
Equities
DJIA: 9605, +1.1%
Nasdaq: 2081, +3.6%
S&P 500: 1043, +2.2%
MSCI Emerging Mkt Index: 894, 4.9% !!!
DJ Global ex U.S.: 193.8, +4.4% !!!
Commentary: Clearly, the real action is overseas. The U.S. markets are merely riding the coattails of the emerging markets and other developed international markets. Is the rally overseas sustainable? Are these markets forecasting a global economic recovery? Why hasn’t the Baltic Dry Index rebounded?
Bonds/Interest Rates
2yr Treasury: .91%, a decline of 7 basis points (1 basis point is .01%) Remember, lower rates implies higher bond prices.
10yr Treasury: 3.35%, a decline of 6 basis points
COY (High Yield ETF): 6.35, +4.9% !!!
FMY (Mortgage ETF): 17.52, .69%
ITE (Government ETF): 57.85, .12%
NXR (Municipal ETF): 14.07, 0.0%
Commentary: The fact that U.S. Treasury rates continued to decline this week even in the face of $70 billion of 3yr, 10yr, and 30yr issuance indicates to me:
>> investors view the U.S. economy as weak
>> investors do not see inflation on the horizon. In fact, could the market be fearful of disinflation if not outright deflation? I am starting to think so. If that is the case, can we have disinflation domestically in the context of a global economic rebound? The cross currents and price action between the bond markets and equity markets presents a real conundrum.
The eye popping returns within the high yield space are highly correlated with those in the emerging market space. I would caution people before adding exposure in those segments.
U.S. Dollar
$/Yen: 90.65 vs 93.11 at August month end
Euro/Dollar: 1.4582 vs 1.4338 at August month end
U.S. Dollar Index: 76.72 vs 78.14
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.
Commodities
Oil: $69.12/barrel vs $69.93 at August month end
Gold: $1007.6/oz. vs $952.4 at August month end
DJ-UBS Commodity Index: 123.792 vs 125.73 at month end
Commentary: How can we experience a global economic recovery without further improvement in commodity prices? The move in gold is a safe harbor trade against the weak dollar. Please see my comments above regarding the Baltic Dry Index.
Summary/Conclusion
While there are a few indications of economic improvement, overall I view the disconnect between the markets and the economy to remain significant. I am more in the camp that market returns are more reflective of ‘fast’ or ‘hot’ money chasing further price appreciation with an eye to exit. This price action can and will force participants into the casino, but please be aware ‘the road to hell is paved with positive carry.’
Thoughts, comments, questions always appreciated.
LD
A Wall Street Veteran’s Recollections of September 11, 2001
Posted by Larry Doyle on September 11th, 2009 6:49 AM |
On Tuesday September 11, 2001 I was employed as the National Sales Manager for Securitized Products at JP Morgan Chase located at 270 Park Avenue in the heart of midtown Manahattan. As I recall, it was a beautiful Indian Summer day.
At 8:30am, I entered a meeting with a salesman to discuss the fact that our Credit Department was not willing to do business with a particularly high profile client. This meeting took place in a small meeting room situated on the trading floor.
I exited the meeting at 8:50am to witness a woman literally collapsing on the floor. I then heard somebody say that a plane had crashed into the World Trade Center. Looking across the trading floor to a TV monitor, I saw what appeared to be a hole in one of the towers. I dismissed it as either my looking from a distance or a problem in the transmission. I distinctly recall thinking that a small prop plane had likely lost control and crashed. That said, I quickly hustled back to the sales desk only to be apprised by a young salesman that a jumbo jet had crashed into the WTC. I sensed real concern amongst my surrounding colleagues.
The young salesman asked me what I thought of the chances that this crash was no mere accident, but an act of terrorism. Thinking it over, we agreed the crash very well could be terrorism. It was now approximately 9:00am.
We had a number of clients located in both towers. A senior salesman situated to my right called a client in the tower not yet hit and asked him what was going on inside the building. The client responded that building management was putting out the message to remain in the building as management monitored the situation. Our salesman apprised him of the mayhem surrounding the first tower. Little did our client know that he and his colleagues at Sandler O’Neil only had a few minutes to exit the building. In hindsight, those few minutes had already passed. Within a few minutes, we witnessed the horrific scene of the second jumbo jet slicing into the second WTC tower.
Panic set in on our desk as we all felt that the city of New York was under attack. I thought we would likely witness a string of attacks at other high profile locations, including Grand Central Station, Penn Station, the PATH Train, and the Empire State Building. Thinking we would literally be trapped in Manahattan, I gave my corporate credit card to the aforementioned young salesman and asked him to go reserve a slew of hotel rooms.
I then called my brother who worked one block away from the WTC and encouraged him to get out of his building. He agreed that he would do just that. In turn, I called my folks to apprise them that I had touched base with my brother and that he was leaving his building. When I called him 30 minutes later, at approximately 9:45am, he still had not left the building. He informed me that it was a sea of humanity surrounding his building and he and his colleagues were trying to determine if they were safer inside or outside. I encouraged him to leave and get uptown. Shortly thereafter he did.
At this point, an eery silence had set in as people were trying to determine the circumstances surrounding these crashes. We were thinking of the people trapped in both towers. We then learned of the plane which crashed into the Pentagon and the other that was downed in the fields of Pennsylvania. Not only was New York under attack, but our country as a whole was under siege.
The young salesman whom I had asked to reserve the hotel rooms returned and apprised me that no hotel rooms were to be had.
After witnessing the collapse of both towers, we knew the world was a changed place. How many friends and colleagues perished literally right before our eyes. I remember thinking that given the points of entry of both jets, a likely death count could be upwards of 8-10 thousand people. Fortunately I was quite high in my estimate as many people had been able to exit. That said, for the thousands who perished and the loved ones they left behind, this was a nightmare beyond description.
I encouraged my colleagues who lived in NYC to head home, and those who lived outside the city to make plans to leave. I heard that train service from both Grand Central (my means of transportation) and Penn Station resumed shortly after noon or thereabouts.
I was in constant contact with my wife throughout this ordeal. Knowing that I had no other way of getting home, I was going to have to go into Grand Central. I was very nervous thinking about that prospect. Ultimately after everybody on our sales desk had departed, I left to catch a train around 2:30pm. The train was jammed, but it was silent. People admittedly were in a state of shock.
For the better part of the next 4 months, I drove into Manhattan every day to avoid Grand Central Station. I would leave my home around 4:30am in order to avoid traffic at bridges and tunnels.
Like many people, I had problems sleeping. I lost a dozen friends and colleagues that day.
May they rest in peace . . . and may we never forget.
LD
Did Morgan Stanley’s John Mack Just Get ‘Shot?’
Posted by Larry Doyle on September 10th, 2009 7:42 PM |
Why would John Mack step down from his role as CEO at Morgan Stanley? Mack is widely regarded as one of the most competitive, if not cutthroat, individuals on Wall Street. I find it very hard to believe that he is stepping down because he just turned 65. Morgan Stanley is not the U.S Post Office.
Morgan Stanley has been ridiculed for not taking greater risk within its trading division over the last 6 months. In the process, Morgan Stanley has lagged its main rival, Goldman Sachs. What did Mack do to address this problem? He recently hired Jack Demaio, a highly regarded markets pro with whom Mack worked during his short tenure at Credit Suisse. So what happened? Why is Mack stepping aside? I think in true Wall Street fashion, he may have been pushed out, or — in Wall Street parlance — he just ‘got shot.’ Why? What have we learned and what do we know?
After Mack left Morgan Stanley in 2001, he was headed to work at Pequot Capital, a large hedge fund run by the legendary Art Samberg. In the midst of his transition to Pequot, Mack was thought to have been involved in providing inside information about Microsoft to Samberg.
Bloomberg addressed this story on May 28th in writing, Pequot Capital to Shut Amid SEC-Insider Trading Probe:
Arthur Samberg, once the world’s biggest hedge-fund manager, said a federal insider-trading investigation is forcing him to shut Pequot Capital Management Inc. more than two decades after starting its first fund.
“With the situation increasingly untenable for the firm and for me, I have concluded that Pequot can no longer stay in business,” Samberg wrote in a letter to clients yesterday. Pequot oversees $3.47 billion, according to a May 15 regulatory filing, down from $4.3 billion in November and $15 billion in 2001, when it was the top-ranked hedge-fund firm by assets.
The U.S. Securities and Exchange Commission in January resumed a probe into whether Samberg’s funds illegally profited in 2001 by trading on inside information about Microsoft Corp., people familiar with the matter said at the time. That was about a year after the agency told Samberg and Morgan Stanley Chief Executive Officer John Mack they wouldn’t be accused of wrongdoing related to insider trading.
So John Mack stepped down because he is soon turning 65? Yeah, right!! If you believe that, can I interest you in some toxic mortgage assets priced at 90 cents on the dollar? I think there is real value there!!
In my opinion, ‘Mack the Knife’ getting shot is an indication of the SEC flexing its muscle.
LD
Eliot Spitzer Calls Financial Self-Regulation a Canard
Posted by Larry Doyle on September 14th, 2009 10:06 AM |
Eliot Spitzer
Say what you want about Eliot Spitzer, but in his pursuit of financial chicanery he took very few, if any, prisoners. Regrettably, his personal failings caused his demise at a time when the American public truly needed an advocate to unearth the failings in our financial regulatory structure.
Spitzer is slowly regaining his stature. He pulls no punches in taking on the many holes in our financial regulatory framework as he writes in The New Republic, Better Regulate Than Never. I commend Spitzer as he calls out the Wall Street self-regulatory oversight in writing:
I totally concur. As much as financial self-regulatory organizations would promote that they are aggressively moving forward to clean up the industry, their historical track record belies that fact.
I would point out that Spitzer’s reference to the Securities Industry Association (SIFMA) is misplaced. SIFMA is merely a de facto trade organization rather than a real cop. Spitzer should have targeted FINRA (Financial Industry Regulatory Authority), which is supposed to be the ‘tough cop.’ That said, I commend him for raising this topic.
Will our media and government pick up on Spitzer’s premise, elevate the debate, and serve the public interest? We have yet to witness any real concerted efforts by the media or the government on this front. Why? The media and the government serve at the behest of the financial industry to a far greater extent than they serve at the behest of the American public.
Spitzer sheds further light on this point by writing:
I totally agree with Mr. Spitzer. Perhaps he is a regular reader of Sense on Cents!!
In all seriousness, where do we go from here? Do we allow the media and the government to neglect their public duty and continue protect Wall Street vs. Main Street?
Keep reading Sense on Cents as I will continue to bang the drum. Readers can help by spreading the word.
LD
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Posted in General, regulation, Wall Street | 1 Comment »