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HomeIs the Securities Investor Protection Corporation (SIPC) a Mere Facade?
Posted by Larry Doyle on August 11th, 2009 4:55 PM |
What good is insurance if after the storm you do not get paid? What good is insurance if the premiums charged are so badly mispriced that they misrepresent and do not cover the embedded risks? Welcome to the world of the Securities Investor Protection Corporation.
Is SIPC a mere facade presented by the Wall Street titans?
Let’s get the take of those who recently relied upon SIPC to fulfill its obligations. To whom do I refer? The victims of the Madoff scam.
If these investors were not protected, then how are we to believe that other investors will be protected on a going forward basis?
Why do I make that statement? None other than current head of the SEC Mary Schapiro addressed this topic in recent Congressional testimony. In a press release put out by Madoff victims, Schapiro admitted that SIPC did not have sufficient funds to pay all of the Madoff claims.
Who funds SIPC? The Wall Street banks. Yes, those banks that have been printing massive revenues and believe that they are back to ‘business as usual.’ Why aren’t the premiums immediately increased on these institutions to properly compensate Madoff victims?
To the extent that certain Madoff investors were aware of the Ponzi scam, obviously they should not receive restitution. I have to believe that number is in the distinct minority.
Given the general lack of confidence in our financial regulators,(the SEC and FINRA) would Congress have the heart and courage to take on the financial behemoths on Wall Street in an attempt to protect the investing public?
These questions and issues lie at the core of badly needed financial regulatory reform. Yes, that reform which seems to be on the back burner now that the markets have rebounded and Wall Street is printing money once again.
Make no mistake, though, that pot is still boiling and these questions need to be fully addressed and answered to the public’s satisfaction.
For a deeper understanding of these questions from the perspectives of the victims of the Madoff scam, please read this recent press release from the Bernard Madoff Victims Coalition. Click on the image below to access a PDF of the full 2-page press release. Let me know what you think.
LD
Board Accountability
Posted by Larry Doyle on August 10th, 2009 6:00 PM |
With a few recent exceptions (Citigroup and BofA), it strikes me that we have witnessed very few questions of accountability directed at the boards of many companies in our country.
Board positions are not supposed to be purely cushy, figurehead type positions for friends of executives; serious corporate governance at the board level is a critically important role in a robust capitalistic system.
Where are the checks and balances at this level?
I am reminded of the neglect, if not malfeasance, of corporate boards in reviewing The SEC Robbed Shareholders, written by Michael Maiello of Forbes.
Maiello addresses recent fines imposed by the SEC against Bank of America and General Electric. He writes:
The Securities and Exchange Commission is supposed to see to it that corporate managers don’t take advantage of the shareholders they’re supposed to represent.
While I have limited confidence in corporate managers, I would only hope that those overseeing these managers, that being the boards of directors, may be more accountable. When will shareholders truly be able to get a fair say in the election of board members? When will our regulatory bodies truly hold these individuals accountable? When will the media expose the closed, if not incestuous, nature of the relationship between senior management and the board?
Maiello does yeoman work in highlighting the travesty imposed upon the shareholders of BofA and GE. He asserts:
The SEC has made a real mess of things. In both cases, the commission settled for amounts so small that they can’t be said to deter executives from using SEC filings to mislead investors.
The other problem is that small as the fines are relative to the violations that the SEC alleged, they are also borne by the wrong people. Corporate executives, not shareholders, are responsible for the content of SEC filings and they should be the ones who pay for lapses, inaccuracies and omissions.
While the SEC is remiss in these specific cases, the fact is before situations such as these get to the SEC, they should be addressed at the board level. The board should be fully aware of potential legal issues and address them forthwith. In the process, board members will have to extract themselves from the pocket of management and represent the rights and interests of shareholders. If they don’t, then they should be exposed for neglect of duty.
LD
Wall Street vs Main Street: The Great Divide Widens
Posted by Larry Doyle on August 4th, 2009 8:01 AM |
Please rank the following professions in terms of commanding respect:
1. used car salesmen
2. lawyers
3. Wall Street
4. dog catchers
5. burglars
6. politicians
Plenty could argue that dog catchers would command the most respect, with burglars a distant second. How so? At least you know exactly what their intentions are, admirable or not, and manage accordingly.
With all due respect to quality individuals in the other professions, those industries as a whole have always suffered from a very poor public perception.
Moving to the fully serious part of my writing this morning, I would venture to say that the chasm which has always existed between Wall Street and Main Street has never been wider and is widening by the day. How so?
I am being inundated regularly with comments and questions as to whether the market is truly representative of the fundamentals in the underlying economy. Others have asked me how an industry that is supposedly once again making sizable profits can shamelessly impose credit card rates of upwards of 30%!!
It is my sense that the American consumer and investor feels woefully neglected at this point in our country’s history. As such, I have little doubt that many people have exited the markets with the intention of NEVER returning.
I would not pretend that I can appreciate the level of anxiety and disgust of everybody in our country today, but I share your contempt for a crowd both in Washington and on Wall Street that has done little to nothing to protect your interests.
This contempt welled up this morning as I read The Wall Street Journal’s, Geithner Vents at Regulators as Overhaul Stumbles:
Treasury Secretary Timothy Geithner blasted top U.S. financial regulators in an expletive-laced critique last Friday as frustration grows over the Obama administration’s faltering plan to overhaul U.S. financial regulation, according to people familiar with the meeting.
The proposed regulatory revamp is one of President Barack Obama’s top domestic priorities. But since it was unveiled in June, the plan has been criticized by the financial-services industry, as well as by financial regulators wary of encroachment on their turf.
While I could wax poetic on the topic of regulatory reform, I will abbreviate my remarks with a very succinct and direct statement: “THESE PEOPLE DON’T GET IT!”
The fact remains, “Future Financial Regulation: Not a Question of Sufficiency, but of Transparency and Integrity.”
Does the American public understand how thay have been abused by both their political and banking representatives? I strongly believe they are gaining a greater awareness of this phenomena every day.
In coming full circle, my respect rankings from top to bottom would be:
1. dog catcher
2. burglars (at least you know their intentions)
3. used car salesmen
4. lawyers
tie for 6th between politicians and Wall Street
How about you? Please share your thoughts and rankings!!
LD
Wall Street Supercop
Posted by Larry Doyle on July 24th, 2009 9:55 AM |
Regulating Wall Street is not a job for mere mortals. This is a job for Supercop!!
Pardon my lighthearted manner to a truly serious issue, but certain topics just lend themselves to breaking out my Irish wit and this is one of them.
Recall that under President Obama’s initial plans to revamp the financial regulatory structure, the Federal Reserve was to be designated as the uber-regulator or Supercop for Wall Street. Well, the best laid plans do not necessarily play out that way, as the Associated Press reports SEC, FDIC Heads Want New Council to Be Supercop:
Key regulators on Thursday broke with the Obama administration, reaffirming their belief that some new powers to monitor big institutions against financial threats should go to an interagency council, not the Federal Reserve.
Some Republican lawmakers also continued to warn against endowing the Fed with new powers in an overhauled system as Congress slogs through a complex deliberation that could reshape the financial landscape in the wake of a historic crisis.
Under the administration’s financial overhaul proposal, the central bank as “systemic risk regulator” would be able to duplicate and even overrule other regulators.
But Securities and Exchange Commission Chairman Mary Schapiro and Sheila Bair, head of the Federal Deposit Insurance Corp., stressed to the Senate Banking Committee that crucial role should be played by the new stability oversight council. The body would include the Treasury Department, the Fed, and the two independent agencies headed by Bair and Schapiro.
I am not necessarily for more government bureaucracy and I hope this supercop council is not merely a layer of red tape. I would be very concerned if the Federal Reserve were designated as the sole supercop. Why? I think it would likely hinder the Fed’s ability to be viewed as totally independent. I already believe the Fed has a credibility issue on that front. Being designated as Wall Street’s supercop would only further jeopardize the Fed’s claim of independence.
Make no mistake about it, though, the efficacy of a proposed supercop is ultimately a question of transparency and integrity. I addressed these points in writing “Future Financial Regulation: Not A Question of Sufficiency, But of Transparency and Integrity.”
I am heartened by the fact that the FDIC under Sheila Bair would be able to play a prominent role in this supercop council. I hold Ms. Bair in high regard. As the AP reports:
Bair testified that an interagency council with strong and extensive authorities “will provide for an appropriate system of checks and balances.” A council “with real teeth … would be highly effective,” Bair said. It would be “tremendous” power to invest in a sole regulator, she said.
Bair also endorsed the proposed creation under the Obama plan of a consumer finance protection agency to oversee areas such as mortgages and credit cards — an idea fiercely opposed by the financial industry.
How will this play out? Sense on Cents will be monitoring developments. Regulating Wall Street is not a job for mere mortals. This is a job for Supercop!!
LD
Related Commentary
Don’t Call the Fed Independent; June 17, 2009
Can We ‘TRACE’ JP Morgan’s Business?
Posted by Larry Doyle on July 17th, 2009 9:09 AM |
On Wall Street, information is everything!! Access to the information is invaluable. Why? Given the speed with which markets move, any early hint of developing news is priceless in terms of the ability to transact quickly and profitably.
Why is ‘high frequency program trading’ viewed with such skepticism? Select participants with advanced computer programs gain access to market flows prior to other participants and are able to act on it. That playing field is not level. I shared my disdain for this practice in writing, “Why High Frequency Program Trading Smells.”
What other battles are being waged by Wall Street firms looking to defend their turf at the expense of consumers and investors? Credit cards and credit derivatives. Which Wall Street firm has the greatest combined exposure to these businesses? None other than JP Morgan Chase.
The Financial Times highlights how JP Morgan Chief Hits at Credit Card Rules:
While Mr. Dimon is railing on new legislation aimed to protect consumer interests in the credit card space, he conveniently avoids mentioning how both JP Morgan Chase and Bank of America are already implementing procedures to skirt that legislation. How might these financial behemoths do that? Shift from fixed rate credit cards to variable rate. I exposed this maneuver a few weeks back in writing, “Banks Build Better Mousetrap.”
Dimon continues his defense of JP Morgan’s franchise:
In regard to derivatives activity, JP Morgan has a dominant position in the market. Why? Their strong capital position, enormous balance sheet, and strong credit rating make them an attractive counterparty for customers. Make no mistake, JP Morgan has a license to ‘print’ money, and a lot of it, across the entire derivatives platform.
While Washington will tout how they are increasing regulation of the derivatives space, this business is truly multi-pronged. There are plain vanilla derivatives in more highly liquid sectors of the market. These ‘standardized’ derivatives will most certainly move to an exchange to create total transparency. Value added for customers will be minimal only because these markets are already fairly well defined and exposed. JP Morgan and other Wall Street firms will cede this ‘standardized’ space while they fight tooth and nail to maintain their enormously advantageous position in the area of ‘customized’ derivatives.
There is little to no transparency in the world of customized derivatives and as a result the bid-ask spreads are very wide. Cha-ching, cha-ching. Jamie and his friends on Wall Street are working extremely hard to keep it this way.
In their defense, it is likely not functionally feasible to move many customized derivatives to an exchange. What should regulators compel them to do? JP Morgan and every other financial firm on Wall Street should have to report every derivatives transaction to a system known as TRACE, which stands for Trade Reporting and Compliance Engine. This system currently only covers transactions within the cash markets and not derivatives. What does that mean for investors? No transparency and price discovery for investors in the customized derivatives space. As such, Jamie and friends can keep those bid-ask spreads nice and wide and ring up huge profits in the process.
I won’t make many friends on Wall Street, and perhaps lose some of my current friends, but TRACE should be implemented across all product lines. For those involved in the markets, please access the TRACE system to gain a wealth of pricing data while keeping your brokers and financial planners honest!!
LD
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