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HomeMore Bank Fraud
Posted by Larry Doyle on January 16th, 2010 12:53 PM |
The bailing out of our largest financial institutions was a violation of moral hazard of the greatest magnitude. With that violation well in place, America is now facing violations of other moral hazards. What do I mean?
The mortgage modification program is a joke because the banks holding the mortgages have no incentive in modifying them. Why? Because, to a very large extent, if the bank modifies the primary mortgage then it has to write off the value of a second lien, if in fact a second lien exists. Given the amount of equity borrowers took out of their homes, there are a lot of second liens outstanding.
How are the banks handling these second liens? Violating a moral hazard and committing fraud in the process. A report from CNBC, Big Banks Accused of Short Sale Fraud, highlights this reality. The report outlines: (more…)
Shedding Light on Dark Pools
Posted by Larry Doyle on October 20th, 2009 4:17 PM |
Kudos to Joe Saluzzi once again. While a number of people in the markets have been pushing for increased oversight of high frequency trading, in my opinion, nobody deserves more credit than Joe Saluzzi of Themis Trading. The pressure initiated by Joe and pushed by others is starting to bear real results. How so?
The highly predatory nature of ‘flash orders’ will likely be discontinued. Now we learn that trading activity in dark pools will also likely be seriously restricted. What are dark pools? Why should you care? If you have an interest in the markets, you should care. Let’s navigate.
I was honored to have Joe join me on August 2nd on No Quarter Radio’s Sense on Cents with Larry Doyle. From my review of that interview, we learned that dark pools have developed in the following manner:
– Originally launched by one or two exchanges for the purpose of allowing major money managers to cross large blocks of stock ‘off the floor’ and thus protect the buyers and sellers identities and the price of the transaction
– Now every dealer and exchange have developed dark pools resulting in more and more business occurring off exchanges and without any benefit of transparency. Who is disadvantged? Those without access to the dark pools.
– Dark pools initially had minimum size orders, but many dark pools have increasingly shifted away from a size requirement.
– Dark pools have developed in such a way that some market participants will abuse the intended purpose of the facility, that is to transact, and instead will look to discover information on pending orders through these dark pools. (more…)
Does Wall Street Run ‘One Way’?
Posted by Larry Doyle on July 10th, 2009 8:47 AM |
Does the American public appreciate the essence of Wall Street? Is it as cutthroat and greedy as many would attest?
As with anything, I do not think it is fair or productive to generalize. There are plenty of world class people on Wall Street and the world is a better place for them. There are also plenty of people for whom I have no personal or professional regard. That’s life. Who couldn’t say the same about every industry.
While individual firms and certain executives would want the American public to focus on single situations, for our purposes currently let’s focus on the financial industry as a whole.
In so doing, it becomes very apparent that Wall Street is now showing it runs “one way.” How so?
The Wall Street Journal highlights how the financial industry is haggling over the valuation of warrants purchased by the U.S. Treasury as part of the TARP (Troubled Asset Recovery Program). The WSJ reports, J.P. Morgan to Send Warrants to Market.
I believe the WSJ ‘s choice of title for this article is amazingly weak. The simple fact is that Wall Street firms are complaining loud and clear about the price they may have to pay to repurchase warrants currently owned by the U.S. Treasury (that’s you and me, folks).
The WSJ writes:
Several Wall Street firms seeking to buy back warrants held by the government as part of the $700 billion financial bailout are complaining that the Treasury Department is demanding too high a price, according to people familiar with the matter.
The Treasury has rejected the vast majority of valuation proposals from banks, saying the firms are undervaluing what the warrants are worth, these people said. That has prompted complaints from some top executives. J.P. Morgan Chase and Co. Chief Executive James Dimon raised the issue directly with Treasury Secretary Timothy Geithner, disagreeing with some of the valuation methods that the government was using to value the warrants.
The inability to agree on a price has already prompted J.P. Morgan to take the next step in a complex process to remove the warrants from the hands of the government. The bank has waived its right to buy the warrants and will allow the Treasury to auction them in the public market, which bank executives say will result in an actual market price.
How gracious of Mr. Dimon! Who would be bidding on these warrants? Other Wall Street banks. Do you think there is a chance for more than a little bit of collusion in the bidding process to keep the warrant valuations excessively low? Of course. Who loses? The American taxpayer . . . again. (more…)
“Crony Capitalism”
Posted by Larry Doyle on May 29th, 2009 7:55 AM |
Has the economic integrity of the United States of America been reduced to the level of a banana republic? This theme is recurring through many channels. In the midst of a daily perspective, one may quickly and strongly dismiss such claims as overhyped libertarian fearmongering. I do not put myslef in that camp, but I do take pause to reflect on the long term implications of actions and programs enacted throughout our economic crisis.
Sin-Ming Shaw, a Thought Leader (left sidebar) here at Sense on Cents, provides sobering and thoughtful commentary on this topic in his article, “America’s Crony Capitalism.” While we all would like a swift, strong, and fast economic recovery, Shaw addresses the lack of integrity and transparency in the process. Many would maintain that “we did what we had to do” or similarly “these ends justifies these means.” I strongly believe the costs have not yet been paid, continue to accrue everyday, and will be astronomical over the long haul.
Shaw provides insights on the Bank Stress Tests:
The government had allowed bankers to “negotiate” the results, like a student taking a final examination and then negotiating her grade.
The truth is that the tests were not designed to find answers. Both Wall Street’s chieftains and the Obama administration already knew the truth. They knew that if the true conditions at many big banks were publicly revealed, many would have been immediately declared bankrupt, necessitating government receivership to stop a tsunami of bank runs.
Wall Street’s titans, however, had convinced Obama and his team that their continued stewardship was essential to getting the world out of its crisis. They successfully portrayed themselves as victims of a firestorm, rather than as accessories to arson.
Strong and indicting charges put forth by Shaw. The fact is, though, he is accurate in his analysis. Washington and Wall Street have sufficiently agreed in their assessment and analysis of this crisis. They have conspired on their entrance to solution. They will debate their exit knowing full well they are joined at the hip in the process.
The necessary rigor to expose and unearth the crime and criminals is severely lacking. Despite talk of a Financial Inquiry Commission, word from Washington is that stall tactics, turf wars, and partisan politics will once again rule the day in forestalling the needed indictments and prosecutions, both literally and figuratively, of those involved in this mess.
Our “Washington wizards” may declare short term victory (Austan Goolsbee interview yesterday), and point to recovering markets as evidence. Those who may care to look at the world from a larger and longer perspective, fully appreciate that history will judge this time using a different measure. Shaw asserts:
The world also wanted to see the US retaking the high road in reinforcing business ethics and integrity – so lacking under the last administration. As taxpayers had already put huge sums into rescuing failing banks, with the prospect of more to come, a transparent process to reveal how the money was being used was imperative.
All this said, our future for now is both clear and murky. The Obama administration, as well as the Bush administration, sacrificed integrity in the name of short term bank solvency. The efficacy of this move will be debated for years. The fact is, though, the cost of such a move is not fully appreciated. Shaw summarizes as much:
Like swine flu, crony capitalism has migrated from corrupt Third World countries to America, once the citadel of sound public and private governance. Is it any wonder that China is perceived as an increasingly credible model for much of the developing world, while the US is now viewed as a symbol of hypocrisy and double standards?
LD
