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HomeWhat Were Ms. Schapiro’s Hedge Fund Investments at FINRA?
Posted by Larry Doyle on May 4th, 2009 8:08 AM |
As Obama looks to send a message to the American public that he will clean up Wall Street, hedge funds are “under the microscope.” Who in Washington will be delegated to lead the charge? None other than SEC head, Mary Schapiro. Bloomberg reports, SEC Chief Schapiro Wants Authority to Make Hedge-Fund Rules.
Hedge funds have become dirty words. When Washington wants to convey excessive Wall Street greed, politicians and regulators now regularly slip “hedge funds” into their statement.
As with any industry, hedge funds run the gamut in terms of business practices and ethics. It is well documented, though, that Washington solicits and receives excessive campaign contributions from the hedge fund community.
I agree that the hedge fund industry deserves greater scrutiny. A trillion dollar industry unregulated is a breeding ground for problems.
Bloomberg reports:
“It’s probably not enough just to register hedge funds” with the SEC, Schapiro said in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” airing this weekend. “It may well be necessary to put in place particular kinds of rules.”
Treasury Secretary Timothy Geithner’s plan to overhaul financial oversight in response to the worst economic crisis since the Great Depression would force hedge funds to register with the SEC, subjecting firms to new disclosure requirements and inspections by agency staff. Schapiro said the SEC’s authority should be broader, so it can impose further restrictions on funds as “situations evolve.”
President Barack Obama yesterday blamed hedge funds that had lent Chrysler LLC money for triggering the automaker’s bankruptcy. Obama said the funds were “speculators” that refused the administration’s buyout offers because they were holding out for an “unjustified taxpayer bailout.”
Schapiro said “it’s certainly possible” that the SEC would consider forcing hedge funds to publicly disclose short- sale positions, imposing restrictions on leverage and restricting what the firms can invest in.
Does anybody have an issue with increased disclosure and oversight? Transparency is critically important in making sure the playing field for all investors is kept fair and level.
Ms. Schapiro does have experience with hedge funds prior to this engagement, though. As I have highlighted, Ms. Schapiro, as head of FINRA, oversaw investments within FINRA’s internal portfolio which included hedge funds, fund of funds, and private equity.
From the 2007 FINRA Annual Report:
FINRA also has investments in hedge funds and funds of hedge funds that it accounts for under the equity method and includes in other investments in the consolidated balance sheets. As of December 31, 2007, the Company had hedge fund investments of $431.2 million.
Ms. Schapiro should be compelled to share with the investing public in which hedge funds FINRA invested.
Will those funds withstand the rigor of newly proposed SEC regulation? At the very least we may learn whether Ms. Schapiro was a good steward of FINRA funds. Beyond that, we may learn a lot more.
If the Obama administration is serious about developing new regulations for Wall Street, let’s make sure the transparency includes Ms. Schapiro’s tenure at FINRA and details of FINRA’s investment portfolio!!
LD
ARS Investor Makes Public Plea
Posted by Larry Doyle on May 3rd, 2009 2:02 PM |
On the heels of Bloomberg breaking the news of FINRA’s investment in Auction Rate Securities, I have received a number of e-mails from ARS investors thanking me for my pursuit in publicizing that information. One e-mail in particular touched me. This investor purchased ARS from Oppenheimer. His e-mail to attorneys general around the country and major media outlets is powerful. I share his questions; they deserve answers. With the writer’s permission: (more…)
“FINRA Is Supposed To Police The Market”
Posted by Larry Doyle on April 29th, 2009 6:52 AM |
I have written extensively about FINRA’s ownership of Auction Rate Securities over the last few months. This morning Bloomberg reports, FINRA Oversees Auction-Rate Arbitrations After Exiting Market.
The Bloomberg article (I am humbled by Bloomberg quoting me in the story) answers a number of questions I have raised, while also opening the door to other issues needing to be addressed:
1. Was FINRA blinded – if not totally conflicted – in addressing the trading, selling, and marketing of Auction Rate Securities? Try 862 million times.
2. Was FINRA lucky, prescient, or well informed in the timing of the sale of their own Auction Rate Securities? We may never know but given that their first “guidance for investors” was not published until after the market had totally frozen, they certainly did not provide much investor protection as is their mandate.
3. I have also written, and Bloomberg highlights, that FINRA had money invested in hedge funds. In light of market developments, I think the public has a right to know which hedge funds. Will FINRA release that information?
4. I unearthed all the information of FINRA’s investment activities from its 2007 Annual Report published in April 2008. I am still waiting for FINRA to release its 2008 Annual Report and wonder why it seems to be delayed.
5. As we move forward with likely regulatory changes for Wall Street, I believe the very nature of a self-regulatory organization funded by the banks it is charged to oversee presents massive conflicts of interest. This specific situation of FINRA’s investment in ARS is indicative of those conflicts. Will Congress have the courage to address these conflicts and serve the public interest in the process?
“To me it smacks of incompetence and negligence,” said Larry Doyle, who worked 23 years on Wall Street and runs a Web site called Sense on Cents. “Finra is supposed to police the market.”
I view FINRA as akin to the palace guard. The question remains, Does The Palace Guard Have No Clothes?
LD
Low Tide Will Reveal Rats Scurrying Amidst The Garbage
Posted by Larry Doyle on April 28th, 2009 9:09 AM |
Every exterminator will tell you that he never finds just one rat. Bernie Madoff has been exposed as an enormous rodent. Is Allen Stanford also a rat? Who else may be in the pack? Mary Schapiro, head of the SEC, revealed yesterday that the SEC is reviewing 150 other hedge funds to determine whether they also operated Ponzi schemes. Reuters reports, U.S. SEC Has About 150 Hedge Fund Probes.
Hedge funds are currently unregulated. How could the SEC have found potentially another 150 “rats” in the space of a mere three months since Ms. Schapiro has been on the job? My instincts lead me to believe the following:
1. Ms. Schapiro is trying to convey a sense of leadership and progress on fraud investigations after the abysmal performance on the Madoff scheme. The SEC needs to burnish its image and Ms. Schapiro is trying to address that with this news release.
2. I have no doubt that many other hedge funds did operate as Ponzi schemes and likely had money invested in Madoff knowing he was the largest rat. As investigators from the SEC have reviewed the list of Madoff investors, the info there has likely led to other hedge fund frauds.
Additionally, do not forget that many hedge funds suspended redemptions in the latter half of 2008. Ponzi schemes, like rats, only thrive given a steady source of food and water in the form new investments. Suspending redemptions is akin to a rat rationing its food supply. While plenty of those suspensions could be legitimate, it would be naive to think that all of them are.
3. We know that FINRA, the self-regulatory organization overseeing Wall Street, had investments in hedge funds, fund of funds, and private equity. That info was provided in the FINRA 2007 Annual Report. We are STILL waiting for the release of the FINRA 2008 Annual Report. Could FINRA have invested in Madoff? Could FINRA have invested in other hedge fund Ponzi schemes? Why by April 28th has FINRA still not released their Annual Report? (more…)
Mary Schapiro Meet Stump Merrill
Posted by Larry Doyle on April 16th, 2009 4:30 PM |
President Obama was elected primarily on one theme: change. Many private and public sectors need change, but perhaps none more than our banking and regulatory oversight. Barack said as much in late February:
Obama leveled a broad indictment of the industry, saying the current financial crisis occurred when “Wall Street wrongly presumed the markets would continuously rise and traded in complex financial products without fully evaluating their risks.” But he also blamed government regulators for not adequately protecting consumers.
Obama further offered:
“strong financial markets require clear rules of the road, not to hinder financial institutions, but to protect consumers and investors, and ultimately to keep those financial institutions strong.”
To this point, who could not agree with Barack’s assessment and designs. However, if we go back to mid-January, why did he select the head of the Wall Street self-regulatory organization, FINRA, to oversee the SEC? FINRA has been widely critiqued for being soft on overseeing the very institutions at the heart of our current economic disaster.
Again today, we hear about FINRA’s incompetence in a Bloomberg report on the investigation of Stanford Financial. Bloomberg reports: (more…)
Where’s Harry When We Really Need Him?!
Posted by Larry Doyle on April 15th, 2009 2:39 PM |
The ratings process for the securities industry has been an absolute joke. With all due respect to those who work at the rating agencies, the business model and massive conflicts of interest have been an unmitigated disaster.
Where were the authorities with the vision to throw on the flashing yellow light in the midst of the storm? Well, we can all take comfort that the SEC has been working on reviewing the rating agencies model since late 2006 and has made 5 rulings. Over and above that, Ms. Schapiro shares with us that the SEC has undertaken further studies over the last ten months. 2006? Ten months? When the need for dynamic movements is never greater, our government continues to move at a snail’s pace.
Let’s listen to Ms. Mary Schapiro, current head of the SEC. It’s a long clip (approximately 55 minutes), but you can fast forward along the way at any time. CSPAN did not provide an embed code for this clip, but by clicking on the image below you will be brought directly to the CSPAN site and the video will begin playing.
As I listen to Ms. Schapiro pontificate about the concepts of aligning interests, business models, users of ratings, conflicts, multiple ratings, and ending reliance on ratings agencies, I have one very clear cut image piercing through my mind.
That image is of Harry Markopolos providing chilling Congressional testimony this past January on the failures of the SEC in handling the Madoff scam. I learned more about the SEC in Harry’s testimony than I had over the course of my entire career on Wall Street.
Couldn’t we use a guy like Harry running the SEC right now?
LD
Does the Palace Guard Have No Clothes?
Posted by Larry Doyle on April 14th, 2009 5:30 AM |
I eagerly await the soon to be released 2008 Annual Report of the Financial Industry Regulatory Authority (FINRA). Prior to its release and in light of all the turmoil on Wall Street over the last 24 months, I thought it may be timely to review the mission and some recent history of the “palace guard,” known as FINRA. From the FINRA website, we learn:
The Financial Industry Regulatory Authority (FINRA), is the largest non-governmental regulator for all securities firms doing business in the United States. All told, FINRA oversees nearly 5,000 brokerage firms, about 173,000 branch offices and approximately 656,000 registered securities representatives.
Created in July 2007 through the consolidation of NASD and the member regulation, enforcement and arbitration functions of the New York Stock Exchange, FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services.
While FINRA promotes investor protection and market integrity, the simple fact is there are still thousands of investors with an estimated hundred BILLION dollars locked up in Auction Rate Securities. The ARS market has been designated as a fraud. FINRA not only did not protect the ARS investors, but participated in the ARS market as an investor themselves. At year end 2006, FINRA had a $647 million position in ARS. Did they sell them? When? To whom? What price? If they did sell their ARS position, did they possess material non-public information and act upon it? Will the 2008 FINRA Annual Report provide answers? I can only hope. Aside from a few state attorneys general, who is truly looking to help these investors?
FINRA touches virtually every aspect of the securities business—from registering and educating industry participants to examining securities firms; writing rules; enforcing those rules and the federal securities laws; informing and educating the investing public; providing trade reporting and other industry utilities; and administering the largest dispute resolution forum for investors and registered firms. It also performs market regulation under contract for The NASDAQ Stock Market, the American Stock Exchange, the International Securities Exchange and the Chicago Climate Exchange. (more…)
Goldman and AIG
Posted by Larry Doyle on March 21st, 2009 5:49 AM |
There has been extensive speculation that Goldman Sachs unjustifiably benefited from the weakness at AIG over the last 6 months. While conspiracy theorists can and will have a field day with this story, at its core I think Goldman did what any well run firm should always do — protect its shareholders.
While the stock values of Merrill Lynch, Morgan Stanley, and Bank of America flirted with total disaster, Goldman Sachs traded down but bottomed out at approximately $50 a share. That price does not strike me as indicative of a firm on the brink of bankruptcy. As Goldman now reveals, it had significant exposure to AIG but it also significantly hedged this exposure to AIG via other transactions. Thus, Goldman would have been negatively impacted by an AIG bankruptcy but not fatally impacted. (more…)
