U.S. bailout program increased moral hazard: watchdog

Wed Oct 21, 2009 1:30am EDT
By David Lawder

WASHINGTON (Reuters) – The U.S. government’s $700 billion financial bailout program has increased moral hazard in the markets by infusing capital into banks that caused the financial crisis, a watchdog for the program said on Wednesday.

The special inspector general for the U.S. Treasury’s Troubled Asset Relief Program (TARP) said the plan put in place a year ago was clearly influencing market behavior, and he repeated that taxpayers may never recoup all their money.

The bailout fund may have helped avert a financial system collapse but it could reinforce perceptions the government will step in to keep firms from failing, the quarterly report from inspector general Neil Barofsky said.

He said there continued to be conflicts of interest around credit rating agencies that failed to warn of risks leading up to the financial crisis. The report added that the recent rebound in big bank stocks risked removing urgency of dealing with the financial system’s problems.

“Absent meaningful regulatory reform, TARP runs the risk of merely reanimating markets that had collapsed under the weight of reckless behavior,” the report said. “The firms that were ‘too big to fail’ last October are in many cases bigger still, many as a result of government-supported and -sponsored mergers and acquisitions.”

ANGER, CYNICISM, DISTRUST

The report cites an erosion of government credibility associated with a lack of transparency, particularly in the early handling of the program’s initial investments in large financial institutions.

“Notwithstanding the TARP’s role in bringing the financial system back from the brink of collapse, it has been widely reported that the American people view TARP with anger, cynicism and distrust. These views are fueled by the lack of transparency in the program,” the report said.

Water worries threaten U.S. push for natural gas

Thu Oct 1, 2009 8:26am EDT

By Jon Hurdle

PAVILLION, Wyoming (Reuters) – Louis Meeks, a burly 59-year-old alfalfa farmer, fills a metal trough with water from his well and watches an oily sheen form on the surface which gives off a faint odor of paint.

He points to small bubbles that appear in the water, and a thin ring of foam around the edge.

Meeks is convinced that energy companies drilling for natural gas in this central Wyoming farming community have poisoned his water and ruined his health.

A recent report by the Environmental Protection Agency suggests he just might have a case — and that the multi-billion dollar industry may have a problem on its hands. EPA tests found his well contained what it termed 14 “contaminants of concern.”

It tested 39 wells in the Pavillion area this year, and said in August that 11 were contaminated. The agency did not identify the cause but said gas drilling was a possibility.

What’s happened to the water supply in Pavillion could have repercussions for the nation’s energy policies. As a clean-burning fuel with giant reserves in the United States, natural gas is central to plans for reducing U.S. dependence on foreign oil.

But aggressive development is drawing new scrutiny from residents who live near gas fields, even in energy-intensive states such as Wyoming, where one in five jobs are linked to the oil and gas industry which contributed more than $15 billion the state economy in 2007.

People living near gas drilling facilities in states including Pennsylvania, Colorado, New Mexico and Wyoming have complained that their water has turned cloudy, foul-smelling, or even black as a result of chemicals used in a drilling technique called hydraulic fracturing, or “fracking.”

The industry contends drilling chemicals are heavily diluted and injected safely into gas reservoirs thousands of feet beneath aquifers, so they will never seep into drinking water supplies.

“There has never been a documented case of fracking that’s contaminated wells or groundwater,” said Randy Teeuwen, a spokesman for EnCana Corp (ECA), Canada’s second-largest energy company, which operates 248 wells in the Pavillion and nearby Muddy Ridge fields.

Bailed-out bankers to get options windfall: study

Wed Sep 2, 2009 11:14am EDT
By Steve Eder

NEW YORK (Reuters) – As shares of bailed-out banks bottomed out earlier this year, stock options were awarded to their top executives, setting them up for millions of dollars in profit as prices rebounded, according to a report released on Wednesday.

The top five executives at 10 financial institutions that took some of the biggest taxpayer bailouts have seen a combined increase in the value of their stock options of nearly $90 million, the report by the Washington-based Institute for Policy Studies said.

“Not only are these executives not hurting very much from the crisis, but they might get big windfalls because of the surge in the value of some of their shares,” said Sarah Anderson, lead author of the report, “America’s Bailout Barons,” the 16th in an annual series on executive excess.

The report — which highlights executive compensation at such firms as Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM), Morgan Stanley (MS), Bank of America Corp. (BAC) and Citigroup Inc. (C) — comes at a time when Wall Street is facing criticism for failing to scale back outsized bonuses after borrowing billions from taxpayers amid last year’s financial crisis. Goldman, JPMorgan and Morgan Stanley have paid back the money they borrowed, but Bank of America and Citigroup are still in the U.S. Treasury’s program.

It’s also the latest in a string of studies showing that despite tough talk by politicians, little has been done by regulators to rein in the bonus culture that many believe contributed to the near-collapse of the financial sector.

The report includes eight pages of legislative proposals to address executive pay, but concludes that officials have “not moved forward into law or regulation any measure that would actually deflate the executive pay bubble that has expanded so hugely over the last three decades.”

“We see these little flurries of activities in Congress, where it looked like it was going to happen,” Anderson said. “Then they would just peter out.”

The report found that while executives continued to rake in tens of millions of dollars in compensation, 160,000 employees were laid off at the top 20 financial industry firms that received bailouts.

The CEOs of those 20 companies were paid, on average, 85 times more than the regulators who direct the Securities and Exchange Commission and the Federal Deposit Insurance Corp, according to the report.

(Reporting by Steve Eder; editing by John Wallace)

Apple, Dell, HP laptop owners sue Nvidia over faulty graphics

Five plaintiffs join forces to demand class-action lawsuit
By Gregg Keizer
May 11, 2009 12:00 PM ET

Computerworld – Owners of Apple (AAPL), Dell (DELL) and Hewlett-Packard (HPQ) laptops have combined their lawsuits against Nvidia (NVDA) in an attempt to force the graphics chip maker to replace allegedly flawed processors, according to court documents.

If granted class-action status, the case could involve millions of laptop computer owners, the plaintiffs said.

The five plaintiffs, including a Louisiana man who bought an Apple MacBook Pro a year ago, filed an amended complaint last week in a San Francisco federal court, accusing Nvidia of violating consumer-protection laws.

Nvidia admitted to the problem in July 2008, when it said some older chipsets that had shipped in “significant quantities” of notebooks were flawed. In a subsequent filing with the U.S. Securities and Exchange Commission (SEC), the company argued that its chip suppliers, the laptop makers and even consumers were to blame.

Nvidia later told the SEC that it would take a $196 million charge to pay for replacing the graphics processors.

Apple, Dell and HP have all told users that some of their laptops contain faulty Nvidia chipsets. Apple, in fact, essentially said that Nvidia had misled it. “Nvidia assured Apple that Mac computers with these graphics processors were not affected,” Apple said in a support document posted last October. “However, after an Apple-led investigation, Apple has determined that some MacBook Pro computers … may be affected.”

Although Apple promised it would repair any defective MacBook Pro for two years after its purchase date, whether it was in warranty or not, HP and Dell first issued BIOS updates designed by Nvidia that boosted fan speed. The increased fan speed was intended to ward off chip failure. Later, however, both companies also extended warranties for the affected laptops, and in some cases offered free repairs.

The plaintiffs in the combined lawsuit said that anything other than a replacement of the flawed chips was insufficient. “This is a grossly inadequate ‘remedy,’ as it results in additional manifest defects, including, without limitation, further degraded battery life, system performance and increased noise in the Class Computers,” the complaint read.

“Worse, this ‘remedy’ fails to solve the actual problem. Instead, this measure only ensures that the Class Computers will fail after the OEM’s express warranty period expires, potentially leaving consumers with a defective computer and no immediate recourse,” the lawsuit continued. “Finally, even after this purported ‘update,’ video and system performance is still degraded due to unacceptably high heat and part failures.”

Todd Feinstein of Louisiana was the one plaintiff who had purchased an Apple laptop. After buying a MacBook Pro in April 2008, the computer ran hot, periodically shut down without warning and displayed only gray or black at times, Feinstein said.

He sent a letter to Nvidia in September 2008 demanding that the company fix his MacBook. “Nvidia has failed to respond,” he said in the complaint.

Other plaintiffs who live in California, Illinois, New Jersey and New Mexico bought Dell or HP notebooks.

The lawsuit requests the case be granted class-action status, and if it prevails, that Nvidia replace the faulty chips and pay unspecified damages.

Last September, a New York law firm sued Nvidia, accusing the company of breaking U.S. securities laws by concealing the existence of a serious defect in its graphics chip line for several months before admitting the problem. That case has been put on hold awaiting a decision by an appellate court.

SEC makes emergency rule targeting ‘naked’ short-selling permanent

By Marcy Gordon, AP Business Writer
Monday July 27, 2009, 8:03 pm EDT

WASHINGTON (AP) — Federal regulators on Monday made permanent an emergency rule put in at the height of last fall’s market turmoil that aims to reduce abusive short-selling.

The Securities and Exchange Commission announced that it took the action on the rule targeting so-called “naked” short-selling, which was due to expire Friday.

Short-sellers bet against a stock. They generally borrow a company’s shares, sell them, and then buy them when the stock falls and return them to the lender — pocketing the difference in price.

“Naked” short-selling occurs when sellers don’t even borrow the shares before selling them, and then look to cover positions sometime after the sale.

The SEC rule includes a requirement that brokers must promptly buy or borrow securities to deliver on a short sale.

Brokers acting for short sellers must find a party believed to be able to deliver the shares within three days after the short-sale trade. If the shares aren’t delivered within that time, there is deemed to be a “failure to deliver.” Brokers can be subject to penalties if the failure to deliver isn’t resolved by the start of trading on the following day.

At the same time, the SEC has been considering several new approaches to reining in rushes of regular short-selling that also can cause dramatic plunges in stock prices.

Investors and lawmakers have been clamoring for the SEC to put new brakes on trading moves they say worsened the market’s downturn starting last fall. SEC Chairman Mary Schapiro has said she is making the issue a priority.

Some securities industry officials, however, have maintained that the SEC’s emergency order on “naked” short-selling brought unintended negative consequences, such as wilder price swings and turbulence in the market.

The five SEC commissioners voted in April to put forward for public comment five alternative short-selling plans. One option is restoring a Depression-era rule that prohibits short sellers from making their trades until a stock ticks at least one penny above its previous trading price. The goal of the so-called uptick rule is to prevent selling sprees that feed upon themselves — actions that battered the stocks of banks and other companies over the last year.

Another approach would ban short-selling for the rest of the trading session in a stock that declines by 10 percent or more.

Schapiro said last week the SEC could decide on a final course of action in “the next several weeks or several months.”

Investors dump brokers to go it alone online

Fri Jul 24, 2009 12:31pm EDT

By Rachel Chang

NEW YORK, July 24 (Reuters) – The collapse of Lehman Brothers (LEH) last September marked the start of a downward spiral for big investment banks. For a smaller fraternity of Internet brokerages, it has set off a dramatic spurt of growth.

Since the start of the financial crisis, $32.2 billion has flowed into the two largest online outfits, TD Ameritrade Holding Corp (AMTD) and Charles Schwab Corp (SCHW), company records show.

By contrast, investors have pulled more than $100 billion from traditional full-service brokerages like Citigroup Inc’s Smith Barney (C) and Bank of America-Merrill Lynch (BAC).

Of course, Americans still keep more of their wealth with established brokerages. According to research firm Gartner, 43 percent of individual investors were with full-service brokers last year, compared with 24 percent with online outfits.

And while figures for 2009 are not yet available, the flow of investors in the past 10 months has clearly been in the direction of the online brokerages, according to analysts both at Gartner and research consultancy Celent.

Joining the exodus is Ben Mallah, who says he lost $3 million in a Smith Barney account in St. Petersburg, Florida, as the markets crashed last year.

“I will never again trust anyone who is commission-driven to manage my portfolio,” said Mallah. “If they’re not making money off you, they have no use for you.”

This trend, a product of both the financial crisis and the emergence of a new generation of tech-savvy, cost-conscious young investors, is positioning online outfits as increasingly important in the wealth management field.

The numbers reflect a loss of faith in professional money managers as small investors dress their wounds from the hammering they took over the last year, the Internet brokerages say.

“There has been an awakening,” said Don Montanaro, chief executive of TradeKing, which reported a post-Lehman spike in new accounts of 121 percent. Investors now realize they alone are responsible for their money, he said.

Countrywide’s Mozilo charged with fraud

Thu Jun 4, 2009 7:41pm EDT

By Gina Keating and Rachelle Younglai

LOS ANGELES/WASHINGTON (Reuters) – Angelo Mozilo, who built the largest U.S. mortgage lender, was charged with securities fraud and insider trading on Thursday, making him the most prominent defendant so far in investigations into the U.S. subprime mortgage crisis and housing bust.

Mozilo, 70, co-founder of Countrywide Financial Corp (CFC), was accused by the U.S. Securities and Exchange Commission with making more than $139 million in profits in 2006 and 2007 from exercising 5.1 million stock options and selling the underlying shares.

The sales were under four prearranged stock trading plans Mozilo prepared during the time period, the SEC said.

The accusations were made in a civil lawsuit filed by the SEC in Los Angeles on Thursday.

The SEC said that in one instance, the day before he set up a stock trading plan on September 25, 2006, Mozilo sent an email to two Countrywide executives that said: “We are flying blind on how these loans will perform in a stressed environment of higher unemployment, reduced values and slowing home sales.”

Those executives, then Countrywide President David Sambol, 49, and Chief Financial Officer Eric Sieracki, 52, were charged by the SEC with knowingly writing “riskier and riskier” subprime loans that they had a limited ability to sell on the secondary mortgage market.

The SEC said that all three executives failed to tell investors how dependent Countrywide had become on its ability to sell subprime mortgages on the secondary market. All three were accused of hiding from investors the risks they took to win market share.

At one stage, Countrywide was writing almost 1 in 6 of American mortgages. The lawsuit said that by September 2006, Countrywide estimated that it had a 15.7 percent share of the market, up from 11.4 percent at the end of 2003.

“While Countrywide boasted to investors that its market share was increasing, company executives did not disclose that its market share increase came at the expense of prudent underwriting guidelines,” the lawsuit said

Bank of America Corp (BAC) bought Countrywide last July 1 for $2.5 billion, less than a tenth of what it had been worth in early 2007.

“TWO COMPANIES”, EARLY WARNING SIGNS

“This is a tale of two companies,” the SEC’s director of enforcement, Robert Khuzami, told reporters. “One that investors from the outside saw. It was allegedly characterized by prudent business practices and tightly controlled risk.”

“But the real Countrywide, which could only be seen from the inside, was one buckling under the weight of deteriorating mortgages, lax underwriting, and an increasingly suspect business model,” Khuzami said.

Phases of fear and elation in the VIX

Here we show a nice relationship between the VIX and the SPX.  While this is a commonly referenced pairing, many still challenge the value of using the VIX as a market indicator.  There are numerous ways too use the VIX and almost everyone has their own tweaks.  This chart shows a very clear inverse relationship with several distinct “phases” discernible in the value of the VIX.  These “phases” correlate well with the action in the SPX.  We have labled these phases “euphoria”, “fear” and “panic”.  We also included the 400 day moving average (equivalent to the 80 week) which we discussed previously in The Significance of the 400 day (80 week) moving average.  This bull/bear market reference point matches up very well with the action in the VIX, as the VIX moves into the “fear phase” just as the 400 day is coming under assault, before eventually breaking.  A final test of the 400 day from below, which we highlighted in late April 2008, was accompanied by one last dip into the “euphoria” zone for the VIX.  That was the “last chance” to get out before the drop gathered steam as the SPX then dropped over 50% in less than 12 months.

We added the notes on Bear Stearns and Citigroup for a consensus of the “expert” opinion at the time.

Most Profitable Mutual Funds Ever

Friday February 20, 10:55 am ET
By Max Rottersman

HANOVER, NH (ETFguide.com) – The highest mutual fund advisory fee, of all time, was collected from the Fidelity Magellan Fund (FMAGX).  In 2001 it took in $792 million.  Magellan has earned the top three, all-time records, grossing $1.8 billion between 2000 and 2002.  Much of that is profit, from future retirees who don’t read their statements.   Most can’t believe such large sums go directly into one manager’s pocket.   After all, if they did, wouldn’t we read about it in the press?  No.  Mutual fund companies provide a steady stream of advertising dollars.  It isn’t a conspiracy.  It’s natural self-interest for all involved, from The New York Times to the Wall Street Journal.

Ironically, American mutual fund regulation is the finest in the world.  I’m not joking.  There’s no secret to the numbers I’m pointing out.  They’re sent to every shareholder once a year.   Sadly, few journalist read fund financial statements either.  And any Fidelity shareholder who doesn’t like the fees is free to leave.

Mutual funds are corporations run on the behalf of their shareholders, represented by a board of trustees.  It’s a legal structure that makes for some confusing language; for example, fund fees are often called expenses (which legally they are), rather than fees (which functionally, you pay).  For example, Fidelity never charges you, the shareholder, directly. Rather, the fund trust pays a fee, from the fund’s assets, to various Fidelity companies (which are separate from the fund corporation) for various services.  Your board of trustees enters into contracts, on the shareholder’s behalf, with the advisor (like Fidelity) and other service providers.  Ironically, mutual funds were born during a ‘socialistic’ time in American history.   Again, I kid you not.  Should shareholders revolt, trustees can easily fire the portfolio management companies which serve the funds.   Interestingly, that has seldom happened.

If you have any question about the profitability of the fund business, consider this.  Last year, these five funds alone earned over $2 billion in advisory fees. Fidelity Contrafund: $522 Million (FCNTX), PIMCO Total Return Fund: $506 Million (PTTAX), Growth Fund Of America: $450 Million (AGTHX), Europacific Growth Fund: $439 Million (AEPGX), Fidelity Diversified International Fund: $374 Million (FDIVX). Again, believe it or not, these are the fees the manager charges for a few people to pick stocks for the fund.  The operational costs are separate.

Flying under the radar, because they don’t offer shares directly to the public, the CREF Stock Account Fund paid $586 million in advisory and administrative fees, the largest amount of any fund in my database.  TIAA-CREF says it’s ‘at cost’.  We have to assume it’s true, that the teachers did their own homework and thought for themselves.

Every shareholder should understand that all mutual funds have two basic costs.  The first is the cost to manage the portfolio; that is, buy and sell stocks and bonds.  A single person with a brokerage account can do this.   In mutual funds, the fee for this ‘portfolio management’ work is called the advisory fee.  The second basic cost is operational.  This work is often done by hundreds of people: administrators, call center workers, accountants, IT professionals, custodians, printers and lawyers.  The operational work is what shareholders ‘see and touch’ when they deal with their mutual fund.  Shareholders seldom, if ever, have any contact with the portfolio manager (advisor).

In 2001 Fidelity charged shareholders $162 million for operational costs (on top of the $792 million).  Fidelity probably makes some money on these costs too, since Fidelity subsidiaries handle shareholder servicing, administration and other ‘touch’ services.  Yet most people don’t believe me when I say most of the advisory fee is profit.  They just can’t believe it’s legal for Fidelity to collect $792 million for a few people picking stocks (which they pay a handsome salary in the millions, but it’s a fraction of what they charge). Here’s a list of 58 Fund Managers Who Took in Over $100 Million in Advisory Fees Last Year.

Bloggers Will Catch the Next Madoff

by Mick Weinstein
Posted on Friday, February 13, 2009, 12:00AM

Independent investigator Harry Markopolos knew something fishy was going on with Bernie Madoff years before the fund manager confessed to his massive Ponzi scheme. But Markopolos couldn’t get the SEC or ‘The Wall Street Journal’ to properly investigate the matter, so his information failed to reach the public — while dozens of new and existing victims poured their life savings into Madoff’s black hole.

Ray Pellecchia, vice president of Corporate Communications at NYSE Euronext, asked an interesting question on his blog last week: “What would have happened if Mr. Markopolos had blogged his analysis? That is, what if he had posted the entire piece on a blog, under his name or a pseudonym?… I believe that blogging’s fast, viral distribution would have been highly effective in this case, and brought down the alleged Ponzi scheme in a hurry. I wonder if future whistle blowers will use blogs if they believe their information is not getting through on official channels.”

Ray made a great point, and I think the answer is clear: Blogs, microblogs (such as Twitter), and other social media tools are simultaneously pulling down communication barriers and establishing quality/truth filters in ways that will enable far more effective early recognition of financial fraud than the limited channels we previously relied upon.

We may — repeat, MAY — have a case in point already.

Financial analyst Alex Dalmady started asking pointed questions about Houston-based Stanford Financial and its affiliate Stanford International Bank of Antigua — which claims over $6 billion in depositors’ assets — when a friend of his asked him to review his portfolio, heavily weighted in remarkably high-yield Stanford CDs.

As Dalmady dug deeper, he found lots of problems with Stanford’s products, documented them in a report called “Duck Tales” (if it looks like a duck, walks like a duck, and quacks like a duck…), then uploaded that report to the ‘net for public consumption. Dalmady published the report in a Venezuelan econo-mag, but noticed that his work on Stanford only “really exploded once it hit the blogs. Miguel Octavio’s The Devil’s Excrement [at Salon.com] took up the story on Monday the 9th, as did Caracas Gringo.”

Merrill paid bonuses early as BofA deal closed: report

Wed Jan 21, 2009 10:43pm EST

NEW YORK (Reuters) – Merrill Lynch (MER) paid billions of dollars of bonuses to its employees, three days before completing its life-saving sale to Bank of America Corp (BAC), the Financial Times reported on its website on Wednesday.

The money was paid as Merrill’s losses were mounting, forcing Bank of America Chief Executive Kenneth Lewis last month to seek additional government support for the deal. Merrill’s compensation committee agreed to pay bonuses on December 29, at least one month earlier than usual, the paper said.

Yet within days of that committee meeting, the FT said, BofA officials became aware Merrill’s fourth-quarter losses would be much greater than expected.

Bank of America, in a statement, told the paper, “Merrill Lynch was an independent company until Jan 1. (Merrill CEO) John Thain decided to pay year-end incentives in December as opposed to their normal date in January. BofA was informed of his decision.”

Last week, Bank of America said it would receive $20 billion in U.S. Treasury investment on top of $25 billion earmarked last fall for a combined BofA-Merrill.

Bank of America said Merrill had a $21.5 billion operating loss in the fourth quarter.

Despite the massive losses, Merrill set aside $15 billion for 2008 compensation, 6 percent lower than a year earlier.

A person familiar with the matter told the FT about $3 billion to $4 billion of that compensation were annual bonuses. The bulk is comprised by salaries and benefits.

(Reporting by Joseph A. Giannone; Editing by Anshuman Daga)

Wall Street’s ‘Disaster Capitalism for Dummies’

14 reasons Main Street loses big while Wall Street sabotages democracy

By Paul B. Farrell, MarketWatch
Last update: 7:10 p.m. EDT Oct. 20, 2008

ARROYO GRANDE, Calif. (MarketWatch) — Yes, we’re dummies. You. Me. All 300 million of us. Clueless. We should be ashamed. We’re obsessed about the slogans and rituals of “democracy,” distracted by the campaign, polls, debates, rhetoric, half-truths and outright lies. McCain? Obama? Sorry to pop your bubble folks, but it no longer matters who’s president.

Why? The real “game changer” already happened. Democracy has been replaced by Wall Street’s new “disaster capitalism.” That’s the big game-changer historians will remember about 2008, masterminded by Wall Street’s ultimate “Trojan Horse,” Hank Paulson. Imagine: Greed, arrogance and incompetence create a massive bubble, cost trillions, and still Wall Street comes out smelling like roses, richer and more powerful!

Yes, we’re idiots: While distracted by the “illusion of democracy” in the endless campaign, Congress surrendered the powers we entrusted to it with very little fight. Congress simply handed over voting power and the keys to trillions in the Treasury to Wall Street’s new “Disaster Capitalists” who now control “democracy.”

Why did this happen? We’re in denial, clueless wimps, that’s why. We let it happen. In one generation America has been transformed from a democracy into a strange new form of government, “Disaster Capitalism.” Here’s how it happened:

*Three decades of influence peddling in Washington has built an army of 42,000 special-interest lobbyists representing corporations and the wealthy. Today these lobbyists manipulate America’s 537 elected officials with massive campaign contributions that fund candidates who vote their agenda.

*This historic buildup accelerated under Reaganomics and went into hyperspeed under Bushonomics, both totally committed to a new disaster capitalism run privately by Wall Street and Corporate America. No-bid contracts in wars and hurricanes. A housing-credit bubble — while secretly planning for a meltdown.

*Finally, the coup de grace: Along came the housing-credit crisis, as planned. Press and public saw a negative, a crisis. Disaster capitalists saw a huge opportunity. Yes, opportunity for big bucks and control of America. Millions of homeowners and marginal banks suffered huge losses. Taxpayers stuck with trillions in debt. But giant banks emerge intact, stronger, with virtual control over government and the power to use taxpayers’ funds. They’re laughing at us idiots!

Govt trading ban could have unintended results

Friday September 19, 5:07 pm ET
By Marcy Gordon and Stevenson Jacobs, AP Business Writers

Big SEC step to ban short-selling of financial stocks could have unintended consequences

WASHINGTON (AP) — The government’s unprecedented move Friday to ban people from betting against financial stocks might be a salve for the market’s turmoil but could also carry serious unintended consequences.

In a bid to shore up investor confidence in the face of the spiraling market crisis, the Securities and Exchange Commission temporarily banned all short-selling in the shares of 799 financial companies. Short selling is a time-honored method for profiting when a stock drops.

The ban took effect immediately Friday and extends through Oct. 2. The SEC said it might extend the ban — so that it would last for as many as 30 calendar days in total — if it deems that necessary.

That window could be enough time to calm the roiling financial markets, with the Bush administration’s massive new programs to buy up Wall Street’s toxic debt possibly starting to have a salutary effect by then.

The short-selling ban is “kind of a time-out,” said John Coffee, a professor of securities law at Columbia University. “In a time of crisis, the dangers of doing too little are far greater than the dangers of doing too much.”

But on Wall Street, professional short-sellers said they were being unfairly targeted by the SEC’s prohibition. And some analysts warned of possible negative consequences, maintaining that banning short-selling could actually distort — not stabilize — edgy markets.

Indeed, hours after the new ban was announced, some of its details appeared to be a work in progress. The SEC said its staff was recommending exemptions from the ban for trades market professionals make to hedge their investments in stock options or futures.

“I don’t think it’s going to accomplish what they’re after,” said Jeff Tjornehoj, senior analyst at fund research firm Lipper Inc. Without short sellers, he said, investors will have a harder time gauging the true value of a stock.

“Most people want to be in a stock for the long run and want to see prices go up. Short sellers are useful for throwing water in their face and saying, `Oh yeah? Think about this,'” Tjornehoj said. As a result, restricting the practice could inflate the value of some stocks, opening the door for a big downward correction later.

The Shakeout After Lehman, Merrill, AIG…

As credit stays tight, power shifts to Bank of America, Barclays, hedge funds, and private equity—and regulators will keep a more watchful eye

by David Henry and Matthew Goldstein

Once-mighty Wall Street has turned into the Boulevard of Broken Dreams. From Bear Stearns (BSC) and Lehman Brothers (LEH) to Merrill Lynch (MER) and AIG (AIG), the punishment for years of bad decisions has been shockingly swift and brutal. As firms wobble, markets gyrate, and investors quiver, the question is: When will the pain end?

The signs aren’t encouraging. Sure, the Federal Reserve’s dramatic bailout of American International Group prevented the full-out global panic that might have unfolded with the collapse of the largest U.S. insurer. But AIG’s sudden lurch toward bankruptcy also showed how dangerously intertwined the financial system has become.

For years that interconnectedness masked enormous underlying risks, but now it’s amplifying them. As each new thread from the crazy web has unwound during the 13-month credit crisis, a fresh problem has emerged. How bad things will get from here depends on how cleanly the losing firms and toxic investments can be extricated from the rest. With each passing day the task seems to grow more difficult. By the end of the credit bust, the total losses, now $500 billion, could reach $2 trillion, according to hedge fund Bridgewater Associates. What’s likely to be left when the Great Unwind is finally complete? A smaller, humbler, highly regulated Wall Street barely recognizable from its heady past, where caution reigns and wild risk-taking is taboo.

Plenty of Skeletons

Merrill’s ties to AIG show just how difficult it might be to untangle the financial system. During the mortgage boom, Merrill churned out billions of dollars worth of dubious collateralized debt obligations, those troublesome bonds backed by pools of risky subprime mortgages. To cut down its own risk, Merrill bought insurance contracts from AIG called credit default swaps, which pay off if the mortgages blow up. Merrill holds $5 billion worth of guarantees from AIG alone. In all, AIG insures $441 billion of CDOs, including $58 billion with the subprime taint. It’s unclear which firms bought those guarantees, but AIG sold many to big European banks.

Fannie Mae, Freddie `House of Cards’ Prompts Takeover

By Dawn Kopecki

Sept. 9 (Bloomberg) — Fannie Mae and Freddie Mac used accounting rules that created a “house of cards” as the housing market descended into its worst slump since the Great Depression.

While the two largest mortgage-finance companies met regulatory requirements for their capital, reviews by the Treasury, the Federal Housing Finance Agency and the Federal Reserve found they probably wouldn’t weather the highest delinquency rates on record, lawmakers and regulators said.

“Once they got someone looking closely at Fannie and Freddie’s books, they realized there just wasn’t adequate capital there,” U.S. Senator Richard Shelby of Alabama, the ranking Republican on the Senate Banking Committee, said after a briefing by Treasury officials. “They found out they had a house of cards.”

Treasury Secretary Henry Paulson and FHFA Director James Lockhart seized control of Fannie and Freddie less than a month after Lockhart, whose job is to oversee the companies, declared them “adequately capitalized” under law. The discrepancy highlights the flaws in legislation and in the regulatory oversight of Fannie and Freddie that didn’t demand they keep more assets as a cushion against losses, according to Joshua Rosner, an analyst with Graham Fisher & Co. in New York.

“Fannie and Freddie’s accounting during the housing crisis appears to have been more fantasy than reality,” said Rosner, who first highlighted problems in 2003, before the two companies were forced to restate about $11.3 billion in earnings.

Citi, Merrill returning billions to investors, paying fine in deals over auction securities

Thursday August 7, 8:05 pm ET
By Marcy Gordon, AP Business Writer

WASHINGTON (AP) — Citigroup Inc. will buy back more than $7 billion in auction-rate securities and pay $100 million in fines as part of settlements with federal and state regulators, who said the bank marketed the investments as safe despite liquidity risks.

Citigroup will buy back the securities from tens of thousands of investors nationwide under separate accords announced Thursday with the Securities and Exchange Commission, New York Attorney General Andrew Cuomo and other state regulators. The buybacks from nearly 40,000 individual investors, small businesses and charities are not expected to cause significant losses for Citigroup; they must be completed by November.

Similar steps to buy back auction rate securities from customers are expected to be taken by other financial institutions. Bank of America Corp. revealed that it has received subpoenas and requests for information about its sale of the investments. Merrill Lynch & Co. said it will offer to buy back an estimated $12 billion in auction rate securities, though the company has already been actively reducing that amount.

Citi, the nation’s largest financial institution, said also will pay $50 million each in civil penalties to New York state and the North American Securities Administrators Association, which represents securities regulators in the 50 states and the District of Columbia.

The SEC also will consider levying a fine on Citigroup, the agency’s enforcement director Linda Thomsen, said at a news conference.

New York-based Citigroup agreed to reimburse investors who sold their auction-rate securities at a loss after the market for them collapsed in mid-February. Also under the SEC accord, Citigroup agreed to make its best efforts to liquidate by the end of next year all of the roughly $12 billion of auction-rate securities it sold to retirement plans and other institutional investors. Cuomo said his office will monitor that effort for three months and then decide on a timeframe.

Banks Say Auction-Rate Investors Can’t Have Money

By Darrell Preston June 6 (Bloomberg) — Franklin Biddar wants his money, and says Bank of America Corp. won’t let him have it. The 65-year-old real estate investor from Toms River, New Jersey, said he hasn’t had access to cash the bank invested for him in auction-rate preferred shares ever since the market seized up in mid-February. Even when Biddar agreed to sell $100,000 worth of the securities to Fieldstone Capital Group, Charlotte, North Carolina-based Bank of America wouldn’t release the bonds, saying the transaction wasn’t in his interest, he said.

“I can’t do anything,” said Biddar, who was so eager to unlock his money that he was willing to accept 11 percent less than what he paid for the securities. “Bank of America got me into these securities that are supposed to be as safe as a money market, and now they won’t get me out.”

Bank of America, UBS AG, Wachovia Corp. and at least four dozen other firms that sold $330 billion of securities with rates set through periodic bidding are thwarting attempts to create a secondary market that would allow investors to access their cash, according to investors. Dealers claim they are saving customers from needless losses on securities they marketed as similar to cash-like instruments.

“By allowing customers to sell at a discount, the banks allow customers to establish damages,” said Bryan Lantagne, the securities division director for Massachusetts Secretary of State William Galvin. Lantagne is head of a task force for nine states looking at whether brokers misrepresented the debt as an alternative to money-market investments.

Investor Lawsuits

At least 24 proposed class action suits have been filed since mid-March against brokerages over claims investors were told the securities were almost as liquid as cash.

Investors ranging from retirees to Google Inc. in Mountain View, California, have been trapped in auction-rate bonds for more than three months after dealers that ran the bidding suddenly stopped supporting the market as their losses mounted on debt linked to subprime mortgages. Before February, dealers routinely bought securities that went unsold, reassuring investors that they could get their money back on a moment’s notice.

About 99 percent of public auctions for auction-rate securities sold by student-loan agencies and closed-end funds fail, as do 48 percent of those for municipals, according to data compiled by Bloomberg. UBS, which cut the value of auction-rate securities held for its customers by 5 percent in March, said yesterday it plans to close its municipal bond business.

Is Wall Street ‘Full of Bull’?

A well-respected analyst for 32 years, Stephen McClellan describes how analysts’ advice is biased and misleading for individual investors

by Ben Steverman

Stephen McClellan is biting the hand that fed him for 32 years.

A top-ranked analyst at Salomon Brothers and Merrill Lynch (MER), McClellan was one of the first to cover the booming computer industry. In addition to being well-respected, he was one of the longest-serving equity analysts on Wall Street, with a career stretching from 1971 to 2003.

Now, the retired 65-year-old number cruncher is saying what he really thinks about Wall Street. In his new book, Full of Bull: Do What Wall Street Does, Not What It Says, to Make Money in the Market (FT Press, 2007, $22.99), McClellan, admits that price targets are “fiction,” and buy/sell/hold ratings aren’t taken seriously by professional investors. Analysts spend perhaps only 20% of their time on research and the rest on marketing and other tasks, he says. They create sophisticated computer programs to track a company’s earnings, revenue, and cash flow in close detail. But the results are “not accurate at all,” he says. In fact, analysts often miss big trends and have a terrible record as stockpickers.

Stiff Penalties
Research isn’t written for retail investors, but for institutions. Those institutions, including mutual funds and hedge funds, have far too much influence over an analyst’s research, McClellan says. Companies and executives are also too good at manipulating analysts.