SEC puts in new ‘circuit breaker’ rules

June 10, 2010

SEC puts into place new ‘circuit breaker’ rules to prevent repeat of May 6 stock market plunge

Marcy Gordon, AP Business Writer, On Thursday June 10, 2010, 5:44 pm EDT

WASHINGTON (AP) — Federal regulators on Thursday put in place new rules aimed at preventing a repeat of last month’s harrowing “flash crash” in the stock market.

Members of the Securities and Exchange Commission approved the rules, which call for U.S. stock exchanges to briefly halt trading of some stocks that make big swings.

The major exchanges will start putting the trading breaks into effect as early as Friday for six months. The New York Stock Exchange will begin Friday’s trading session with five stocks: EOG Resources Inc., Genuine Parts Co., Harley Davidson Inc., Ryder System Inc. and Zimmer Holdings Inc. The exchange will gradually add other stocks early next week, expecting to reach by Wednesday the full number that will be covered.

The Nasdaq stock market plans to have the new program fully in place on Monday.

The plan for the “circuit breakers” was worked out by the SEC and the major exchanges following the May 6 market plunge, which saw the Dow Jones industrials lose nearly 1,000 points in less than a half-hour.

Under the new rules, trading of any Standard & Poor’s 500 stock that rises or falls 10 percent or more in a five-minute period will be halted for five minutes. The “circuit breakers” would be applied if the price swing occurs between 9:45 a.m. and 3:35 p.m. Eastern time. That’s almost the entire trading day. But it leaves out the final 25 minutes before the close — a period that often sees raging price swings, especially in recent weeks as the kind of volatility that marked the 2008 financial crisis returned.

The idea is for the trading pause to draw attention to an affected stock, establish a reasonable market price and resume trading “in a fair and orderly fashion,” the SEC said.

On May 6, about 30 stocks listed in the S&P 500 index fell at least 10 percent within five minutes. The drop briefly wiped out $1 trillion in market value as some stocks traded as low as a penny.

The disruption “illustrated a sudden, but temporary, breakdown in the market’s price-setting function when a number of stocks and (exchange-traded funds) were executed at clearly irrational prices,” SEC Chairman Mary Schapiro said in a statement. “By establishing a set of circuit breakers that uniformly pauses trading in a given security across all venues, these new rules will ensure that all markets pause simultaneously and provide time for buyers and sellers to trade at rational prices.”

Read the rest of this entry »


Geithner, Paulson to address meltdown probe

May 6, 2010

Meltdown probe hears from bailout architects Paulson, Geithner on ‘shadow banking’

Daniel Wagner, AP Business Writer, On Thursday May 6, 2010, 12:57 am EDT

WASHINGTON (AP) — A special panel investigating the financial crisis is preparing to hear from two key architects of the government’s response: Former Treasury Secretary Henry Paulson and Treasury Secretary Timothy Geithner.

Geithner and Paulson will provide their perspectives on the so-called “shadow banking system” — a largely unregulated world of capital and credit markets outside of traditional banks. They will describe their roles in selling Bear Stearns (BSC) to JPMorgan Chase & Co. (JPM) after pressure from “shadow banking” companies made Bear the first major casualty of the crisis.

The pair will testify Thursday morning before the Financial Crisis Inquiry Commission, a bipartisan panel established by Congress to probe the roots of the financial crisis. It is the first time the panel has heard from either of the men who called the shots in late 2008 as the global financial system nearly collapsed.

The panel is looking at nonbank financial companies such as PIMCO and GE Capital that provide capital for loans to consumers and small businesses. When rumors spread in 2008 that Bear Stearns was teetering, these companies started what former Bear Stearns executives described Wednesday as a “run on the bank,” drawing so much of its capital that it could not survive.

Then-Treasury Secretary Paulson and Geithner, as president of the Federal Reserve Bank of New York, engineered Bear’s rescue. The New York Fed put up a $29 billion federal backstop to limit JPMorgan’s future losses on Bear Stearns’ bad investments.

Bear Stearns was the first Wall Street bank to blow up. Its demise foreshadowed the cascading financial meltdown in the fall of that year.

The panel is investigating the roots of the crisis that plunged the country into the most severe recession since the 1930s and brought losses of jobs and homes for millions of Americans.

In earlier testimony before the House Committee on Oversight and Government Reform, Paulson defended his response to the economic crisis as an imperfect but necessary rescue that spared the U.S. financial market from total collapse.

“Many more Americans would be without their homes, their jobs, their businesses, their savings and their way of life,” he said in testimony prepared for that hearing.

Read the rest of this entry »


U.S. bailout program increased moral hazard: watchdog

October 21, 2009

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.

Read the rest of this entry »


Bailed-out bankers to get options windfall: study

September 2, 2009

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)


Investors trading 3 stocks that may be doomed

August 27, 2009

Investors still trading Fannie, Freddie, AIG shares, even though prices are likely to hit zero

Daniel Wagner, AP Business Writer
Thursday August 27, 2009, 5:36 pm EDT

WASHINGTON (AP) — Investors are still trading common shares of Fannie Mae (FNM), Freddie Mac (FRE) and American International Group Inc. (AIG) by the billions, even though analysts say their prices are almost certain to go to zero.

All three are majority-owned by the government and are losing huge sums of money. The Securities and Exchange Commission and other regulators lack authority to end trading of stocks in such “zombie” companies that technically are alive — until the government takes them off life support.

Shares of the two mortgage giants and the insurer have been swept up in a summer rally in financial stocks. Investors have been trading their shares at abnormally high volumes, despite analysts’ warnings that they’re destined to lose their money.

“People have done well by trading them (in the short term), but when it gets to the end of the road, these stocks are going to be worth zero,” said Bose George, an analyst with the investment bank Keefe, Bruyette & Woods Inc.

Some of the activity involves day traders aiming to profit from short-term price swings, George said. But he said inexperienced investors might have the mis-impression that the companies may recover or be rescued.

“That would be kind of unfortunate,” he said. “There could be a lot of improvement in the economy, and these companies would still be worth zero.”

The government continues to support the companies with billions in taxpayer money, saying they still play a crucial role in the financial system.

Fannie and Freddie buy loans from banks and sell them to investors — a role critical to the mortgage market. They have tapped about $96 billion out of a potential $400 billion in aid from the Treasury Department.

Officials have said AIG’s failure would be disastrous for the financial markets. Treasury and the Federal Reserve have spent about $175 billion on AIG and AIG-related securities. The company also has access to $28 billion from the $700 billion financial industry bailout.

But analysts say the wind-down strategies for the companies are almost sure to wipe out any common equity, making their shares worthless.

Read the rest of this entry »


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

July 27, 2009

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.”

Read the rest of this entry »


How Do I Know You’re Not Bernie Madoff?

June 15, 2009

by Paul Sullivan
The New York Times
Monday, June 15, 2009

Tony Guernsey has been in the wealth management business for four decades. But clients have started asking him a question that at first caught him off guard: How do I know I own what you tell me I own?

This is the existential crisis rippling through wealth management right now, in the wake of the unraveling of Bernard L. Madoff’s long-running Ponzi scheme. Mr. Guernsey, the head of national wealth management at Wilmington Trust, says he understands why investors are asking the question, but it still unnerves him. “They got their statements from Madoff, and now they get their statement from XYZ Corporation. And they say, ‘How do I know they exist?’ ”

When he is asked this, Mr. Guernsey says he walks clients through the checks and balances that a 106-year-old firm like Wilmington has. Still, this is the ultimate reverberation from the Madoff scandal: trust, the foundation between wealth manager and client, has been called into question, if not destroyed.

“It used to be that if you owned I.B.M., you could pull the certificate out of your sock drawer,” said Dan Rauchle, president of Wells Fargo Alternative Asset Management. “Once we moved away from that, we got into this world of trusting others to know what we owned.”

The process of restoring that trust may take time. But in the meantime, investors may be putting their faith in misguided ways of ensuring trust. Mr. Madoff, after all, was not charged after an investigation by the Securities and Exchange Commission a year before his firm collapsed. Here are some considerations:

CUT THROUGH THE CLUTTER Financial disclosure rules compel money managers to send out statements. The problem is that the statements and trade confirmations arrive so frequently, they fail to help investors understand what they own.

To mitigate this, many wealth management firms have developed their own systems to track and present client assets. HSBC Private Bank has had WealthTrack for nearly five years, while Barclays Wealth is introducing Wealth Management Reporting. But there are many more, including a popular one from Advent Software.

These systems consolidate the values of securities, partnerships and, in some cases, assets like homes and jewelry. HSBC’s program takes into account the different ways firms value assets by finding a common trading date. It also breaks out the impact of currency fluctuation..

These systems have limits, though. “Our reporting is only as good as the data we receive,” said Mary Duke, head of global wealth solutions for the Americas at HSBC Private Bank. “A hedge fund’s value depends on when the hedge fund reports — if it reports a month-end value, but we get it a month late.”

In other words, no consolidation program is foolproof.

Read the rest of this entry »


Countrywide’s Mozilo charged with fraud

June 4, 2009

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.

Read the rest of this entry »


Some positive developments

April 2, 2009

We have a lot to show, so we’ll keep each one short and sweet.

First, an update on the SPX battle with the 50 day. The bear trap looks to be pretty solid with assistance from the Feds. How much backing and filling needs done is still up for debate. We have added a new indicator to the bottom of the chart this time, the daily 13/34 exponential moving average indicator. We have it set on a favorite parameter of John Murphy at Stockcharts.com that we have referenced previously in Is it really 2001 again? Look for further reference in the charts below.  This indicator on the daily chart is more of a leading indicator (subject to some whipsaw) and becomes more valuable when combined with the medium and long period charts.  The daily indicator has turned positive (above zero) and has held positive ground for the first time since early in the year.  This is the most positive showing for this indicator since April/May of 2008.

spxtesting800040209

Here is a weekly shot of the same indicator.  Even with this indicator still deeply in negative territory (below zero) a clear positive trend change is visible.  This is confirmed by the SPX moving above the 13 week exponential moving average, which drags the indicator higher.  These are also the first positive developments in this indicator since April/May of 2008.

spxweekly040209

Finally we have the monthly chart featuring the indicators referenced previously (MACD, RSI, ROC) plus an overlay of the 20 month Bollinger Bands set to two standard deviations.  This shows all of these indicators to have been severely stretched, yet showing signs of recovery.  The MACD histogram is now climbing for two months in a row and the RSI is closing in on 30, which marks the top of oversold territory.  The ROC has at least ceased its vertical drop and the Bollinger Bands are finally well below the current price as opposed to being violently penetrated to the downside.  This at least shows stabilization, with potential being revealed by the shorter periods.

spxmonthly040209


The Fight Over Who Will Guard Your Nest Egg

March 28, 2009

By JASON ZWEIG
wsj.com

A power struggle in Washington will shape how investors get the advice they need.

On one side are stockbrokers and other securities salespeople who work for Wall Street firms, banks and insurance companies. On the other are financial planners or investment advisers who often work for themselves or smaller firms.

Brokers are largely regulated by the Financial Industry Regulatory Authority, which is funded by the brokerage business itself and inspects firms every one or two years. Under Finra’s rules, brokers must recommend only investments that are “suitable” for clients.

Advisers are regulated by the states or the Securities and Exchange Commission, which examines firms every six to 10 years on average. Advisers act out of “fiduciary duty,” or the obligation to put their clients’ interests first.

Most investors don’t understand this key distinction. A report by Rand Corp. last year found that 63% of investors think brokers are legally required to act in the best interest of the client; 70% believe that brokers must disclose any conflicts of interest. Advisers always have those duties, but brokers often don’t. The confusion is understandable, because a lot of stock brokers these days call themselves financial planners.

Brokers can sell you any investment they have “reasonable grounds for believing” is suitable for you. Only since 1990 have they been required to base that suitability judgment on your risk tolerance, investing objectives, tax status and financial position.

A key factor still is missing from Finra’s suitability requirements: cost. Let’s say you tell your broker that you want to simplify your stock portfolio into an index fund. He then tells you that his firm manages an S&P-500 Index fund that is “suitable’ for you. He is under no obligation to tell you that the annual expenses that his firm charges on the fund are 10 times higher than an essentially identical fund from Vanguard. An adviser acting under fiduciary duty would have to disclose the conflict of interest and tell you that cheaper alternatives are available.

If brokers had to take cost and conflicts of interest into account in order to honor a fiduciary duty to their clients, their firms might hesitate before producing the kind of garbage that has blighted the portfolios of investors over the years.

Richard G. Ketchum, chairman of Finra, has begun openly using the F-word: fiduciary. “It’s time to get to one standard, a fiduciary standard that works for both broker-dealers and advisers,” he told me. “Both should have a fundamental first responsibility to their customers.”

Read the rest of this entry »


How About a Stimulus for Financial Advice?

February 26, 2009

By ROBERT J. SHILLER
Published: January 17, 2009

In evaluating the causes of the financial crisis, don’t forget the countless fundamental mistakes made by millions of people who were caught up in the excitement of the real estate bubble, taking on debt they could ill afford.

Many errors in personal finance can be prevented. But first, people need to understand what they ought to do. The government’s various bailout plans need to take this into account — by starting a major program to subsidize personal financial advice for everyone.

A number of government agencies already have begun small-scale financial literacy programs. For example, the Treasury announced the creation of an Office of Financial Education in 2002, and President Bush started an Advisory Council on Financial Literacy a year ago. These initiatives are involved in outreach to schools with suggested curriculums, and online financial tips. But a much more ambitious effort is needed.

The government programs that are already under way are akin to distributing computer manuals. But when something goes wrong with a computer, most people need to talk to a real person who can zero in on the problem. They need an expert to guide them through the repair process, in a way that conveys patience and confidence that the problem can be solved. The same is certainly true for issues of personal finance.

The significance of this was clear at the annual meeting of the American Economic Association this month in San Francisco, where several new research papers showed the seriousness of consumer financial errors and the exploitation of them by sophisticated financial service providers.

A paper by Kris Gerardi of the Federal Reserve Bank of Atlanta, Lorenz Goette of the University of Geneva and Stephan Meier of Columbia University asked a battery of simple financial literacy questions of recent homebuyers. Many of the respondents could not correctly answer even simple questions, like this one: What will a $300 item cost after it goes on a “50 percent off” sale? (The answer is $150.) They found that people who scored poorly on the financial literacy test also tended to make serious investment mistakes, like borrowing too much, and failing to collect information and shop for a mortgage.

A paper by Liran Einav and Jonathan Levin, both of Stanford, reporting on work with William Adams of Citigroup, shows how sophisticated automobile lenders can be in their loan technology. They use complicated statistical models not only to approve people for credit, but also to fine-tune the down payment and even to suggest what kind of car individuals can buy. This suggests to me that many borrowers can’t match the expertise of lenders.

And another paper, by Paige Marta Skiba of Vanderbilt University and Jeremy Tobacman of the University of Pennsylvania, showed that payday loans — advanced to people who run out of cash before their next paycheck — exploit people’s overoptimism and typically succeed in charging annual rates of interest that may amount to more than 7,000 percent.

One wishes that all this financial cleverness could be focused a bit more on improving the customers’ welfare!

Read the rest of this entry »


Most Profitable Mutual Funds Ever

February 20, 2009

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.

Read the rest of this entry »


Bloggers Will Catch the Next Madoff

February 13, 2009

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.”

Read the rest of this entry »


Merrill paid bonuses early as BofA deal closed: report

January 21, 2009

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)


Treasury, Fed continue extensive bailout efforts

November 24, 2008

Monday November 24, 2:33 pm ET
By Christopher S. Rugaber, AP Business Writer

Nothing a few more billion can’t cure: Treasury, Fed take more steps to fight meltdown

WASHINGTON (AP) — The government’s latest effort to address the financial crisis is a $20 billion investment in banking giant Citigroup Inc. (C), along with an agreement to guarantee hundreds of billions of dollars in possible losses.

The step, announced late Sunday, is the latest in a long list of government moves to counter the financial meltdown:

–March 11: The Federal Reserve announces a rescue package to provide up to $200 billion in loans to banks and investment houses and let them put up risky mortgage-backed securities as collateral.

–March 16: The Fed provides a $29 billion loan to JPMorgan Chase & Co. (JPM) as part of its purchase of investment bank Bear Stearns (BSC).

–May 2: The Fed increases the size of its loans to banks and lets them put up less-secure collateral.

–July 11: Federal regulators seize Pasadena, Calif.-based IndyMac (IMB), costing the Federal Deposit Insurance Corp. billions to compensate deposit-holders.

–July 30: President Bush signs a housing bill including $300 billion in new loan authority for the government to back cheaper mortgages for troubled homeowners.

–Sept. 7: The Treasury takes over mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE), putting them into a conservatorship and pledging up to $200 billion to back their assets.

–Sept. 16: The Fed injects $85 billion into the failing American International Group (AIG), one of the world’s largest insurance companies.

Read the rest of this entry »


Wall Street’s ‘Disaster Capitalism for Dummies’

October 20, 2008

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!

Read the rest of this entry »


A short history of modern finance

October 16, 2008

Link by link
Oct 16th 2008
From The Economist print edition

The crash has been blamed on cheap money, Asian savings and greedy bankers. For many people, deregulation is the prime suspect.

THE autumn of 2008 marks the end of an era. After a generation of standing ever further back from the business of finance, governments have been forced to step in to rescue banking systems and the markets. In America, the bulwark of free enterprise, and in Britain, the pioneer of privatisation, financial firms have had to accept rescue and part-ownership by the state. As well as partial nationalisation, the price will doubtless be stricter regulation of the financial industry. To invert Karl Marx, investment bankers may have nothing to gain but their chains.

The idea that the markets have ever been completely unregulated is a myth: just ask any firm that has to deal with the Securities and Exchange Commission (SEC) in America or its British equivalent, the Financial Services Authority (FSA). And cheap money and Asian savings also played a starring role in the credit boom. But the intellectual tide of the past 30 years has unquestionably been in favour of the primacy of markets and against regulation. Why was that so?

Each step on the long deregulatory road seemed wise at the time and was usually the answer to some flaw in the system. The Anglo-Saxon economies may have led the way but continental Europe and Japan eventually followed (after a lot of grumbling) in their path.

It all began with floating currencies. In 1971 Richard Nixon sought to solve the mounting crisis of a large trade deficit and a costly war in Vietnam by suspending the dollar’s convertibility into gold. In effect, that put an end to the Bretton Woods system of fixed exchange rates which had been created at the end of the second world war. Under Bretton Woods, capital could not flow freely from one country to another because of exchange controls. As one example, Britons heading abroad on their annual holidays in the late 1960s could take just £50 (then $120) with them. Investing abroad was expensive, so pension funds kept their money at home.

Once currencies could float, the world changed. Companies with costs in one currency and revenues in another needed to hedge exchange-rate risk. In 1972 a former lawyer named Leo Melamed was clever enough to see a business in this and launched currency futures on the Chicago Mercantile Exchange. Futures in commodities had existed for more than a century, enabling farmers to insure themselves against lower crop prices. But Mr Melamed saw that financial futures would one day be far larger than the commodities market. Today’s complex derivatives are direct descendants of those early currency trades.

Read the rest of this entry »


Bailout becomes buy-in as feds move into banking

October 14, 2008

Tuesday October 14, 9:43 pm ET
By Jeannine Aversa, AP Economics Writer

Government moves into banking — to the tune of $250 billion — as the bailout becomes a buy-in

WASHINGTON (AP) — Big banks started falling in line Tuesday behind a rejiggered bailout plan that will have the government forking over as much as $250 billion in exchange for partial ownership — putting the world’s bastion of capitalism and free markets squarely in the banking business.

Some early signs were hopeful for the latest in a flurry of radical efforts to save the nation’s financial system: Credit was a bit easier to come by. And stocks were down but not alarmingly so after Monday’s stratospheric leap.

The new plan, President Bush declared, is “not intended to take over the free market but to preserve it.”

It’s all about cash and confidence and convincing banks to lend money more freely again. Those are all critical ingredients to getting financial markets to function more normally and reviving the economy.

The big question: Will it work?

There was a mix of hope and skepticism on that front. Unprecedented steps recently taken — including hefty interest rate reductions by the Federal Reserve and other major central banks in a coordinated assault just last week — have failed to break through the credit clog and the panicky mind-set gripping investors on Wall Street and around the globe.

Read the rest of this entry »


US to invest directly in banks: Paulson

October 10, 2008

by Adam Plowright Fri Oct 10, 10:12 PM ET

WASHINGTON (AFP) – The US government plans to invest directly in US banks for the first time since the Great Depression, Treasury Secretary Henry Paulson said Friday, expanding the focus of the government’s 700-billion-dollar rescue plan.

“We’re going to do it as soon as we can do it and do it effectively,” Paulson said when asked about an equity-buying plan.

“There’s no doubt in our mind, given the magnitude of the issue … that we can use the taxpayers’ money more effectively and efficiently … if we develop a standardized program for making, encouraging equity participation,” he added.

A 700-billion-dollar US government rescue plan approved last week had initially focused on the problem of liquidity for banks by offering to buy up their toxic assets.

Paulson’s comments demonstrate how the Treasury, after initially resisting the idea, now recognizes the need and attraction of direct investments in struggling banks which are unable to raise new capital from private investors.

Analysts and officials say there is a precedent for the US government buying equity in the Reconstruction Finance Corporation created during the Great Depression when thousands of banks failed.

The rescue plan, called the Troubled Asset Relief Program (TARP), has so far failed to calm investors or restore confidence in the financial system. The leading indices for the US stock market tumbled 18 percent over the week.

Implementation is taking time because of the complexity of the problems, but Paulson said officials were “working around the clock to deal with this.”

The secretary of state has warned that the first purchases of toxic assets could take several weeks and he gave no timetable for the equity purchase program. He also declined to comment on the amount of money that would be spent on buying toxic assets compared with equity.

Read the rest of this entry »


Dow finishes below 10,000 for first time since ’04

October 6, 2008

Monday October 6, 8:26 pm ET
By Joe Bel Bruno and Tim Paradis, AP Business Writers

Despite big afternoon rally, Wall Street finishes below 10,000 for first time since 2004

NEW YORK (AP) — Wall Street joined in a worldwide cascade of despair Monday over the financial crisis, driving the Dow Jones industrials to their biggest loss ever during a trading day. Even a big afternoon rally failed to keep the Dow from its first close below 10,000 since 2004.

The sell-off came despite the $700 billion U.S. government bailout package, which was signed into law Friday after two weeks in which traders had appeared to count on the rescue as their only hope to avoid a market meltdown.

At its worst point, the Dow was down more than 800 points, an intraday record. The stock market rallied during the final 90 minutes of the trading day, and the Dow finished down about 370 points at 9,955.50.

The average is down almost 30 percent from its all-time high of 14,164.53, set a year ago Thursday.

Speculation among traders late in the session that the market’s pullback had been severe enough to force the Federal Reserve into taking other steps to soothe the markets helped stocks rebound from their lows.

“If you can’t say that we’re oversold now I don’t know what you say. You’re at least due for a bounce if nothing else,” said Bill Stone, chief investment strategist for PNC Wealth Management.

The global plunge in stocks was under way well before Wall Street ever woke up. In Japan, the Nikkei average lost more than 4 percent. And then the losses spread across Europe — nearly 6 percent for the FTSE-100 in Britain, 7 percent for the German DAX and more than 9 percent for France’s CAC-40.

Read the rest of this entry »


Wells Fargo agrees to buy Wachovia, Citi objects

October 3, 2008

Friday October 3, 6:19 pm ET
By Sara Lepro, AP Business Writer

Wells Fargo agrees to acquire Wachovia for $14.8 billion; Citigroup demands Wachovia nix deal

NEW YORK (AP) — A battle broke out Friday for control of Wachovia (WB), as Wells Fargo (WFC) agreed to pay $14.8 billion for the struggling bank, while Citigroup (C) and federal regulators insisted that Citi’s earlier and lower-priced takeover offer go forward.

The surprise announcement that Wachovia Corp. agreed to be acquired by San Francisco-based Wells Fargo & Co. in the all-stock deal — without government assistance — upended what had appeared to be a carefully examined arrangement and caught regulators off guard.

Wells’ original offer totaled about $15.1 billion, but since the value of its shares closed down 60 cents Friday, the deal is now valued at about $14.8 billion.

Only four days earlier, Citigroup Inc. agreed to pay $2.1 billion for Wachovia’s banking operations in a deal that would have the help of the Federal Deposit Insurance Corp.

The head of the FDIC said the agency is standing behind the Citigroup agreement, but that it is reviewing all proposals and will work with the banks’ regulators “to pursue a resolution that serves the public interest.”

Citigroup, which demanded that Wachovia call off its deal with Wells Fargo, said its agreement with Wachovia provides that the bank will not enter into any transaction with any party other than Citi or negotiate with anyone else.

Barring legal action, the future of Wachovia will be determined by the bank’s shareholders and regulators, which both have to approve a final deal.

It was clear which they preferred Friday, as Wachovia shares climbed as high as 80 percent.

The FDIC is talking out of both sides of its mouth, said Roger Cominsky, partner in law firm Hiscock & Barclay’s financial institutions and lending practice. The agency says it stands behind the deal with Citigroup because it hasn’t been nixed yet, he said. “But at the same time, they are saying they are reviewing all proposals.”

By law, he said the FDIC is required to find the least-costly resolution for taxpayers. The Wells Fargo deal would not rely on any assistance from the government.

Read the rest of this entry »


Historic bailout bill passes Congress; Bush signs

October 3, 2008

Friday October 3, 6:02 pm ET
By Julie Hirschfeld Davis, Associated Press Writer

Congress enacts historic bailout legislation for financial industry; Bush quickly signs it

WASHINGTON (AP) — With the economy on the brink of meltdown and elections looming, a reluctant Congress abruptly reversed course and approved a historic $700 billion government bailout of the battered financial industry on Friday. President Bush swiftly signed it.

The 263-171 vote capped two weeks of tumult in Congress and on Wall Street, punctuated by urgent warnings from Bush that the country confronted the gravest economic disaster since the Great Depression if lawmakers failed to act.

“We have acted boldly to help prevent the crisis on Wall Street from becoming a crisis in communities across our country,” Bush said shortly after the plan cleared Congress, although he conceded, “our economy continues to face serious challenges.”

His somber warning was underscored on Wall Street, where enthusiasm over the rescue gave way to worries about obstacles still facing the economy, and the Dow Jones industrials dropped 157 points. The Labor Department said earlier in the day that employers had slashed 159,000 jobs in September, the largest cut in five years.

The historic vote was a striking turnaround from the measure’s spectacular failure earlier in the week, which had triggered a massive stock sell-off and prompted jittery lawmakers — fearing a crushing economic contagion that was spreading to their constituents — to reconsider.

“Let’s not kid ourselves: We’re in the midst of a recession. It’s going to be a rough ride, but it will be a whole lot rougher ride” without the rescue plan, said Rep. John A. Boehner, R-Ohio, the minority leader, as he prepared to cast his vote for the most sweeping federal intervention in markets in decades.

Treasury Secretary Henry Paulson pledged quick action to get the program up and operating.

The bailout, which gives the government broad authority to buy up toxic mortgage-related investments and other distressed assets from tottering financial institutions, is designed to ease a credit crunch that began on Wall Street but is engulfing businesses around the nation.

Read the rest of this entry »


SEC gives banks more leeway on mark-to-market

October 1, 2008

Wed Oct 1, 2008 3:24am EDT
By John Poirier and Emily Chasan

WASHINGTON (Reuters) – U.S. securities regulators on Tuesday gave the financial industry a reprieve from marking hard-to-value assets down to fire sale prices, throwing a lifeline to an industry beset by strained credit markets and the latest round of bank failures.

The U.S. stock market added to gains on the news, in hopes that regulators’ new interpretation of fair value, or mark-to-market, accounting rules, will slow or reverse the heavy flow of mortgage-related losses on banks’ balance sheets.

In the new guidance, first reported by Reuters, the U.S. Securities and Exchange Commission reminded financial services firms that they don’t need to use fire sale prices when evaluating their hard to price assets.

“This is a significant first step and adds stability, confidence, and liquidity within the capital markets,” said Steve Bartlett, president and chief executive of The Financial Services Roundtable. “By clarifying how to treat assets in an uncertain market, the SEC is continuing to provide transparency to investors and helping institutions to provide credit in periods of market stress.”

U.S. accounting rule maker, the Financial Accounting Standards Board said on its Web site on Tuesday that it would change the agenda for its Wednesday meeting to focus on fair value accounting. The board is contemplating issuing additional guidance through a FASB staff position as soon as Wednesday, according to a person familiar with the matter.

MARK-TO-ESTIMATE

The SEC’s guidance on Tuesday, came on the last day of the third quarter for most U.S. companies, allowing them to incorporate the changes in their next round of financial statements.

Read the rest of this entry »


WaMu is largest U.S. bank failure

September 25, 2008

Thu Sep 25, 2008 11:24pm EDT

By Elinor Comlay and Jonathan Stempel

NEW YORK/WASHINGTON (Reuters) – Washington Mutual Inc (WM) was closed by the U.S. government in by far the largest failure of a U.S. bank, and its banking assets were sold to JPMorgan Chase & Co. (JPM) for $1.9 billion.

Thursday’s seizure and sale is the latest historic step in U.S. government attempts to clean up a banking industry littered with toxic mortgage debt. Negotiations over a $700 billion bailout of the entire financial system stalled in Washington on Thursday.

Washington Mutual, the largest U.S. savings and loan, has been one of the lenders hardest hit by the nation’s housing bust and credit crisis, and had already suffered from soaring mortgage losses.

Washington Mutual was shut by the federal Office of Thrift Supervision, and the Federal Deposit Insurance Corp was named receiver. This followed $16.7 billion of deposit outflows at the Seattle-based thrift since Sept 15, the OTS said.

“With insufficient liquidity to meet its obligations, WaMu was in an unsafe and unsound condition to transact business,” the OTS said.

Customers should expect business as usual on Friday, and all depositors are fully protected, the FDIC said.

FDIC Chairman Sheila Bair said the bailout happened on Thursday night because of media leaks, and to calm customers. Usually, the FDIC takes control of failed institutions on Friday nights, giving it the weekend to go through the books and enable them to reopen smoothly the following Monday.

Washington Mutual has about $307 billion of assets and $188 billion of deposits, regulators said. The largest previous U.S. banking failure was Continental Illinois National Bank & Trust, which had $40 billion of assets when it collapsed in 1984.

Read the rest of this entry »


New world on Wall Street

September 22, 2008

Goldman Sachs and Morgan Stanley to face more oversight from the Federal Reserve. Change provides more funding and opens door to more mergers.

By Tami Luhby, CNNMoney.com senior writer
Last Updated: September 22, 2008: 7:19 AM EDT

NEW YORK (CNNMoney.com) — And then there were none.

Federal regulators converted Wall Street’s remaining stand-alone investment banks – Goldman Sachs (GS) and Morgan Stanley (MS) – into bank holding companies Sunday night.

The move allows Goldman and Morgan to scoop up retail banks and to streamline their borrowing from the Federal Reserve. The shift also is aimed at removing them as targets of nervous investors and customers, who brought down their former rivals Bear Stearns (BSC), Lehman Brothers (LEH) and Merrill Lynch (MER) this year.

But it also puts Goldman and Morgan under the Fed’s supervision, increasing the agency’s regulatory oversight and possibly forcing them to raise additional capital. As banks, Morgan and Goldman will be forced to take less risk, which will mean fewer profits.

And it brings to a close the era of the Wall Street investment bank, a storied institution that traded stocks and bonds, advised mergers and showered lavish bonuses on its executives.

“The separation of investment banking and commercial banking has come to an end,” said Bert Ely, an independent banking consultant.

Read the rest of this entry »


%d bloggers like this: