Tuesday, July 28, 2009

UK Financial Institutions head Kingman faces up to 2 year "Gardening leave" - a useful hiatus / avocation for US Government officials?

The UK's Financial Times reported "It emerged that Mr Kingman (head of UKFI) had already been in talks with at least one bank — a potential conflict of interest, which means that he could be forced to take up to two years’ “gardening leave”.

It seems to me that the smell of freshly tended REAL, genuine, not artificial, fake or plastic flowers could do the US financial "system" some good. After all Mr Geithner and Mr Bernanke bemoaned that the "systems" failed us; which reasonably implies that the "systems" caused the crisis no?

Monday, July 27, 2009

Bernanke - USA Today May 2006 (Not a typo)

On the issue of risky home mortgages, Bernanke pointed out that the Fed has issued some guidance for lenders and he underscored the importance of borrowers making sure they understand how interest-only and other non-traditional mortgages work.

"We're not saying you shouldn't make these loans. What we're saying is that they be done the right way," Bernanke told the banking conference. Borrowers and lenders holding exotic mortgages could get clobbered if housing prices drop or interest rates rise sharply.

In his speech, Bernanke said federal banking regulators will press ahead on a sweeping plan aimed at improving risk management for the country's largest and most internationally active banks. Hhhhhmmmm......

The proposal, years in the making, dubbed Basel II, would instruct such banks to use complex new risk formulas to determine capital requirements. The thrust of the proposal is to promote stability of the U.S. financial system and make big banks better able to withstand any financial problems that might erupt in the global marketplace.

"No immediate crisis requires us to move toward Basel II, but the gradual evolution of market practice and the emergence of very large and increasingly complex banking organizations operating on a global scale require that we make significant changes in the way we assess capital adequacy at these organizations," Bernanke said at the conference organized by the Federal Reserve Bank of Chicago.

"Indeed, waiting for a crisis to force change would be foolish; by moving forward now [2006 mind you], we have the luxury of being deliberate in the development and introduction of a system that promises significant benefits," Bernanke added. [Emphasis added]

Full Story link http://www.usatoday.com/money/economy/housing/2006-05-18-bernanke-housing_x.htm

Contributing: Associated Press Writer Michael Tarm in Chicago.

But Mr Bernanke - You watched the parade that's become near the 2nd Great Depression starting when? October 2006 (WSJ) or was it May 2006 (USA Today)

Mr. Bernanke said in his recent Town Hall interview with Jim Lehrer "I was not going to be the Federal Reserve chairman who presided over the second Great Depression, and for that reason, I had to hold my nose and stop those firms from failing. I am as disgusted about it as you are, and I think it's absolutely critical as we go forward that we put in a new system that will make sure that when a firm does not succeed in the marketplace, that it fails."

Bernanke was quoted in May 2006 by USA Today (see blog entry and full story link) then later by the Wall St Journal when? October 2006 (not a typo).

Too Much-ee data?
Wonder if Bernanke is / was overwhelmed by too much financial data and impresarios (spin doctors) that the basics of financial leverage slipped by.
Or that he couldn't discern with all of those sophisticated forecasts and a few PhD's walking around that this picture reveals too little? Is it too simplisitic?
Despite Obama platform promise of transparency / disclosure FDIC's TLGP refuses to release (rejected a FOIA request log #09-1132) the names of the NON FDIC - yes NON FDIC insured recipients and amounts despite accounting for about $260B (near 60%) of that program's total as of June 2009 report.

I'm more than intrigued that the SEC would sue a CEO to recover compensation recieved while risks in financial statements were less than SARBOX prescribed. Let's wait and see when or IF the same SEC will look into recovering upon the same premise from a certain few Wall St brokers and banks....hmmmmm.

In the meantime should we care or bother? Yet again, it appears another near total Waste of US taxpayer monies; when it could or should be devoted to human health care; not certain Wall St welfare.

Sunday, July 26, 2009

Don't you wish you could go OFF balance sheet? AIG FPG - SEC's Wells Notice - not the first time - SEC sued AIG FPG when? 2004

The SEC sued AIG FPG in when? 2004 for 2001 and 2002 events -
(full copy of SEC Complaint) http://www.sec.gov/litigation/complaints/comp18985.pdf

From at least March 2001 through January 2002, American International Group, Inc. (“Defendant AIG”), primarily through its wholly owned subsidiary AIG Financial Products Corp. (“AIG-FP”), (collectively referred to herein as “AIG”) developed, marketed, and entered into transactions that purported to enable a public company (or “counter-party”) to remove certain assets from its balance sheet.

For a fee, AIG offered to establish a special purpose entity (“SPE”) to which the other party to the transaction would transfer troubled or other potentially volatile assets. AIG represented that, under generally accepted accounting principles (“GAAP”), the SPE would not be consolidated on the counter-party’s financial statements.

The counter-party thus would be able to avoid charges to the income statement of its financial statements resulting from declines in the value of the assets transferred to the SPE.

The transaction that AIG developed and marketed, however, did not satisfy GAAP requirements of GAAP for nonconsolidation of SPEs.

Post 2004, (the heart of the hockey stick era) when companies like AIG effectively helped issuers to create new off balance sheet, special purpose entities outside of the jurisdiction SEC registration statements one must wonder what and how the new, improved and wrinkle-free AIG FPG services including credit default insurance post 2004 were in the best interests of customers.

Note: In this past week's Mr Geithners' testimony a Senator recited a bit of GSE history HUD 2004 bought $175B in zero down payment mortgages, in 2005 HUD backed $1 Trillion in 100% zero down mortgages - yes from near zero to $1.2 Trillion in 2 years. Wall St's mortgage backed mortgage securitization machine with aid from the likes of AIG FPG set leveraged bets where? OFF BALANCE SHEET.

Monday, July 20, 2009

Banks & Brokers - at a disadvantage to Hedge Funds - we'll set up our own; where? Off Balance Sheet and look what happened

and that's pretty much the reason for the hockey stick era.

Since Hedge Funds and banks and brokerages were all competing to make money in "the capital markets" - it became clear that hedge funds had clear advantages - except one; they could not directly execute their own trades or properly custody their own securities; hence Prime Broker operations became large sources of revenues (and ideas and strategies) and the parade of traders OUT of the regulated world of banks and brokers into the UNregulated world of hedge funds; replete with customized performance fees and contracts; the ability to create a fund at whim; without registration and raise money - although not directly from john q public - but accredited investors; note that Reg D (for I doubt if it ever happens) - if even one hf investor is deemed unaccredited it may imperil the entire fund's legitmacy.

Thursday, July 16, 2009

CIT - Banks' Competitor or Customer matters

So - why the headline? It would appear that when a competitor (CIT) can be eliminated, by definition, it reduces competition, profits from commercial lending to the remaining "LUCKY" goes? Up. At borrowers expense. How the FED and or FDIC justified this decision is curious. CIT looks to declare BK being denied FDIC TLGP or other emergency program assistance.

(I note a subtle, but important contrast - the absence of most TARP recipients' insiders to acquire stock in the face of myriad uncertainties yet a brief review of the past few months and last year shows CIT insiders were, net, with a few sales, putting their own personal cash on the line.)

Note: Goldman Sachs record profits were CAUSED by another Government backstop as here in Janet Tavakoli's article today http://edition.cnn.com/2009/POLITICS/07/15/tavakoli.goldman.earnings/
"In an unprecedented move, the Fed created a Term Securities Lending Facility, or TSLF, that allowed primary dealers like Goldman to give non-government-guaranteed "triple-A" rated assets to the Fed in exchange for loans. The trouble was that everyone knew the triple-A assets were not the safe securities they were advertised to be. Many were backed by mortgage loans that were failing at super speed."

The FDIC TLGP (Term Loan Guarantee Program) announced June 23 that $285B (not a typo) was committed to provide a back-up, implicit government guarantee upon debt issued by certain Banks, Thrifts and NON FDIC INSURED affiliates. YES NON FDIC INSURED affiliates of same. It would appear that affiliation, like membership has its privileges.
A FOIA (Freedom of information request) was submitted by my office to the FDIC requesting names of the affiliates and amounts backed under the TLGP on June 24, I'm told it may take 30 days for a response. Stay tuned sports fans.

In further contrast, of the estimated $1.4 T (not a typo) of Commercial Mortgage Backed loans and securities (owed to banks by customers) that an Alliance Investment expert on Bloomberg TV Friday July 10, 2009 stated "we expect 25% ($350B) to default yet only 10% (of the $350B ) has been reserved thus far" OK time will tell - however as in the headline it appears to matter whether you're a competitor or customer of the LUCKY banks.

Off balance sheet leverage CAUSED the massive TARP and TSLF facilities not to mention the ensuing relaxed, kinder, gentler fair value accounting rules - did CIT exceed the "speed limit" compared to a certain few banks and brokerage firms?

We may never know all the facts, yet uneven policy may impact the customers of CIT and their customers too. Where and more importantly HOW do our elected and appointed officials draw the proverbial line in the sand? It appears that a so called AAA rated mortgage backed derivative security (held or to be traded for the purpose of proprietary profit and compensation) is deemed a better use of US Taxpayers public monies than a non rated loan to a commercial business; make that thousands of small businesses; the core of CIT's customer base.

Where is the nascent lead singer voice of the US Chamber of Commerce on this one? And NO Mr Buffett is unlikely to ride to the rescue - Berkshire owns substantial stakes in two CIT competitors, Goldman Sachs and General Electric.

Monday, July 13, 2009

US Treasury - look in the mirror - recognize something? Fiduciary duty to US Taxpayers

Yes, to this day the US Treasury STILL has not received full disclosure from certain TARP recipients.

Not only that, certain TARP recipients upon questioning in front of US Congress - stated (and I'm paraphrasing) "See all the money is the same color - so we can't state exactly where the bailout funds were applied" hmmm....yet another, but in this case, by far, the largest failure and breach of a basic fiduciary duty, the duty of care, aka due dilgence BEFORE taking action and CONTINUING due diligence after making an investment or "loan" in the case of TARP.

Perhaps the US Treasury will be deemed a "broker" or "investment adviser" and be covered by the SEC's proposal to require a fiduciary standard of care. Wonder whether like the infamous Clinton tax hikes it will be radioactive - er retroactive?

Sunday, July 5, 2009

Wall St's OFF Balance sheet expansion, hockey stick era inflated by leverage - a stealth, counterfeit money supply aka CASH?

The US Treasury controls the printing of money for circulation. The Federal Reserve is charged with regulating the money supply. The NY Fed is charged with watching and regulating whom? Its district's MEMBER banks, long ago American Express cardholders were told what? Membership has its privileges. The SEC is charged with overseeing securities issuers and market participants; except due to legal loopholes, private placement, unregistered securities, off balance sheet entities and hedge funds.

[Note: US taxpayers PAID the salaries of all employees of the US Treasury, Federal Reserve, NY Fed, and the SEC and the creators and overseers of same; our elected officials of all stripes - past and present. Ever notice the patterns of career track? Right into the first chair orchestra of the regulated entities. Talk about a principal agent conflict of interest brewing on the taxpayers' dime. Recall the Defense Depts. ban on soon going to work for contractors?]

Trader think - "So, (by the way, did you happen to notice that "so" is today's leading popular narrative segue previously known as and a replacement for the versatile, "Uh"), when you can take mortgages, package them together into derivatives, like many in the sausage trade, create investments called Mortgage backed securities then, because we be so smart and technically gifted, slice them and dice them like pieces of exotic sushi into mild to spicy to nuclear hot, that creates risk and what? The potential for return, returns like sushi, from mild to nuclear.

Trader think - "Oh so we'll create a market; but because some of the sushi is so hot; we'll need to keep it private (created, traded and valued in and as a result of over the counter markets - read in the privacy of darkness) because this particular sushi is not suitable for just anyone or everyone; first you have to have a proprietary model and two you need to have money to get into the sushi bar. Hindenberg-like OFF balance sheet entities, like these private sushi bars, were set up by a few, not ALL, Wall St banks / brokerage firms.

Off balance sheet entities of some few US financial institutions.

  • A few, too large to fail, Wall St banks and/or brokerage firms, perhaps not illegally or fraudulently, for maximum, IMPORTANTLY, in this order 1) paydays for it's employees; then 2) profits for their shareholders, began to supply these entities with cash believed at least in part, subject to proof, diverted from public customers' money market funds into affiliated banks, then loaned NOT to arms-length public customers as the bank's charters require, but their own off balance sheet-sponsored entities, then leveraged into all manner of derivative securities. Of course, in a major bout of facetiousness, the banks did not "control" the OBS they merely sponsored them - that might force the PCOAB certified, independent accountants, auditors to suggest OFF switches like a transexual to ON, such that there may result abomination -- UNnatural financial statement consolidation - there goes another "C" word again.
  • Reported leverage was about 2000% to 3000% (20 to 30x). If underlying equity increased just by 1% - paper profits increased by 20% to 30%!
  • Trader think - "Wow, if we increase the leverage to 50 or 60 to 1 then a 1% equity increase generates a 50 or 60% PAPER profit and the beauty is we CAN get paid in cash NOW - because we CAN tweak our black box models to lock in this strategy for 10 years, let me whip out that HP 12c - how soon CAN we start minting our own money?"
  • During the hockey stick years these paper profits surged - because, in large measure, the increasing leverage in these entities.
  • In the "when not if" 2006/2007 era the the music began to fade such that those tidy paper profits began to correct in the opposite direction because mortgage borrowers started to forget to pay the monthly nut and the value of the underlying collateral, valued by the TOO smart to fail, proprietary, shiny, sleek, whiz bang models (by Wall St adult, professionals) went BANG and the poor little LEVERAGED collateral was no longer worth what was once gleaming in the darkness. And equity went south for a generation.
  • In 2008, Bear Stearns, Fannie Mae, Freddie Mac were bailed out. Lehman Bros declared BK in Sept and Merrill Lynch was forced to merge with Bank of America. AIG was given hundreds of billions so that counterparties could be protected from what? Their own failures to perform due diligence - but they have an excuse - the music was playing so beautifully, loud and oh for so long like an opponent's deafening end zone they missed the signals over and over and over again.
  • US Taxpayer money was GIVEN to TARP institutions.
  • Congress never got a straight answer to 'what did you do with the money?" As if these entities did not have millions of dollars devoted to accounting systems or basic books and records requirements - amazing!
  • But as I surmise, subject to proof, Congress never directly asked if any of the TARP money was directed to any (as opposed to none) off balance sheet sponsored entity, related contracts, securities, partnerships, or counterparties.
  • Want to join with me in suggesting Congress rephrase that line of questioning?
  • FDIC TLGP report tucked neatly in the last line of the table reveals that certain insured and NON FDIC insured (not a typo) affiliates debt - table as of May 2009. See? $285 Billion was backed for insured and NON insured affilates.
  • Monthly Reports on Debt Issuance Under the Temporary Liquidity Guarantee Program
    Debt Issuance under Guarantee Program (dollar figures in millions) May 31, 2009
  • Insured Depository Entities No. Debt O/S Cap1 for Group %Share of Cap
    Assets <= $10 Billion 46 $ 1,636 $ 3,097 52.8%
    Assets > $10 Billion 21 $ 58,900 $315,171 18.7%
    Bank and Thrift Holding Companies,Non-Insured Affiliates
    34 $285,242 $466,741 61.1%
    All Issuers 101 $345,778 $785,009 44.0%
  • A FOIA Request for the break out of the names and the amounts guaranteed for the NON Insured Affiliates was submitted June 24, 2009. Log #09-1132.
  • Link http://www.fdic.gov/regulations/resources/TLGP/total_issuance5-09.html
  • (Now the FDIC can compete with American Express and create a new class of card holder - the "Affiliate" such that Affiliation has mucho grande privileges than mere membership" - then in the not distant future, because Mandarin Chinese will be the dominant language of all things finance, Da (big) privileges.)
  • Seriously, why, taxpayers may rightfully, ask (AND victims of Hurricane Katrina, and any and all victims of floods, tornadoes who do not have insurance or the millions of Americans who do not have health insurance) - why are NON insured bank and thrift affiliates benefitting from the explicit US treasury guarantee in the TLGP program?
  • Only after the CASH paydays to the traders, Accounting rules, like fabric softener, were changed, freshened up, with new packaging such that the laundry would go thru a gentle cycle with new, kinder, gentler valuations upon the heretofore easy to value but now distressed, difficult to value investments would be a tad more generous to the "institution" that created the charade (er excuse me, investment securities) to begin with, Insurance reserves were relaxed aka tapped.
  • Dissecting interests - banks and brokerage firms perform two ways:
  • 1) For public customers' accounts,
  • 2) For their own accounts - in the past called proprietary trading ON balance sheet - but in the hockey stick era, where? OFF balance sheet (out of regulators' view) through entities like SIV's - Structured Investment Vehicles.
  • This calls into question do the public customers' interests or shareholders and employees' interests come first? What is the institutions's boards' duty, audit and compensation committees to monitor this fundamental issue? What does the banks' charter state? Why do banks exist as they do? Is it to serve customers' interests first? Or second?
  • Was there a stealth - hidden - band (er banks) strumming music called the Dynamix? Indeed, Dynamic while it was oh so soothing, those oh so smart, professional, mature, adult traders' yet like a hot stick of dynamite tossed to the US Treasury and US taxpayer? Trader think - with feelings oh so hurt, fretting, boo hoo, "my models betrayed me, so sorry, sans that important piece of musical instrument called "cash"!
  • Don't you wish you were a "music" major.

Public vs. Private "Information"

Joseph Stiglitz, was awarded a Nobel prize for ~ "Assymetric Information Advantages" - perhaps the Nobel committee, pre-hockey stick era, was signaling what would or could result in the creation, enablement and cover - up of the largest financial fraud yet reported.

Perhaps US Congress and the agencies and GSE's (US Treasury, Federal Reserve, SEC, Fannie Mae, Freddie Mac included) felt / decided that the average Joe would not understand or connect the dots; or perhaps maybe it might beckon their previous oversight (undersight / myopia), or some of their own personal, hockey stick era real estate deals (buys, sells, refi's) or some of their supporters into the brightness of sunshine?

Wall St banks / brokers were in "full compliance" tells us what?

If Wall St banks / brokerages can say they were in full compliance with any and all rules and regs - it by definition, tells us this. That the problems occurred where? In the UNregulated entities, the root source, causes of the urgent need for TARP and related relief funded by the US taxpayer last fall. AIG was 100% compliant in its regulated insurance operations, BUT not when it came to the Financial Products Group FPG. Why? Very simple, because FPG was UNregulated!

Why no lawsuits filed by Wall St to recover losses????? (When public customers / investors lose money they often sue the brokerage firm.)

It's more than curious, that certain Wall St banks / brokerage firms, having suffered the largest losses known to man, HAVE NOT, I repeat have NOT filed any lawsuits to recover their losses. Could it be that all the answers lie inside? I'll bet you might know the answer.

Where is the VOICE of the people? US Congress, State, County and City Elected officials and the media in failing to tell the story to the people?

  • Why should the states, counties or cities care? Because moneys committed to the TLGP could be used for state purposes. The best decisions are usually "local".

Another perspective of siesta on the taxpayers' dime.

Friday, July 3, 2009

"Handled with CARE" customers treated like family, a real standard for financial services, regulators and the rest of the world

As Americans' celebration of US Independence Day draws near, the Stamp Act among other non-representative acts led our founders to collaborate and write the Declaration of Independence. I read the Declaration recently and at its base is a document, based upon certain unalienable rights - life, liberty and the pursuit of happiness, which sets forth a new mode of human endeavor independent of the British Crown and King George. Taking a clue from the Stamp Act I was reminded of a business school management lesson - the acronym "STAMP" to represent one model for behavioral change.

Behavioral change is easier to implement if it's what? S.T.A.M.P.
S - simple
T- timely
A- actionable
M- measurable
P- probable

This writer was born and raised on the Jersey shore, NJ's nickname is "the Garden state"; however when it comes to the care a customer's account deserves McConnell says "I'm from the state of Missouri - the "SHOW ME" state.

As the headline suggests, if more involved in the financial services industry including regulators, elected officials, and market participants looked upon and over ALL accounts as "their own family's money" would they have acted the same?

I'm not suggesting that all would have been prevented, not in the least, however, what I am 100% urging is that there, starting now, be a hand written, yes HAND WRITTEN certification - as follows:

"Handled with CARE" suggested format for Hand-Written PERSONAL certifications by financial services industry.
"I have invested, monitored AND SUPERVISED my customers' accounts and proprietary trading accounts with the same care as my family's and here's the proof; with a due diligence checklist performed for each on an annual basis OR whenever risk return levels deviate AT ANY TIME from historical or our own unique models and expectations."


There, that should be STAMP right? No more siesta on the taxpayers' dime. And Happy Fourth of July, Independence Day America!