Friday, September 25, 2009

Schumer IndyMac Summer 2008 letter - the only one?

It's that simple - wonder if Senator Schumer ever came across similar information upon any other financial institution and kept the letters to himself?

See Housing Wire report here
See NY Times related story link here

To be fair the subsequent US Treasury Office of Inspector General found that the letter was a "contributing factor" in the timing of IndyMac's collapse, but that "the underlying cause of the failure was the unsafe and unsound manner in which the thrift was operated." It seems however not everyone knew what Mr Schumer's office believed they knew, since the IndyMac depositors showed up en masse and withdrew substantially more (try a B$) than before the letter was publicized.

And Bloomberg gives a little more color regarding OTS resentment over the Senator's interference in the regulatory process

Schumer's letter alleged that OTS had fallen asleep and failed for years to detect "the profligate lending practices at Indymac and others including Countrywide" - and "If OTS had done its job as regulator and not let IndyMac's poor and loose lending practices continue, we wouldn't be where we are today,'' Schumer, a New York Democrat, said in an e-mail yesterday. `Instead of pointing false fingers of blame, OTS should start doing its job to prevent future IndyMacs." One may wonder if certain investors in Indymac-originated mortgages were themselves underwater; when a FDIC resolution and loss sharing may have helped same investors out a little more than others...we may never know or...

Yet back to the headline this may partly explain why similar letters were not penned or released: According to the NY Times archive:
As a result, he has collected over his career more in campaign contributions from the securities and investment industry than any of his peers in Congress, with the exception of Senator John F. Kerry of Massachusetts, the Democratic nominee for president in 2004, according to the Center for Responsive Politics.

The Wall St Journal gives more here:

Today Rep. Barney Frank's Financial Services Committee conducted a hearing titled Federal Reserve Oversight. Mr Alvarez, GC at the Fed testified; a goodly portion of his questioning concerned Fed disclosures or the lack thereof and one question in particular centered on whether a Congressional request for an audit of an open bank institution should as the law states now, require approval of the Fed before it could begin. I wondered how Senator Schumer's letter regarding Indymac fit within the four squares of that line of questioning...hmmmm.

Just a simple question - of what's known, knowable, unknown or unknowable in the spectrum of foreseeability; apparently something in particular caught the Senator's attention. And apparently NOTHING since has ignited the Senators pen.

Open letter to Ken Feinberg re: the purpose of compensation and its nexus to fiduciary duty

The guiding and ONLY principle in establishing a compensation policy for the financial services industry including securities, banks and insurance companies and entities like GE Capital should be priority then alignment of interests of parties thereto. It helps to begin and include the social, industry, entity, vendor levels for and on behalf of whom? The customer which in many cases includes beneficiaries of fiduciary accounts; trusts, IRAs, 401k and pension plans, eleemosynary organizations charities, non profits, foundations, endowments and homeowners associations.

Friday, September 25, 2009

Dear Mr Feinberg,

From the early 1980’s thru today my fiduciary expertise stems from deep analysis, design, supervision of a major securities firm's compensation plan and internal accounting policies including proprietary trading at the “firm” entity level through distribution by a financial adviser, then into the customer’s account. Profitability to the firm is implicit every step along the way until we recognize – THE CENTRAL QUESTION - where does the fiduciary duty to the customer begin? You might be interested to know that in the past some firms’, not all, trading desks were agency – not profit centers; but clearly that was the past.

Also not all derivatives nor entities which invest in them are "bad" (as one measure only, over 90% of FDIC insured institutions are NOT on the watch list) rather I focus my remarks on professionals at certain institutions including traders, managers, executives, boards, outside auditors and primary regulators which implicitly or overtly sanctioned massive leverage; compounded by the utter failure to diversify collateral; however this stands in stark contrast to the similarly massive cash bonus paydays enjoyed by same during the "hockey stick era."

As such I am keenly interested in your process as “Pay Czar”, upcoming proposals and potential clawbacks of previous cash compensation. In some instances, in addition to my comments to the NY Times see below (which the moderator did not post) there may be instances of past fraudulent “conversion” as detailed below but summed up here:

Proprietary asset valuation models and parties thereto had motivation to do what? Over mark assets, add significant leverage, such that leverage both blessed such marks and signaled other market participants that asset marks were fair and thereby caused the conversion of same into what? It appears that traders and related parties created and inflated a set of assets (one form of currency) (RMBS, CDO's, etc.) knowing their compensation was payable in what? CASH, legal tender. CASH Compensation; when other means and forms make for better alignment and are preferred – for instance, compensating traders in the currency of the particular asset or index based upon same.

Secondly – although “legal” as per the SEC’s April 2004 decision to permit CSE’s to use proprietary valuation models in determining minimum net capital, seems to have gone off track causing certain, not all, off balance sheet, special purpose entities’ proprietary traders to improperly mark assets. Only traders can know or feel liquidity at the position level especially when nearly all of the subject securities are / were ‘created, issued, traded and valued” where? In the privacy and privilege of darkness of certain over the counter markets.

Third – if banks, broker dealers’ charters of authority are based upon serving public customers’ interests FIRST then the existence of “proprietary” trading in ANY security or market seems contrary. Flash trading seems only the most recently revealed, publicized example; hijacking of information. Proposed solution – dislocate proprietary purposes from agency intent – many principal agent conflicts as relates to the public customer will be a thing of the past – so that public customers can have “reason” (firewalls or Chinese walls are ineffective, rather tangible organizational separation) may be the solid evidence, not just hope, to again reasonably believe, rely upon and repose their full faith and trust in the institution of the capital markets, Wall St, the entity and individual adviser in particular.

Four – CASH compensation resulted for traders, managers and executives yet what is the purpose of such off balance sheet special purpose entities; how were public customers or the public in general benefiting from such private arrangements. Among other considerations the UK minister's "socially useless" theory is applicable here.

Five – LEVERAGE – explicit and implicit leverage should (and should have been) be reported to a public, observable market clearing entity. Such reporting can be best done at the entity level through trade level – on a generic asset level basis; similar to some of the long used conventions used to mark retail customers’ option order tickets – opening, closing, long, short, cash or leveraged which attach to and remain with the trade as it clears in addition to certain CFTC trade reporting conventions; additional thoughts are too long to write here.

Six – LEVERAGE – in off balance sheet vehicles, special purpose entities seems to have caused an unmonitored “stealth” money supply enabled by proprietary traders’ inflated asset marks and valuations; that disease was then transmitted into the money markets including commercial paper, asset backed commercial paper and repo's.
(a cut and paste from the NY Fed website) -
Major Change to Outstanding Calculations (April 10, 2006)
On April 10, 2006, the Federal Reserve Board made major changes to its CP outstanding calculations.

Seven – extensive research from public records including AIG’s (and Travelers and Radian) 2003 (not a typo) to exit broker dealer excess SIPC, after 30 years of NEVER having paid out on a claim, a quote from the AIG, yes AIG spokesman “It’s too much exposure” yet at the same time AIG Financial Products Group was doing what? Underwriting more and larger credit default swaps and related counterparty insurance; we know now lacking adequate underwriting capacity. As to why the primary regulators including the NASD (now FINRA), the SEC or state securities administrators failed to inquire or investigate remains to be seen; with the essential inquiry being “what is ANY / NEW too much exposure?” The link to the NY Times article from August 9, 2003 is here:

Eight – subject to proof, certain broker dealer entities may have improperly benefited at public customers’ expense by shifting customers' monies from money market mutual funds into entities’ affiliated banks’ deposit accounts then “loaning” it out not to public, arm’s length third parties but perhaps proprietary and/or controlled entities. It is believed that the emergency, extraordinary CASH infusions were necessitated due in part by the hidden UNregulated actions of certain sponsors of SIV's (structured investment vehicles). As a result – you might be interested to reference certain non, yes non FDIC insured affiliates of certain Banks and Thrifts have received support through the FDIC’s TLGP program; for which my office submitted a FOIA request #09-1132 which was denied by FDIC office of general counsel.

Link to the FDIC TLGP table here
32 such institutions including Banks, Thrifts and NON FDIC insured affiliates of same received $248B over 52% of outstanding program support as of August 2009.

Nine – FiduciaryALERTS™ one pagers, were issued annually by my office since 2004 urging review and caution with hedge funds, fixed income and real estate due to concerns not limited to explicit and implicit leverage and lack of transparency. Including one from May 2006 entitled "What do Johnny and Elvis have in common?" (Johnny being the deceased Johnny Carson) - both their estates announnced plans to do what? Sell, yes sell certain real estate holdings.

February 22, 2009 comment to NY Times:
Thank you for your comment. Comments are moderated and generally will be posted if they are on-topic and not abusive. For more information, please see our Comments FAQ.
February 22, 2009 5:10 am

There may be two additional ways to seek recovery of "executive pay" and other types of Wall St. distributions; 1)it's possible that some broker dealers - in the past, may not have met minimum net capital requirements had their assets been marked to "true markets" rather than their own proprietary models; hence, at least dividend payments to shareholders (including executives) would have been disallowed. 2)Subject to proof, it's possible that some parties to transactions of what are now deemed "toxic assets" may have engaged in less than transparent or fraudulent acts. Today some banks, if not for taxpayer dollars, would be insolvent' and in the absence of private buyers, forced into BK. and we were reminded that BK trustees' claims or clawbacks for prior and proven fraudulent conveyances can go back 6 years - correctomundo! Clawback - it's music to my ears and may provide the US taxpayer much needed relief that ultimately justice will have been served. Last - let me be the first to raise my hand to volunteer to help in any and all recovery.
— fiduciaryexpert, Los Angeles, CA

PS: The entities themselves are and have been in the “know” as the annual estimated IT budgets for the Financial Services Industry is over $350 Billion (not a typo) and I believe that may not include GE Capital. Among other questions, what is the proprietary trading IT spend over the past several years? See link here

PPS: Hedge Funds and similarly unregistered and unregulated entities must be part of some form of at minimum generic but descriptive position disclosure in addition to disclosing valuations of same as proprietary, public market or derived. Only one example of a present UNFAIR advantage is that over mutual funds. Mutual funds MUST disclose holdings and amounts thereof every 6 months; hedge funds do not and are not required to disclose their playbook. Since both vehicles compete, sign and signal in the same capital markets they should be regulated more evenly.

PPPS: When will the securities industry and regulators prominently disclose to public customers that year after year the majority of active investment strategies fail to deliver even bench mark return, risk or diversification benefits? See the SPIVA study at S&P.

Monday, September 21, 2009

"Brookings Ben" -admits OTC derivatives "liquid" pre-Lehman; "Emergency, Extraordinary" Bailouts = unexpected; ergo Regulators' excuses do not add up

Referring to off balance sheet trades; really, Ben?

See video here

I'm exceedingly curious - SHOW ME how and what data you reviewed to make that statement. "That prior to Bear Stearns or certainly the Lehman-induced financial market crisis last September YOU KNEW that these OTC derivatives markets were liquid."

1) If you "knew" said markets were "liquid" that means you were aware and watching and exercising some level of prudent safety and soundness supervision correct?
2) At what point did you first become aware or had concerns; especially in light of your 2006 public comments detailed below?
3) Given what you profess to know NOW - what was THEN known, knowable, unknown or unknowable?
4) Last, since you knew said markets - Why did you need to propose emergency, extraordinary measures to send US Taxpayer cash to certain (certainly not all) financial institutions? Any reasonable conclusion would seem to be that YOU indeed did not know even the basics.

Based upon whose collateral (underlying real estate) valuations? Recall that the SEC allowed brokers to use their own valuation models back in 2004?
Based upon or more accurately in contrast to your, yes YOUR speeches related to the housing and related markets in 2006. The WSJ headline peeped on October 5, 2006 (not a typo) "Bernanke suggests sinking housing market could dampen growth" Uh, you do read the venerable journal and have penned an Op-Ed or two - but silly me I didn't happen to catch any correction or retraction.

OTC Derivatives market Liquid? Based upon what data?
The US taxpayers would like to know EXACTLY that markets' so called "liquidity" stats?
Trade volume, dollar volume, and types of securities traded in 2008 compared to any previous period - lets say any year after 2003 ok? Let's not forget to take a look at the related Repo, CP and ABCP (Asset backed commercial paper) issuance from certain parties. The NY Fed specifically carved out a new data category for ABCP when and why? In 2006, see any connections here?

Liquidity for Ben, came from where?
Look no further than the above mentioned PROPRIETARY valuation models AND the massive credit induced leverage often in financial institutions' controlled proprietary off balance sheet vehicles financed by what - also as above, look at the mammoth increase in the short term paper markets (Repo's, CP and ABCP). Leverage reported as much as 20 or 30 to 1 (Mr Buffett is quoted on Bloomberg a few months ago ..."Right and intraquarter it was a little more than that"; when underlying collateral valuations were not rising, rather declining. (Read your own speeches and media quotes). What game were you watching? Several credit ratings agencies issued reports such as 2005 (not a typo) by S&P titled "Who will be left holding the bag?"
See link here - S&P removed that one but you can email for the pdf document.

It's not a question of intellectual capacity ok?
Intellectual capacity you have more than most (recall the awe inspiring Smartest guys in the room at Enron and the Nobel Prize winners and one former Fed Governer who drove Long Term Capital into the ground), however awake, alert, both eyes open, both hands on the wheel at all times especially while the car reaches hyper NASCAR speeds with no brakes and watch out for that curve and the WALL - !!!

BB was asked how will the Fed develop tools, if any, to determine where a or the line may be drawn for two different but related measures of a financial institution (broadly defined); illiquidity and insolvency.

The height of a principal agent problem at the head literally and figuratively of the Federal Reserve, US Central Bank - another fact and no wonder Ron Paul has come out with "The End of the Fed"

Monday, September 14, 2009

Leverage blessed leverage for certain banks' prop trades and hedge funds

When regulators look to address the fix they need look no further than what HAD always been observable - leverage. Mr Benanke, Mr Paulson, Mr Geithner were each aware of same during the hockey stick era 2003 to 2007 and did what? NOTHING. Mr Geithner protected his NY Fed turf by creating LFIG (The Large Financial Institutions Group), Mr Bernanke gave several prescient speeches as early as 2006, Mr Paulson did what he knew how best to do - a deal for the Street.

When it comes to leverage, for the uninitiated leverage equals borrowed money and when Wall St and certain banks lever they do so for whose benefit? The house, I repeat the house. Not you, not me; but their own traders and executive CASH compensation, last shareholders then somewhere somehow the bond holders of these institutions forgot how to perform due diligence and general creditors and got what they deserved. Mr Buffett in only his sage way, stated a few months back when it comes to leverage, "If you don't owe anyone money guess what ? ( I added that piece) you can't go broke." True then, true today and true tomorrow.

But back to the headline, this writer has maintained that the very increase in leveraged holdings in particular in mortgage backed (and related derivative) securities (for that matter it could have been any asset), gave the rest of the participants IN THAT MARKET signals that they too could and/or should hold even more of the SAME.

After all there must have been more sameness, just like milk right? More homogeneity so relying upon similar data, crunched through similar internal models measuring volatility and correlation to warn when danger (less liquidity) was approaching. However, just as few could react in time to avoid the deadly Indian Ocean tsunami which struck the day after Christmas 2004 the same could be said for certain banks' proprietary trading desks. The question to have been asked was NOT whether a potential tsunami required measurement it was the when not if occurrence of a large earthquake that caused the waves that required measurement. Such that the same underlying mortgage collateral is AND was undeniably in a when not if state.

Leverage, Darkness, Derivatives, Internal Models, CASH Compensation
It's more than a fascination; fascinatin' stuff in certain parts of the country; how could certain
banks and brokers churn out record after record "profit" and pay terrific sums in CASH compensation if they truly competed in transparent markets? Drum beat please...answer? Leverage. And darkness. And derivatives. These securities were largely created, traded, valued over the counter (dealer darkness, indicative levels based upon cherry picked, disclosed trades) and trader CASH compensation upon same; not to you, not to me. I'd be more fascinated to learn how these traders invested these CASH bonuses (and more recent bonus replacement salary increases) - especially the amounts funded by taxpayers - writ you and me.

Another principal agent conflict of interest on the taxpayers (unleveraged) dime; I only wish it was a dramatization.

Wednesday, September 2, 2009

AIG to pay CASH (from US Taxpayers) for "Brokers' Retention Bonuses"

As reported here Feb 2009 - on top of the past TARP recipients "Retention Awards" over $5 B (not a typo) including to brokers and financial advisers at Merrill Lynch, Smith Barney and Morgan Stanley but not Wachovia - this time, as reported today in Investment News AIG's broker dealers will issue "the newest such Retention Bonuses" in amount which is unknown.

See full story here

Wonder where all that CASH is coming from - but there is a better way to pay - pay it in AIG Stock - not US Taxpayer cash!

Tuesday, September 1, 2009

NFL Coach Dennis Green's 2007 rant applicable to Financial Services Regulators

NFL Cardinal's coach Dennis Green's 2007 post game interview was decried as a rant by many in the media; yet this writer lauds it as an example of a clear headed admission of mission not accomplished but NOT for lack of trying.

Coach Green –
“We knew who they were…
they were who we thought they were,
they were who we thought they were
That's why we took the damn field
AND we let’em off the hook.”

During the hockey stick period 2003 thru 2007 same could apply to all those Federal Reserve officials (Greeenspan / Bernanke and Geithner), US Treasury (Snow/Paulson) and US Congress members, committees and subcommittees, staffs, FSI lobbyists, GSE’s, FINRA (NASD), SEC and NYSE.

Today Bloomberg reported that Mr Tarullo is to be Mr Obama's first Fed Reserve Governor appointee; further revealed that Mr Geithner formed LFIG yes LFIG read on for more (can you believe this? why not everything else was at the height of incredulity!)

Is “monitor” an action verb? Apparently not during 2003 thru 2008 in the lexicon of Mr Geithner.

Bloomberg story excerpt

...The existing structure relies on hundreds of examiners from the 12 district banks, from San Francisco to Boston, visiting lenders overseen by the central bank. Examiners make recommendations on individual banks rather than focusing on the system as a whole.

Treasury Secretary Timothy Geithner fought an earlier attempt to strengthen the role of the Fed’s Board of Governors in bank supervision.

As firms from Bank of America Corp. to JPMorgan Chase & Co. became larger and more complex earlier this decade, former Fed Governor Susan Bies wanted to create centers of expertise and accountability for particular markets and potential dangers, such as derivatives trading and settlement.

Geithner, then New York Fed president, wanted to preserve his bank’s responsibility for activities inside specific firms and capital-markets surveillance. A compromise was reached in the form of a panel known as the Large Financial Institutions Group, staffed by both Fed board and district bank officials, which coordinates supervisory decisions on the biggest lenders.

Full story link

As this reader has asked many times – show me and the US taxpayer what were the top 3 accomplishments, if any of Mr Geithner while he served as President of the NY Fed from 2003 thru 2008? What questions were asked by the Senate confirmation panel in contrast to same?

In particular, what was known, knowable, unknown or unknowable by Mr Geithner and his staff of hundreds of well paid PhD’s? How many man hours were devoted to studying and analyzing data? What conclusions were formed in contrast to that which we now know was what? Knowable.

As in supervision, oversight and monitoring – in regard to certain banks and broker dealers – did the responsible parties know who they were? I assume the answer should be yes, so, our regulators (our appointed protectors) "knew who we thought they were" AND...? Did the hordes of supervisors "take the field"? Did the supervisors "let’em off the hook"?

Go ask Coach Dennis Green how much tape he watched to COME to know da Bears then ask any of the regulators and Congress how much “tape” they watched of certain of the Financial Services Industry which now that I think of it could be more accurately called the Financial Self-Services Industry huh?