Merrill Lynch completely rejects the allegations of insider trading which have been the subject of recent press coverage

TO BE NOTED: From Bloomberg:

Sydney Morning Herald

"Merrill Lynch denies insider trading

Merchant banking giant Merrill Lynch has denied allegations of insider trading, raised at the weekend by a member of a famous Sydney racing family.

In reports published in Fairfax newspapers on Saturday, David Waterhouse alleged Merrill Lynch executives were involved in short-selling $55 million of blue chip Australian stocks in January last year.

In a statement filed with the Victorian Supreme Court, Mr Waterhouse alleges Merrill Lynch subsidiary Berndale Securities seized control of How Trading, the options trading account he held with them, on January 14 last year, Fairfax says.

Four days later, Merrill Lynch reported a $US9.83 billion ($A12.54 billion) four-quarter loss.

In the four days before the announcement, Berndale used the How Trading account to short-sell $55 million of Australian shares, the Fairfax report said.

Mr Waterhouse said the details were revealed to him by Merrill Lynch staff at a meeting before the US announcement was made.

How Trading and Berndale are involved in a $9 million dispute before the Supreme Court, Fairfax said.

But a spokeswoman for Merrill Lynch rejected Mr Waterhouse's allegations.

"Merrill Lynch completely rejects the allegations of insider trading which have been the subject of recent press coverage," she said in a statement.

"Merrill Lynch has already commenced proceedings to recover in excess of $9 million owed to it by How Trading and David Waterhouse. These proceedings are set down for trial next Tuesday."

this would be the first time a feeder fund agreed to make payments to the trustee

TO BE NOTED:



"Banco Santander agrees to pay $235 to settle claims with Madoff trustee

Lita Epstein
May 27th 2009 at 10:30AM

In order to avoid a lawsuit, Banco Santander SA (STD), which ran one of the largest feeder funds for Bernie Madoff investors, agreed to pay $235 million to avoid a lawsuit by Madoff trustee Irving Picard, according to a report in The Wall Street Journal. If the court agrees to the settlement, which is about 85 percent of what Picard intended to seek, this would be the first time a feeder fund agreed to make payments to the trustee.

This settlement would also increase the amount Picard has recovered for distribution to investors to a total of $1.2 billion. Most of the other funds recovered so far have come from Madoff 's business and personal assets.

Santander ran the Optimal Investment Services Fund, which primarily included clients from Latin America. Santander is one of several banks that offered its clients compensation for loses from the fraud. Santander reported in April, that 93 percent of its clients affected by the Madoff scandal accepted its offer, which was originally valued at 1.38 billion euro.

Santander, which is one of Europe's largest banks, had about $3 billion of its clients' money invested through Madoff for which it earned about $100 million in management fees in 2006 and 2007 combined. Santander reports it lost $23.8 million of its own money in Madoff investments.

Court papers filed with the settlement show that Santander is a net loser. Since the bank opened accounts with Madoff in 2006 and 2007, they deposited $1.5 billion beyond what they took out in redemptions. But Optimal withdrew about $275 million in the 90 days before the Madoff scandal broke on December 6. That withdrawal is recoverable under bankruptcy law.

Picard just started to target individual investors who made profits investing with Madoff. He believes in several of these instances defendants "should have known" about the fraud. Some defendants dispute these allegations, while others haven't yet responded.

Lita Epstein has written more than 25 books including Reading Financial Reports for Dummies."

High-level bank regulators were aware that thrifts were inappropriately backdating capital contributions

TO BE NOTED: Via Alea From Reuters:

"UPDATE 2-U.S. bank regulators directed capital backdating

Thu May 21, 2009 5:00pm EDT

* Regulators were aware of practice and allowed it-report

* In one case, regulators directed backdating-report (Adds Grassley, Delmar comments)

By Karey Wutkowski and John Poirier

WASHINGTON, May 21 (Reuters) - High-level bank regulators were aware that thrifts were inappropriately backdating capital contributions, allowing the institutions to appear healthier, and in one case directed a thrift to engage in the practice, according to a U.S. government watchdog report released on Thursday.

The Treasury's Office of Inspector General report said it was "alarming" that high-level officials at the U.S. Office of Thrift Supervision approved or directed the backdating of capital at six thrifts, including failed lender IndyMac Bank.

Allegations of capital backdating have tarnished the reputation of the agency, a division of Treasury that largely regulates mortgage lenders.

In March, the inspector general placed acting OTS Director Scott Polakoff on leave pending a review of allegations of capital backdating in 2008. The report released on Thursday did not indicate the progress of that review.

The capital backdating allowed IndyMac to maintain its "well capitalized" status and avoid a requirement that could have made it more difficult for the thrift to keep taking risky brokered deposits -- a big source of funding for some banks, the report said.

"We consider these matters very serious and find it alarming that such high-level OTS officials were not only aware of the backdating at two thrifts, but either directed or authorized the thrifts to backdate the capital contribution," the report said.

It said the OTS senior deputy director directed the backdating of capital at a thrift in the agency's Southeast region, but not IndyMac.

Polakoff was senior deputy director before becoming the OTS acting director in February. He did not immediately respond to a request for comment.

"We have taken the necessary actions to remedy the situation," OTS spokesman William Ruberry said, adding that the OTS's error was in not making sure a valid note receivable existed.

"Each of these transactions would have been acceptable if such a note had been recorded. So, we're talking about a piece of paper in a file. That's what these cases amount to," he said.

Senator Chuck Grassley, the top Republican on the Senate Finance Committee, said the OTS needed to hold the appropriate people accountable.

"This report paints the disturbing picture of a regulatory agency being much too cozy with the industry it's supposed to be regulating," Grassley said in a statement.

Rich Delmar, counsel to the inspector general for Treasury, said the office planned "to review the other corrective actions taken" at OTS.

The Treasury audit report released on Thursday follows the inspector general's "material loss review" of IndyMac, which was seized in July after loan defaults mounted and tight capital markets caused losses on mortgages it could not sell.

That material loss review uncovered the capital backdating at IndyMac and other thrifts, prompting the audit report.

The report does not name the five other thrifts but notes that the capital contributions that were backdated occurred at the institutions from January 2007 through August 2008.

BankUnited Financial Corp (BKUNA.O: Quote, Profile, Research, Stock Buzz) is among the institutions that were included in the report but not named, according to a source familiar with the matter. The troubled Florida lender is in the process of being sold and has drawn at least one bid from a private equity consortium, according to a source familiar with the matter.

The OTS submitted a letter in response to the inspector general report, saying it has focused "extensive resources" on the issue of backdated capital contributions. It said it has provided detailed guidance to its staff and the institutions it supervises about proper recognition of capital contributions. (Reporting by Karey Wutkowski and John Poirier; additional reporting by Paritosh Bansal; editing by John Wallace)"

deficit at the federal agency that guarantees pensions for 44 million Americans tripled in the last six months to a record high

TO BE NOTED: From the NY Times:

"U.S. Insurer of Pensions Sees Flood of Red Ink

By ERIC LIPTON

WASHINGTON — The deficit at the federal agency that guarantees pensions for 44 million Americans tripled in the last six months to a record high, reaching $33.5 billion, largely as a result of surging bankruptcies among companies whose pensions it expects it will soon need to take over.

The agency, the Pension Benefit Guaranty Corporation, faced a shortfall of just $11 billion as of October. The combined effect of lower interest rates, losses on its investment portfolio and rising numbers of companies filing for bankruptcy produced the jump in its projected deficit, officials said Wednesday.

Because the agency has $56 billion in assets — most of which is invested in Treasury bonds — it is not facing any prospect of default in the short term, officials said.

“The P.B.G.C. has sufficient funds to meet its benefit obligations for many years because benefits are paid monthly over the lifetimes of beneficiaries, not as lump sums,” the agency’s acting director, Vince Snowbarger, testified Wednesday at a Senate hearing. “Nevertheless, over the long term, the deficit must be addressed.”

The financial troubles are just a small part of the challenges facing the pension agency, which was created by Congress in 1974 and today is responsible for pension programs covering 1.3 million people. It pays about 640,000 people actual benefits worth about $4.3 billion a year.

The P.B.G.C.’s former director, Charles E. F. Millard, was subpoenaed to testify at the hearing Wednesday. But he cited his constitutional right to avoid self-incrimination and declined to answer any questions.

Mr. Millard, who resigned in January, has been accused by the agency’s inspector general of having inappropriate contact with companies including BlackRock, JPMorgan Chase and Goldman Sachs, all of which competed for and won contracts to help manage $2.5 billion of the agency’s funds. Those contracts will now most likely be canceled.

Employers nationwide with so-called defined-benefit, or traditional, pension plans pay fees to the P.B.G.C. in return for a promise that it will take over their pension plan if a company fails.

On Tuesday, for example, the agency announced that it had assumed the pension plan once run by the Lenox Group, a bankrupt maker of tableware, giftware and collectibles based in Eden Prairie, Minn. Assuming control of pensions for this company’s 4,300 workers will cost the agency an estimated $128 million — the difference between what Lenox had in its pension fund and what the total estimated obligations are.

In the last six months, 93 companies whose pension plans are covered by the agency have filed for bankruptcy, including Chrysler, whose failure alone could cost the agency $2 billion. A bankruptcy by General Motors would make the situation worse. G.M. had 670,000 workers as of late last year in its pension system, whose collapse would cost the agency an estimated $6 billion.

Options to close the $33.5 billion deficit include a federal bailout by taxpayers, a change in insurance premiums it charges employers or increasing its investment returns.

Last year, the agency’s board voted to allow it to shift its investment strategy to put more money into stocks, private equity and real estate, in an effort to reduce the deficit.

If that shift had taken place, the losses would most likely have been larger. But only a relatively small amount of the funds have already been shifted to stocks, so the losses on the investment portfolio were responsible for just $3 billion of the jump in the deficit in the last six months.

Senator Herb Kohl, Democrat of Wisconsin and chairman of the Senate Special Committee on Aging, which held the hearing Wednesday, blamed poor supervision by the agency’s board and management, at least in part, for the troubles, adding that he intended to introduce legislation that would expand the board and require it to meet at least four times a year. The board has not met in person since February 2008.

“The role of P.B.G.C. is too crucial to allow its governance to slip through the cracks,” Mr. Kohl said."

Prosecutors are trying to determine whether it conspired with financial advisers to overcharge customers.

TO BE NOTED: From Bloomberg:

"JPMorgan Faces Charges Over Derivatives Sales to Alabama County

Share | Email | Print | A A A

By Martin Z. Braun and William Selway

May 8 (Bloomberg) -- JPMorgan Chase & Co. said yesterday it’s facing charges that it violated federal securities laws over bond and interest-rate swap sales that helped push Alabama’s most populous county to the brink of bankruptcy.

Potential action by the U.S. Securities and Exchange Commission comes as Birmingham, Alabama’s mayor awaits trial this summer on bribery and money laundering charges in connection with the deals while he was president of the Jefferson County Commission.

At least seven former JPMorgan bankers are under scrutiny in a Justice Department criminal antitrust investigation of the sale of unregulated derivatives to local governments across the U.S., federal regulatory records show.

“The bigger the amount of money, the more temptation there is for corruption,” said Christopher “Kit” Taylor, executive director of the Municipal Securities Rulemaking Board from 1978 to 2007.

JPMorgan may be the first bank to be challenged by federal regulators for the practice of selling municipalities interest- rate swaps, a technique marketed as a way for cash-strapped cities and towns to save on their financing. The transactions have also provided Wall Street banks with fees 10 times larger than what they get for municipal bond sales.

The complex contracts, which local officials across the U.S. have said they don’t understand, backfired last year as fallout from the global credit crunch caused municipal borrowing costs to rise more than fourfold.

Soaring Costs

No location has been hit harder by its derivative deals than Jefferson County, which for more than a year has been unable to pay the soaring cost of its sewer bond deals with JPMorgan in 2002 and 2003.

The SEC’s move toward sanctioning JPMorgan comes four years after Bloomberg News reported that the New York-based bank overcharged the county by at least $45 million on derivative contracts. All of the transactions were tied to debt that financed construction of the county’s sewers.

Those public financings have pushed the county toward insolvency, threatening it with bankruptcy. They’re also threatening to cost local residents, as the rate for their sewer bills has more than tripled to cover borrowing costs.

JPMorgan spokesman Brian Marchiony declined to comment. The bank said in a regulatory filing yesterday that it is “engaged in discussions” with the SEC to reach a resolution before the agency files a civil complaint.

JPMorgan Closes Unit

JPMorgan said in September that it decided to close the unit that sold interest-rate swaps to government borrowers.

SEC spokesman John Heine declined to comment and Jefferson County Commissioner Jim Carns said he was unaware of any SEC moves against JPMorgan.

JPMorgan’s role in selling interest-rate derivatives to cities and towns has led to a nationwide federal investigation of the bank. Prosecutors are trying to determine whether it conspired with financial advisers to overcharge customers.

The bank sold swap contracts to school districts and other borrowers desperate to raise cash. In Butler, Pennsylvania, JPMorgan convinced a cash-strapped school district in 2003 to sell it an option on an interest-rate swap, a so-called swaption, for $730,000.

The district later said it had been duped by the bank. Last year it repaid JPMorgan seven times what it had received to get out of the deal. Erie, Pennsylvania’s school district sold a similar contract to the bank in 2003.

‘Sucker Punch’

“You have severe building needs, you have serious academic needs,” James Barker, superintendent of the Erie school district, said in a Nov. 2007 interview. “It’s very hard to ignore the fact that the bank says it will give you cash.”

Three years after JPMorgan paid the Erie schools $750,000, interest rates went the wrong way and the district paid the bank $2.9 million to cancel the contract.

“That was like a sucker punch,” Barker said. “It’s not about the district and the superintendent. It’s about resources being sucked out of the classroom. If it’s happening here, it’s happening in other places.”

In 2002 and 2003, relying on JPMorgan’s advice, Jefferson County refinanced $3 billion of sewer bonds with floating-rate debt and interest-rate swaps, public records show.

The bank had told county commissioners that the deals would cut the locality’s borrowing costs. In a swap, parties agree to exchange interest payments based on an underlying bond. The two sides pay each other amounts based on different rates, which vary based on a financial index.

Credit Ratings

In 2008, the insurers guaranteeing Jefferson County’s bonds lost their top credit ratings, after suffering subprime mortgage related losses. As a result, the yields on the bonds surged more than three-fold in one month to 10 percent.

The swaps compounded the increased borrowing costs because under the agreements the variable rates the banks paid the county declined.

Since then, Jefferson County’s annual sewer debt payment surged to $460 million, more than twice the $190 million it collects in revenue. The county couldn’t refinance the bonds without paying hundreds of millions of dollars in fees to get out of the swaps, and it didn’t have the money to do that.

JPMorgan is now in negotiations to prevent Jefferson County from filing the biggest municipal bankruptcy since Orange County, California defaulted in 1994.

Bank Losses

The Jefferson County transactions have also forced losses on the bank. Jefferson County owes JPMorgan more than $600 million for the swaps and the bank has so far not forced the county to pay.

The unregulated world of derivatives, which provided Wall Street banks with enormous fees, was ripe for corruption, said Taylor, the MSRB’s former executive director.

“Until you get strong ethical rules put in place nationwide, you’re asking for problems,” he said.

A December federal indictment of former Jefferson County Commission President Larry Langford alleged that JPMorgan paid an Alabama banker and former chairman of Alabama’s Democratic Party to get involved in the sewer financing deals. JPMorgan gave William Blount, a long-time friend of Langford, almost $3 million to arrange the swaps associated with the county’s sewer refinancing, the indictment said.

Bear Stearns Cos. paid Blount $2.4 million while Goldman Sachs Group Inc. paid him $300,000 after Langford told JPMorgan to include the firm as a condition of a $1.1 billion swap agreement in 2003, the indictment said. The banks weren’t charged.

Rolex, Jewelry

Blount helped Langford get a $50,000 loan and paid for jewelry, a Rolex watch and expensive clothing from Ermenegildo Zegna SpA and Salvatore Ferragamo SpA, the indictment said.

Langford, Blount and Blount’s associate Albert LaPierre, who was allegedly paid $219,500 by Blount for his help, have all pleaded not guilty. In response to a parallel civil complaint filed by the SEC, the men have argued that the agency doesn’t have jurisdiction over swaps.

Given the scope of the case so far, it’s not surprising that the SEC would consider charges against JPMorgan, said Jim White, a former financial adviser to Jefferson County. The county hired White after it had agreed to do the swap deals.

“If you know all that, and you’ve read the indictment, then you wouldn’t be surprised,” White said yesterday.

The Justice Department investigation of JPMorgan is looking at transactions across the country.

Collusion Allegation

In Pennsylvania, two school districts sued JPMorgan last year, alleging the bank colluded with a financial adviser to reap excessive, undisclosed fees on derivative deals. The lawsuits were dismissed by a federal judge, who said the transactions weren’t covered by securities laws.

The Erie City School District sued JPMorgan and a Pennsylvania financial adviser in federal court alleging they colluded to reap more than $1 million in excessive fees on a derivative deal.

Erie’s school board, which said it had “rudimentary, laymen’s understanding of the derivatives market,” met in September 2003 with JPMorgan banker David DiCarlo. DiCarlo told the board that the district could make $750,000 by selling a swaption, or an option on an interest-rate swap, according to an audiotape of a board meeting.

DiCarlo told the board he didn’t know how much JPMorgan would make on the deal. Pottstown, Pennsylvania-based Investment Management Advisory Group, which had been recommended to advise the district by DiCarlo, told board members that the district was getting a fair price for the contract, the tape shows.

The district ended up paying JPMorgan $1 million in fees for the $750,000 it had received upfront, according to data compiled by Bloomberg.

To contact the reporter on this story: William Selway in San Francisco at wselway@bloomberg.net. Martin Z. Braun in New York at mbraun6@bloomberg.net."

trader pleaded guilty Tuesday to criminal charges that he made trades based on inside information he got from a former Lehman Brothers broker

TO BE NOTED: From the NY Times:

"Guilty Plea in Insider Trading Case

By THE ASSOCIATED PRESS

A Florida trader pleaded guilty Tuesday to criminal charges that he made trades based on inside information he got from a former Lehman Brothers broker.

The trader, Jamil Bouchareb, 27, of Miami Beach, entered the plea to charges of conspiracy and securities fraud in United States District Court in Manhattan.

As part of a plea deal with prosecutors, Mr. Bouchareb agreed to serve up to four years in prison. He also must forfeit more than $1.5 million in profits from trades. Sentencing was set for Aug. 5.

Prosecutors say Mr. Bouchareb made trades based on tips from a broker, Matthew C. Devlin, who got his information from his wife, a partner at a public relations firm, from 2004 to 2008.

Mr. Devlin pleaded guilty in December to conspiracy to commit insider trading and securities fraud, admitting that he passed along inside secrets he learned from his wife, enabling them to earn $4.8 million in profits."

possible abuse of inside information by hedge funds and investment banks that have delicate information about new bond offerings

TO BE NOTED: From the NY Times:

"2 Men Accused by S.E.C. in Insider Trading Case

By ZACHERY KOUWE

The Wall Street salesman sounded cryptic: “You’re listening to my silence, right?”

But those few words, spoken to a valuable client in 2006, over a recorded telephone line, have now led to a landmark case of insider trading.

Winks and nods are common currency on Wall Street, but this case, disclosed Tuesday by the Securities and Exchange Commission, is significant because it is the first to focus on the vast, murky market for credit-default swaps, considered by some to be among the most dangerous instruments of the financial crisis.

The S.E.C. claims Jon-Paul Rorech, a salesman at Deutsche Bank, tipped off a money manager at a prominent hedge fund, Millennium Partners, about a deal involving the company that controls Nielsen Media, the television ratings service. Based on that information, the money manager, Renato Negrin, then bought credit-default swaps that rose in value when the deal was made public, eventually earning him a $1.2 million profit, the S.E.C. claims.

“Rorech and Negrin checked their integrity at the door and schemed to engage in insider trading of C.D.S. to the detriment of investors and our markets,” Scott W. Friestad, the deputy director of the S.E.C.’s Division of Enforcement, said in a statement.

Mr. Rorech, 36, through his lawyer Richard M. Strassberg of the law firm Goodwin Procter, denied violating any securities laws. He has been placed on paid leave pending the results of the investigation, which the S.E.C. said was continuing.

Mr. Negrin, 45, through his lawyer, Lawrence Iason, of the law firm Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, denied receiving insider information and said he would fight the charges.

“We have a zero-tolerance policy toward insider trading and Millennium requires every employee to certify annually that they are aware of and in compliance with our policies,” said Israel Englander, the founder of Millennium, which manages $11 billion. The firm has agreed to put the profits in escrow until the case is resolved.

Deutsche Bank said it would continue to look into the matter in cooperation with the S.E.C.

According to the S.E.C., the trouble began in July 2006, when Mr. Rorech, seeking to curry favor with Mr. Negrin, an important client, alerted the money manager to a coming bond offering. The deal was to finance the leveraged buyout of VNU, the Dutch media conglomerate that controls Nielsen. Many financial companies record the telephone calls of employees, and so the conversations were picked up. The men also spoke via cellphone, the S.E.C. said.

Mr. Negrin then bought credit-default swaps — instruments that serve as insurance policies on the bonds, in the case of default — and profited when the deal was announced a week later, the S.E.C. said.

Regulators also claim that Mr. Rorech was prohibited by Deutsche Bank from soliciting trades for credit-default swaps on VNU and other companies before he called Mr. Negrin. While this is the first time credit-default swaps have been the focus of an S.E.C. insider-trading investigation, regulators have recently called for increased transparency and regulation of the market.

The case also raises questions about the possible abuse of inside information by hedge funds and investment banks that have delicate information about new bond offerings and trade credit-default swap contracts. The contracts are primarily bought and sold through private negotiations between investors instead of on a public exchange, and typically bring in hefty fees for investment banks.

The S.E.C. has been examining trades of credit-default swaps since at least 2007 after Ben S. Bernanke, the Federal Reserve chairman, urged regulators to take action to prevent abuses in the market."

JPMorgan held “sham negotiations” about a potential merger and made public some confidential data

TO BE NOTED: From Bloomberg:

"WaMu Asks Judge for Probe of JPMorgan Merger Conduct (Update1)

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By Vivek Shankar

May 1 (Bloomberg) -- Washington Mutual Inc., the bankrupt former parent of the biggest U.S. bank to fail, asked a Delaware judge for an investigation of JPMorgan Chase & Co. related to its conduct in acquiring the failed bank.

The motion expands on a Texas case in which stakeholders in Washington Mutual seek billions of dollars from New York-based JPMorgan, alleging misconduct leading up to the $1.9 billion acquisition of Washington Mutual’s thrift unit.

Washington Mutual, based in Seattle, alleged JPMorgan held “sham negotiations” about a potential merger and made public some confidential data that drove down the value of its thrift unit. Joseph Evangelisti, a spokesman for JPMorgan, declined to comment on Washington Mutual’s investigation request filed today in U.S. Bankruptcy Court in Wilmington, Delaware.

Regulators seized Washington Mutual’s banking units and sold them to JPMorgan on Sept. 25. Washington Mutual filed for bankruptcy the next day.

The case is In re. Washington Mutual Inc., 08-12229, U.S. Bankruptcy Court, District of Delaware (Wilmington).

To contact the reporter on this story: Vivek Shankar in San Francisco at vshankar3@bloomberg.net"

the last thing they need is for the general population to think there could be some less than arms-length dealings going on behind the scenes

TO BE NOTED: From Zero Hedge:

"BlackRock Hires Vice Chairman Of U.S. Treasury Borrowing Advisory Committee

Posted by Tyler Durden at 11:30 AM

Bloomberg reports that Larry Fink's BlackRock has taken over R3 Capital Management, a $1.5 billion credit hedge fund started by ex-Lehman corporate bond trading desk head Rick Rieder. R3, which was previously part of Lehman Brothers and subsequent to Lehman's bankruptcy, was purchased by Rick Rieder and other management members for the paltry sum of $250 million.

Rieder has joined BlackRock as head of its fixed-income alternatives portfolio team and will continue to manage the R3 funds, according to a memo sent yesterday to BlackRock employees. Bobbie Collins, a spokeswoman for the New York-based firm, confirmed the memo today and declined to comment further.

Other members of the R3 team who are joining BlackRock include J. Richard Blewitt, Russell Brownback, Leland Hart, Michael Lipsky, Mike Phelps, John Stein, Josh Tarnow, Paul Tice, and Michael Weaver, according to the memo.

Lehman Brothers in October sold its 45 percent stake in R3for $250 million and made a new $250 million passive investment in R3’s fund, which can’t be divested until May 2011, R3 said in an October statement.

The R3 situation is curious as it basically occurred in a bankruptcy court firesale, with very little disclosure on just what assets and liabilities were being acquired by the R3 general partners from Lehman, and if any of the other Lehman firesales were an indication (Lehman U.S. brokerage assets, Neuberger Berman), the bankrupt estate likely lost out on any potential upside due to Judge Peck's desire to speed through any asset sale at warp speed. However, that should be a concern for the Lehman offical and ad hoc creditor committee (and their legal advisor Milbank Tweed) - if they were ok with hitting whatever lowball bid came their way, it is their issue.

What Bloomberg failed to catch however, is that by hiring Rieder as head its fixed income alternatives team, BlackRock is also retaining the very useful services of the vice chairman of the U.S. Treasury's Borrowing Advisory Committee, and is responsible for critical advisory memoranda to Tim Geithner such as this one, focusing on advice for Treasury debt issuances. Whether or not in this way BlackRock will have a hotline to Tim Geithner's cabinet on all fixed income issues, is not that clear: based on their hot reception of the PPIP they already have that. However, it is disappointing that the public-private incest continues unabated with no disclosure by either the government or BlackRock as to the full motives for this specific retention. This is even more troubling as BlackRock together with PIMCO will be the biggest beneficiaries of the private-public bait and switch, and the last thing they need is for the general population to think there could be some less than arms-length dealings going on behind the scenes. This most recent action would only reinforce these suspicions."

"there will be reasons for politicians to complain and to focus on the five winners to see how they 'abused' the system,"

TO BE NOTED:



NO PRIVATE HEDGE

By KAJA WHITEHOUSE Bridgewater Associates, the $71 billion money-management firm, has come out against participating in Treasury Secretary Tim Geithner's plan to get private investors to buy banks' toxic assets -- a week after saying it was interested in it.

In an investor note obtained by The Post, Bridgewater founder Ray Dalio gave Geithner's plan two thumbs-down, arguing that the hopes of would-be buyers probably won't be met by what the government is offering, especially when it comes to the sale of so-called legacy securities.

In the note, which is entitled, "Why We Decided Against Buying in the PPIP and Why We Doubt That It Will be Broadly Subscribed," Dalio cited economic and political concerns with Geithner's Public-Private Investment Program, dubbed PPIP, saying the numbers just don't add up -- at least when it comes to PIPP's legacy-securities program.

PPIP aims to remove toxic assets from the system by giving private investors, such as hedge funds and mutual funds, leverage to buy assets through two programs. The legacy-securities program enables those investors to buy older residential and commercial mortgage-backed securities that have been at the heart of many banks' troubles.

"When the program was first announced, we were originally interested" because the leverage the government was promising made the assets cheaper. "However, as things now stand, very little leverage is actually being offered via the 'Legacy Securities Program,' " Dalio wrote, pointing out that the leverage offered is just 1-to-1.

He also blasted the program for its initial design, saying it is ripe for conflicts, pointing to the plan to hire five asset managers to run everything on behalf of themselves, the government and the other investors.

"The managers are clearly in a conflict-of-interest position because they have both the government and the investors to please and because they will get their fees regardless of how these investments turn out," Dalio wrote.

Bridgewater's investors include pension funds, endowments and foreign governments.

He also questioned the political risks that the program's design could create, saying the limited number of managers "raises possibilities (or at least perceived possibilities) of them colluding because they all know each other."

And so regardless of whether the investments make or lose money, "there will be reasons for politicians to complain and to focus on the five winners to see how they 'abused' the system," he wrote.

Dalio's criticism of the program is sure to raise eyebrows, as his firm is one of just a handful that would have likely met Treasury's requirements for participation. What's more, Dalio is widely regarded as an influential expert, and recently was named by Alpha Magazine as the fifth-best money maker in the hedge-fund world, behind George Soros.

To be sure, Dalio doesn't slam everything about PIPP. Indeed, he doesn't slam the legacy-loan program, in which investors buy loans instead of securities and offers leverage of between 6-to-1 and 12-to-1.

But, "we aren't interested in illiquid loans," he said in his note.

Dalio didn't respond to a request for comment."

of negligent, unethical and outright criminal behaviour, ranging from high crimes to misdemeanours

From Willem Buiter:

Moral hazard - lite and strong

March 26, 2009 10:44pm

I have always been a believer in the screw-up theory of history (and particularly of disasters) rather than of the conspiracy theory of history (disasters). The financial crisis that has engulfed the world certainly offers massive evidence for the importance of screw-ups - errors, mistakes, misunderstandings, singular stupidity verging on idiocy, misjudgements and missed opportunities. I am, however, as more detailed evidence accumulates about the genesis of the financial collapse, becoming more and more impressed with the importance of misfeasance and malfeasance - of negligent, unethical and outright criminal behaviour, ranging from high crimes to misdemeanours.

Three representative examples:

(1) UBS agrees to pay $780m (£548m) in fines and to turn over a yet-to-be-determined number of US customer names to the US government as part of a settlement in which the Swiss bank admitted it helped thousands of clients evade taxes. I don’t understand why a bank that systematically and over many years promotes, aids and abets tax evasion, tax avoidance and tax fraud should be allowed to continue to exist. Why aren’t all those involved stamping license plates? Surely, these are criminal as well as civil offences?

(2) Bernie Madoff runs a $50 bn Ponzi scheme over many decades, right under the noses of the regulators in one of the two financial co-centres of the universe. It is possible Bernie Madoff was the only crook involved. Possible, but unlikely.

(3) Why is Barclays sufficiently desperate to avoid even partial UK government ownership, that it is willing to accept £7 billion of capital from the Middle East at a price well in excess of what was available from the UK Treasury? Is this not a clear breach of the fiduciary duty of the management and the board? Why is Barclays now even actively considering selling one one of its crown jewels, iShares, rather than accepting a public sector capital injection when this was on offer? Could it be related to the fact that Barclays runs one of the world’s largest ‘tax efficiency’ units, which it does not wish to be subject to closer scrutiny by a shareholder who is supposed to speak for the British tax payer?

On March 17, 2009, Barclays Bank obtained a court order banning the Guardian from publishing documents which showed how the bank set up companies to avoid hundreds of millions of pounds in tax. The gagging order was granted by Mr Justice Ouseley after Barclays complained about seven documents on the Guardian’s website which had been leaked to the Liberal Democrats’ deputy leader, Vince Cable.

I am sure there is some legal peg that Mr Justice Mousey can hang this gagging order on, but to me this is an extraordinary interference with the freedom of the press and the public’s right to know something that is clearly of significant public interest. I tend to forget that justice and the law are two quite unrelated concepts.

The internal Barclays memos showed executives from SCM, Barclays’s structured capital markets division, seeking approval for a 2007 plan to sink more than $16bn into US loans. Tax benefits were to be generated by an elaborate circuit of Cayman islands companies, US partnerships and Luxembourg subsidiaries.

These documents were leaked to Dr. Cable by a former employee of the bank, who also wrote a long account of how the bank works. It included the following telling paragraphs: “The last year has seen the global taxpayer having to rescue the global financial system. The taxpayer has already had a gun put to their head and been told to pay up or watch the financial system and life as we know it disappear into a black hole.

“It is a commonly held view that no agency in the US or the UK has the resources or the commitment to challenge SCM. SCM has huge amounts of resources, the best minds rewarded by millions of pounds. Compare this with HMRC [Her Majesty's Revenue & Customs] recently advertising for a tax and accounting expert with the pay at £45,000.”

“Through the use of lawyers and client confidentiality SCM regularly circumvents these rules, just one example of why HMRC will never, in its current state, be up to the job of combating this business.” ...

Financial nonfeasance, misfeasance and malfeasance thrive on opaqueness, complexity and lack of transparency

Another reason why banks (although quite willing to take the King’s shilling in the form of guarantees for assorted assets and liabilities; indeed Barclays is considering joining the UK government’s asset protection programme) may be reluctant to accept the state as a major shareholder is the more intense scrutiny of what the bank has on its balance sheet that this is likely to imply.

It is clear that the vast majority of the large border-crossing banks are continuing to exploit every accounting trick in the book to avoid recognising the marked-to-market losses on their dodgy assets. With most banks cursed with paper-thin equity cushions in relation to their assets, a more intense, let alone a quasi-forensic scrutiny of the balance sheet by a nosy expert paid for and acting on behalf of the government shareholder could easily precipitate a move from partial to full state ownership and thence into insolvency and an orderly restructuring or liquidation.

Too many bank insiders have exploited their monopoly of information and the control it bestows on them, to enrich themselves by robbing their shareholders blind. There has been a spectacular failure of corporate governance. Boards have foresaken their fiduciary duties. Surely, even the liability insurance taken out by board members ought not to shelter those who are guilty of, at best, such willfull negligence and dereliction of duty? Where are the class actions suits by disgruntled shareholders? Where are the board members in handcuffs?

Now that there is no meat left on the shareholder drumstick, the rogue managers and employees are going after a piece of the really juicy bird - the ever-patient tax payer. I hope they choke on it.

Moral hazard refers, in insurance parlance, to a situation where the likelihood of an insured event occurring can be influenced by the insured party, without the insurer being able to observe accurately the actions of the insured party that influence the outcome. So anything that creates incentives for excessive risk taking, like limited liability and investments in toxic assets that benefit from leverage in the form of non-recourse lending by the Fed, would create moral hazard in the insurance sense of the word - moral hazard lite.

What we have seen and continue to see in much of the border-crossing financial sector, however, is a rather more literal form of moral hazard: a lack of morals in some key participants in the financial system dance causing major hazards to the financial well-being of millions of powerless victims. Corrupted morality putting at risk genuine, wealth-creating financial intermediation, innovation and risk-taking. This is moral hazard strong.

Finance is one of the great social inventions of humanity; the division of labour and specialisation in effort and activity that are at the root of all prosperity depend on it. It makes me sick to see an entire branch of human endeavour brought into disrepute by the actions of a relatively small (but still far too large) number of masters of the universe. There will have to be a reckoning, and not just in the court of history."

Me:
"I am, however, as more detailed evidence accumulates about the genesis of the financial collapse, becoming more and more impressed with the importance of misfeasance and malfeasance - of negligent, unethical and outright criminal behaviour, ranging from high crimes to misdemeanours."

I agree. To me, Fraud, Negligence, Collusion, and Fiduciary Mismanagement, form the second most important cause of this crisis. Just think subprime. Yesterday, Secretary Geithner said the following:

" We saw huge gains in increased access to credit for large parts of the American economy, but those gains were overshadowed by pervasive failures in consumer protection, leaving many Americans with obligations they did not understand and could not sustain. The huge apparent returns to financial activity attracted fraud on a dramatic scale."

"The rising market hid Ponzi schemes and other flagrant abuses that should have been detected and eliminated."

"Consumer and investor protection is a critical component of the President's regulatory reform plan. We are developing a strong, comprehensive plan for consumer and investor regulation to simplify financial decisions for households and to protect people from unfair and deceptive practices."

These sound like a good beginning.

To me the most important cause of this crisis falls into this category as well. It is Looting:

http://www.nytimes.com/2009/03/11/business/economy/11leonhardt.html?ref=business

And “Looting” provides a really useful framework. The paper’s message is that the promise of government bailouts isn’t merely one aspect of the problem. It is the core problem.

Promised bailouts mean that anyone lending money to Wall Street — ranging from small-time savers like you and me to the Chinese government — doesn’t have to worry about losing that money. The United States Treasury (which, in the end, is also you and me) will cover the losses. In fact, it has to cover the losses, to prevent a cascade of worldwide losses and panic that would make today’s crisis look tame.

But the knowledge among lenders that their money will ultimately be returned, no matter what, clearly brings a terrible downside. It keeps the lenders from asking tough questions about how their money is being used. Looters — savings and loans and Texas developers in the 1980s; the American International Group, Citigroup, Fannie Mae and the rest in this decade — can then act as if their future losses are indeed somebody else’s problem."

And:

http://www.bankofengland.co.uk/publications/speeches/2009/speech374.pdf

"No. There was a much simpler explanation according to one of those present. There was absolutely no incentive for individuals or teams to run severe stress tests and
show these to management. First, because if there were such a severe shock, they would very likely lose their bonus and possibly their jobs. Second, because in that
event the authorities would have to step-in anyway to save a bank and others suffering a similar plight.
All of the other assembled bankers began subjecting their shoes to intense scrutiny. The unspoken words had been spoken. The officials in the room were aghast. Did
banks not understand that the official sector would not underwrite banks mismanaging their risks? Yet history now tells us that the unnamed banker was spot-on. His was a brilliant articulation of the internal and external incentive problem within banks. When the big
one came, his bonus went and the government duly rode to the rescue. The timeconsistency problem, and its associated negative consequences for risk management, was real ahead of crisis. Events since will have done nothing to lessen this problem, as successively larger waves of institutions have been supported by the authorities"

Finally, I hope that everyone noted this:

Treasury Proposes Legislation for Resolution Authority

"Treasury Secretary Timothy Geithner on Monday called for new legislation granting additional tools to address systemically significant financial institutions that fall outside of the existing resolution regime under the FDIC. A draft bill will be sent to Congress this week and several key features are highlighted below.

The legislative proposal would fill a significant void in the current financial services regulatory structure and is one piece of a comprehensive regulatory reform strategy that will mitigate systemic risk, enhance consumer and investor protection, while eliminating gaps in the regulatory structure. "

The power and ability and funds to seize large banks or financial concerns could soon be law. I said "could". Posted by: Don the libertarian Democrat"

JJ, Thanks for the comment. I saw that story :

http://www.spiegel.de/international/business/0,1518,druck-614539,00.html

I didn't know about Flowers. On Mr. Buiter's topic:

http://www.spiegel.de/international/business/0,1518,598499,00.html

"Yet again, dozens of investigators mounted simultaneous raids on numerous locations. But this time the investigations aren't into corruption. Investigators are looking into charges of speculation, market manipulation, breach of trust and deception, insider trading and incompetence among greedy finance managers at the Munich-based Hypo Real Estate, one of the German banks that has been the most deeply entangled in the finance crisis. The sums of money involved in this scandal far exceed those in the Siemens affair."

This has been going on, but not much noticed in the US:

"Subprime Swindlers Reconnect to Homeowners in Foreclosure Scams "

http://www.bloomberg.com/apps/news?pid=20601109&sid=aUL_Qh8cOzv8&refer=home

It also goes to Mr. Buiter's point. Posted by: Don the libertarian Democrat

Reuters reports Bill Gross has been hired to advise the U.S. government on the $118 billion of assets guaranteed in the Bank of America bailout.

From Zero Hedge:

"Bill Gross En Route To Becoming 4th Branch of Government

Posted by Tyler Durden at 11:08 AM

The most flagrant abuser of conflicts of interest in the current economy, PIMCO, has just gotten its tentacles even more entangled with the rotor of the government's economic shredder. Reuters reports Bill Gross has been hired to advise the U.S. government on the $118 billion of assets guaranteed in the Bank of America bailout. Pimco will be responsible for "evaluating Bank of America's holdings, including securities backed by residential and commercial loans, to help determine the company's losses."

The world's largest bond fund is opportunistically prepared for just these kinds of assignment, by recently raising a $3 billion distressed DISCRETIONARY fund for mortgage-backed security investing. This of course happened after PIMCO was selected for a comparable assignment, where it was picked to advise on $80 billion of credit union deposits. We fully expect Gross in his next monthly letter to announce the creation of a distressed fund investing/shorting Bank of America securities. But, of course, everything in Newport Beach is walled off from everything else. Last time we checked El-Erian was personally putting up chinese walls within the Sharkeez booths in Newport Beach. Sphere: Related Content"

Me:

Don said...

How did Gross miss the Flight To Safety in US Treasuries? I've assumed that he didn't think Lehman would be allowed to fail. Since then, he's been on a roll, betting on a full government guarantee. The conflict of interest is a possible time bomb if these investments fail and Pimco still makes a ton of money. Isn't this a bad brew?

Don the libertarian Democrat

March 2, 2009 12:02 PM

Witness the various forms of corruption underlying the current global financial crisis that started in the U.S.

From Forbes, via Jesse:

"Corruption
Corruption And The Global Financial Crisis
Daniel Kaufmann 01.27.09, 2:58 PM ET

It would be very convenient to start this article by stating that corruption is a challenge mainly for public officials in developing countries and that it is unrelated to the current global crisis.

I also wish I could claim that corruption has declined worldwide as a result of the global anti-corruption and awareness-raising campaign, the many effective anti-corruption commissions, and the recognition that poverty and culture are the reasons why corruption prevails.

But none of it is true. For starters, corruption is not unique to developing countries, nor has it declined on average. Some developing countries, such as Chile and Botswana, exhibit lower levels of corruption than some fully industrialized nations. And countries like Colombia and Liberia have made gains in recent years, while others, such as Zimbabwe, have deteriorated. Bribery remains rife in many countries, totaling about $1 trillion globally every year.

In truth, anti corruption commissions, revised laws and awareness-raising campaigns have had limited success. Focus on petty or administrative bribery has been misplaced at the expense of high-level political corruption.

One neglected dimension of political corruption is "state capture," or just "capture." In this scenario, powerful companies (or individuals) bend the regulatory, policy and legal institutions of the nation for their private benefit. This is typically done through high-level bribery, lobbying or influence peddling.

The cost to society of bribing a bureaucrat to obtain a permit to operate a small firm pales in comparison with, say, a telecommunications conglomerate that corrupts a politician to shape the rules of the game granting it monopolistic rights, or an investment bank influencing the regulatory and oversight regime governing them.

As a country becomes industrialized, its governance and corruption challenges do not disappear. They simply morph and become more sophisticated: Transfer of a briefcase stashed with cash is less frequent.

Instead, subtler forms of capture and "legal corruption" exist: an expectation of a future job for a regulator in a lobbying firm, or a campaign contribution with strings attached. In many countries this may be legal, even if unethical. In industrialized nations undue influence is often legally exercised by powerful private interests, which in turn influence the nation's regulations, policies and laws.

This has dire consequences: Witness the various forms of corruption underlying the current global financial crisis that started in the U.S.

There are multiple causes of the financial crisis. But we can not ignore the element of "capture" in the systemic failures of oversight, regulation and disclosure in the financial sector. Concrete examples abound.

First, the way Freddie Mac and Fannie Mae spent millions of dollars lobbying some influential members of Congress in exchange for, among other things, lax capital reserve requirements for these mortgage giants.

Second, how AIG's "small" derivatives unit located in London managed to obscure its accounts, be governed by lax regulatory oversight, and take inordinate risks that effectively brought down AIG's empire of 100,000 employees in 130 countries, accelerating the global financial crisis.

Third, how giant mortgage lenders such as Countrywide Financial switched regulators so to fall under the lax oversight of the Office of Thrift Supervision, which was funded by fees paid by the regulated banks (and which also supervised AIG's derivative unit).

Fourth, how in April 2004, during a 55-minute-long meeting at the Securities and Exchange Commission, the largest investment banks persuaded the SEC to relax its regulatory stance and allow them to take on much larger amounts of debt.

Finally, Madoff's giant Ponzi scheme, some of which appears to be plain fraud, though system-wide irregularities also point to subtler forms of corruption and capture. Years ago the SEC knew that Madoff, who had served on the commission's own advisory committee, had multiple violations and was misleading it in how he managed the funds of his customers. Yet the SEC failed in unmasking the Ponzi scheme.

Consequently, the study of corruption ought to include acts that may be legal in a strict narrow sense but where the rules of the game have been bent. Would this broader view of corruption result in different corruption ratings? Absolutely.

Let's look at the U.S. Over the past few years, traditional measures of corruption, such as the Corruption Perceptions Index by Transparency International, have placed the U.S. among the least corrupt nations in the world, currently ranking No. 18 among 180 rated countries.

In stark contrast, when in 2004 I calculated an index of "legally corrupt" manifestations (measured through the extent of undue influence through political finance and powerful firms influencing politicians and policy making), the U.S. rated in the bottom half among the 104 countries surveyed. Countries like the Netherlands, Norway, Denmark and Finland exhibited low levels of "legal corruption" (ranking Nos. 1 through 4, respectively). Yet the U.S. was rated 53rd, a few ranks below Italy. Chile rated 18th. Also rating better than the U.S. were countries like Botswana, Colombia and South Africa.

Corruption and capture are important causes of the crisis. But it is also urgent to face up to the consequences of "new world order." There is a rapid--unprecedented in peacetime--expansion in the role and scope of government in "market economies." This new overarching role of government, taking place in the U.S. and other large economies, is occurring at five levels.

First, the public sector is reshaping regulation; second, the government is becoming an owner of financial institutions; third, it is bailing out selected private concerns through a quick and massive infusion of funds; fourth, it is to provide almost a huge fiscal stimulus into infrastructure; and fifth, it intends to extend the social (and housing) safety net for millions of vulnerable citizens.

There are governance and corruption risks in each of these areas. Lobbyists are already at the door. These new risks are not exclusive to the U.S., but apply to other G-7 countries: Russia and China, among others. With the U.S. leading, current global estimates of disbursed and planned bailout funds approach $3 trillion, while cumulative global plans for fiscal stimulus near $2 trillion.

The new U.S. administration has stated its intention to address the challenges of transparency and accountability in its stimulus plan. The devil will be in the details. Merely creating an oversight institution will not do; system-wide reforms in incentives are required. Deep-seated transparency reforms need to be a cornerstone in the government's plan, and should apply to U.S. public agencies as well as domestic and international financial institutions. Regulations supporting effective disclosure, as well as improved audit, accounting and risk-rating standards, should be preferred to restrictive regulatory controls that block innovation and growth.

Humbly learning from other nations will also go a long way. The situation in the U.S. warrants studying other countries--for instance, Sweden and Chile, which successfully addressed their financial crises long ago. Chile also offers guidance on how to structure less corrupt and effective concessions in infrastructure, where the U.S. is a novice.

In order to restore confidence, citizens, entrepreneurs and bankers need to have renewed trust in the financial system. That way they can be persuaded that it is no longer a giant Ponzi scheme. Transparency is the key.

Daniel Kaufmann, a Chilean citizen, is senior fellow at the Brookings Institution, formerly director of governance at the World Bank. Read his blog at www.thekaufmannpost.net."

Me:

Posted by Donthelibertariandemocrat | 02/02/09 12:34 AM EST

I believe that Fraud, Negligence, Fiduciary Mismanagement, and Collusion are the second most important cause of this crisis.

Sadly, people are focusing on low interest rates, too much money out there, complex investments, etc. In other words, everything but people actually committing crimes and misleading clients. This also happened in the S & L Crisis.

If we focused on human agency explanations, rather than mechanistic explanations, it would be obvious that actual individual human beings are responsible for the severity of this crisis. It is most obvious in the selling of sub-prime and clearly fraudulent mortgages.

Thank you for joining those of us who the problem. Of course, this aspect of the crisis will be ignored, leading to another outbreak fairly soon. Keep your column handy for the next time.

Don the libertarian Democrat

but could nonetheless provide a great source of free entertainment to a nation suffering through a severe downturn

From Dean Baker:

"Do "Officials" Have Names? Post Conceals Obama Administration Effort to Hand Tax Dollars to Bankrupt Banks

The Washington Post must be shooting for the Pulitzer for incredibly bad reporting. How else can one explain an article on plans for bailing out the banks that never once conveys the basic fact to readers that many, if not most, of our banks are in fact bankrupt.

Instead the article uses euphemisms to conceal this fact. For example, it tells readers that the scope of the toxic asset "problem" has reached $2 trillion. What does this information tell readers. Do the people reading this article know that this sum vastly exceeds the capital of the banking system?

That seems unlikely. So most readers would not know that the Robert Rubins of the world are sitting on bankrupt banks. In other words, they would be shut down and put out of business if we let the market run its course.

Instead the Obama administration is looking to hand taxpayer dollars to the banks through a variety of complex mechanisms. The main reason for using complex mechanisms (rather than simply seizing bankrupt institutions) seems to be to conceal the fact that we are handing taxpayer dollars to bank shareholders and the wealthy executives who run them.

The Post is obviously eager to assist in this effort. At one point, it even is so polite to tell us that the administration doesn't want to limit executive compensation as part of getting welfare from taxpayers because "officials" are worried that such limits would discourage banks from participating.

Isn't it neat how the people who work in the Obama administration don't have names. Are they called "official 1," "official 2" etc.? Since "officials" are not always entirely truthful in what they tell reporters, it is important for readers to know who made such claims.

Who cares if some banks don't participate in getting handouts? Citibank, Bank of America, and many other major banks have no choice. They will go bankrupt without assistance. If some banks actually can get by without the government's assistance, why would we want to force it on them?

If their toxic assets have really frozen lending, although not actually jeopardized their solvency, then the shareholders would have a great lawsuit against any bank executive who refused to act in the interest of the shareholders in order to preserve their own high pay. Such instances would presumably be rare, but could nonetheless provide a great source of free entertainment to a nation suffering through a severe downturn.

In short, there is good reason to believe that the Obama administration is trying to slip hundreds of billions of dollars to bank shareholders and their top management. The Washington Post seems to be helping.

--Dean Baker"

And I say:

"then the shareholders would have a great lawsuit against any bank executive who refused to act in the interest of the shareholders in order to preserve their own high pay."

Right now, these shareholders are backing these bankers because they are at the point of being wiped out. But, when that happens, you might well see lawsuits for fiduciary mismanagement, collusion, fraud, and negligence.

In allowing such ghastly management by bankers, the shareholders must take some of the blame. But, given the situation the bankers have left their banks in, does anybody really doubt that there are grounds for some my listed complaints?

Posted by: Don the libertarian Democrat | January 31, 2009 11:37 AM

"We've been taught a very old lesson, which is that values matter."

From Justin Fox:

"Davos cross-post: Tony Blair & Co. are still bullish on capitalism

Posted by Justin Fox | Comments (4) | Permalink | Trackbacks (0) | Email This

Tony Blair says he recently ran into an old friend from his leftie university days."Ah, I told you," his friend said. "I told you capitalism is going to end."

Blair doesn't buy it. "The free enterprise system as a whole has not failed," he says. "The financial system has failed. ... We've been taught a very old lesson, which is that values matter."

He's saying all this up on stage in a session on "The Values Behind Market Capitalism" this morning. (I'm sitting near the back of the room, and the wifi connection is excellent.) But this is also sort of the big theme of the World Economic Forum this year: Something's broken with financial-market capitalism. Hardly any of the people who show up at an event like this want to replace it with some other kind of -ism. So they talk a lot about the need to temper the profit motive with values.

"One lesson we should not learn from the current financial crisis is that we should turn the clock back on global financial markets," says HSBC Group Chairman Stephen Green, who is next up after Blair. But neither can we go back to the credo of recent years: "If there's a market for it and it's legal I don't need to think about anything else."

And now it's more of the same from Pepsi's Indra Nooyi, with some added digs toward Wall Street: "As CEO of a Main Street company I think we have been tainted by the issues that have come up on the other street. ... 100% of Main Street has got great values and is doing fine. The other part of the economy has problems." She also thinks regulators need to be paid more.

Meanwhile, Shimon Peres likes "the Google" and thinks it's great that Sergey and Larry have gotten rich off it. But he thinks social democracy is great too.

So there you have it. The Third Way is upon us. More later, but I'm starting to feel like I'm being kind of rude by blogging while these people speak. It shows a lack of values, perhaps."

Moi:

1. donthelibertariandemocrat Says:
   Thursday, January 29, 2009 at 11:09 am

   In my opinion, we've been living in the third way for a while. Since it has basically suited us, and will take severe economic and social disruptions to change, probably not for the better, I suggest we keep it.

   I seem to agree with the ethics argument in the following sense: I feel that Fraud, Negligence, Fiduciary Mismanagement, and Collusion were rampant. We need a serious investigation and prosecution where crimes are discovered, and civil suits need to be pursued as well. Some of the advice, while not criminal, was not up to code, so to speak.

   I feel that this goes back to the S & L Crisis. I felt that many investors got away with fraud, etc., in that crisis. One of the excuses for not prosecuting people was that sheer stupidity often looks like fraud. I didn't buy it then, and I don't buy it now.

   In any case, I don't get the feeling that many people agree with me, so I expect another one of these pushing the legal envelope catastrophes in the near future.

   On the other hand, who can argue with better ethical behavior? Maybe people who argue that it's not economically efficient in distributing funds to them.

"there was no confusion on wall street and investment banks were not at all duped by rating agencies"

From the Skeptical CPA:

"J'accuse

"first, late-stage receivables securitizations were a criminal fraud perpetrated by the investment banks in conjunction with mortgage lenders. tavakoli asserts there was no confusion on wall street and investment banks were not at all duped by rating agencies--indeed, they knowingly exploited the conflicted interests and moral weakness of those agencies to sell trillions of loss-making loans onto unsophisticated investors. they did so in an effort to pass off investment bank losses while collecting fees on the packaging and distribution of those losses. ... nail not only their bankrupt leadership but these outfits themselves to a tree and light it on fire. i'll more than gladly accept permanently lower growth as the price paid for the modest semblance of moral rectitude, culpability and worthiness that might ensure that 'banker' is not merely another euphemism for 'parasite'," gaius marius (gm), 9 January 2009 at: http://declineandfallofwesterncivilization.blogspot.com/2009/01/start-with-indictments.html.

( THIS IS BASICALLY MY POSITION, AND WHY I SAY THAT FRAUD, NEGLIGENCE, FIDUCIARY MISMANAGEMENT, AND COLLUSION, ARE THE SECOND LEADING CAUSE OF THE CRISIS. )

gm has a link to a 6-minute interview with Janet Tavakoli (JT) of Chicago who says things like "there were no black swans, but black barts". See it. She's wonderful! I love you JT! JT is as critical of investment bankers (IB) who sold MBSs and CDOs as I've been. JT contends IBs knowingly packaged garbage which they sold to investors. The scheme was something akin to what I call a "secured debt, unsecured debt swap" prior to bankruptcy of an insolvent company. gm is more hostile to the IBs, than me. Imagine, he wants them burned at the stake. I'll settle for their merely visiting GSG's CNC guillotine! Chop, chop! For an explanation of what's going on see:

http://skepticaltexascpa.blogspot.com/2007/09/are-tehy-really-this-stupid.html.

http://skepticaltexascpa.blogspot.com/2007/12/of-quants-faith-and-alcoholics.html.

http://skepticaltexascpa.blogspot.com/2008/12/deprizio-doctrine-and-aig.html."

The Black Swan was the inability of the government to easily and effectively deal with the mess created. Most of the Investor Class believed that the government could. They were wrong.

"Bill Gross’s decision to back out of a $38 billion bond swap for GMAC LLC debt is paying off "

My question about Pimco and GMAC has been answered:

"Gross Wins ‘Game of Chicken’ Shunning GMAC Debt Swap (Update1)

Email | Print | A A A

By Caroline Salas and Ari Levy

Jan. 9 (Bloomberg) -- Bill Gross’s decision to back out of a $38 billion bond swap for GMAC LLC debt is paying off for his Pacific Investment Management Co. investors now that the U.S. government has bailed out the auto and mortgage lender( THIS LOOKS BAD IF PIMCO IS PARTICIPATING IN BUYING MORTGAGES FOR THE FED ).

Pimco, manager of the world’s biggest bond fund, reneged on a Dec. 15 agreement to join an investor group participating in GMAC’s debt swap and ignored warnings that bankruptcy might follow. While holders led by Dodge & Cox accepted as little as 60 cents on the dollar to reduce GMAC’s debt, the bonds Pimco kept soared as much as 83 percent, to 80.5 cents on the dollar, after GMAC won approval to become a federally backed bank( COLLUSION ? ).

Gross, whose fund beat 99 percent of its peers in the past five years, won a bet that the U.S. wouldn’t allow Detroit-based GMAC to fail because its car loans were needed to prop up General Motors Corp. The government approved GMAC’s conversion to a bank on Dec. 24, giving it access to the Treasury’s $700 billion rescue program even though the debt swap didn’t get the 75 percent participation required by the Federal Reserve.

“It was a game of chicken,” said Sean Egan, president of bond ratings firm Egan-Jones Ratings Co. in Haverford, Pennsylvania. “Some investors benefited whereas others were harmed. They were harmed because they relied on information that was provided by the federal government, which proved to be inaccurate.”

GMAC’s $797 million of 7.25 percent notes maturing in 2011, which Pimco owned as of September according to data compiled by Bloomberg, rose to 80.5 cents from 44 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Holders who tendered those notes for cash got 70 cents on the dollar.

Ownership Stake

GM owned all of GMAC until the Detroit-based automaker sold a 51 percent stake for $7.4 billion in 2006 to a group led by Cerberus Capital Management LP( SNOW WORKS HERE ), the New York-based private equity firm. In 2007, GMAC financed about 75 percent of the inventory at GM dealers and a third of GM car buyers.

Soured subprime mortgages and plunging auto sales led to $7.9 billion of losses over the past five quarters, raising doubt about the lender’s survival. GMAC applied to become a bank on Nov. 20 so it could get access to federal rescue funds, and the bond swap was designed to help the firm qualify. GMAC said the Fed would reject its application if less than 75 percent of the debt covered by the swap was tendered.

While Pimco was part of the investor group that negotiated better terms and then agreed to tender $10.5 billion in debt, the firm never surrendered its holdings. Gross’s refusal to participate cast doubt on whether the debt swap would be completed, sending GMAC bonds down as much as 5.5 cents.

Relaxed Rules

Gross, 64, told the New York Times last month he wouldn’t tender because Cerberus was trying to bully creditors to reduce their claims by as much as half. Gross told the Times he wanted Cerberus to put more money into GMAC. Pimco owned more than $340 million of GMAC debt as of Sept. 30, according to regulatory filings and Bloomberg data.

Only 59 percent of the bonds were tendered. Instead of allowing GMAC to fail, the government relaxed its requirements for the debt exchange and provided $6 billion in aid, saying that the lender’s collapse must be prevented to protect GM, the biggest U.S. automaker, and the nation’s economy. Cerberus and GM must divest most of their ownership under the accord.

“The government said that they needed X, and when push came to shove they were willing to settle for a lower number than X,” Egan said. “Certain investors either through direct knowledge or through other means( COLLUSION ? ) were able to determine that the Fed was willing to bend its rules for bank holding companies.”

Bond Rally

Pimco, a unit of Munich-based Allianz SE, manages almost $800 billion in assets, including the $128 billion Total Return Fund. Led by Gross, the fund returned 4.8 percent last year, in the 93rd percentile among its peers, according to data compiled by Bloomberg. It returned an average of 5.4 percent over the past five years, in the 99th percentile.

Mark Porterfield, spokesman for Pimco in Newport Beach, California, declined to comment. Analyst Adam Rubinson of Dodge & Cox, who led the bondholder committee, declined comment.

“The bonds have rallied tremendously based on the fact they’ve received this federal support( TRUE ),” said Kathleen Shanley, an analyst at bond research firm Gimme Credit LLC in Chicago. “There’s improved odds they would be paid off at 100 percent. So, that would be better than people who had to make concessions” in the exchange offer, she said.

The cost of credit-default swaps protecting against a GMAC default has plunged since Dec. 24 to levels that indicate about an 18 percent chance of default over one year, compared with 45 percent before the swap, according to CMA DataVision in London.

‘Dumb Luck’

The upfront price of five-year credit-default swaps on GMAC have dropped 28.5 percentage points to 15.5 percentage points, CMA data show. That’s in addition to 5 percentage points a year and means it would cost $1.55 million initially and $500,000 a year to protect $10 million of GMAC bonds. Credit swaps pay the buyer face value in exchange for the underlying bonds, or the cash equivalent, if the company defaults.

Shanley recommends investors take advantage of the rally and sell because GMAC may continue to report losses and require more capital. Should GMAC fail, the guaranteed( YES ) notes issued in the exchange would rank ahead of the old notes for repayment.

“The company is in a much more competitive position for the long term as a result of the bank holding company approval,” said Gina Proia, a spokeswoman for GMAC. “We needed to execute the things we did in order to get the approval. Everyone is in a better position.”

Holders of notes that were ineligible for the exchange, such as individual investors who held about $14.6 billion of so- called SmartNotes, also gained from the deal. GMAC’s 7.5 percent SmartNotes due in 2017 climbed to 41.5 cents on the dollar from 15 cents before the conversion, Bloomberg data show.

They’re benefiting from “dumb luck,” said Egan of Egan- Jones. “GMAC is certainly out of the woods for the next 12 months. After that, it’s an open issue.”

I think that Pimco has to step away from buying MBSs for the Fed. I like Pimco and William Gross, but this could easily lead to accusations of collusion and conflict of interest. They made out in the GMAC bailout, and they should be happy with that.