The Financial Industry Regulatory Authority (FINRA) recently issued a report outlining is its regulatory and examination priorities for 2012. The securities industry regulator is focusing on conduct and products meant to beat the market that are unsuitable investments for many investors.
Federal prosecutors plan to file criminal actions against four former traders who allegedly overvalued collateralized debt obligations (CDOs) sold by Credit Suisse in order to increase their commissions. The events occurred in 2008 and resulted in a $2.85 billion write down by Credit Suisse. Credit Suisse fired the traders and cooperated with authorities in their investigation. (“Ex-Traders at Credit Suisse Expected to Be Charged With Fraud,” New York Times, Dealbook).
Continue reading "Credit Suisse Traders Face Criminal Charges for Mortgage Investment Fraud" »
Given the array of exotic alternative investments being sold to the public, it’s logical that many investors often don’t understand what they are buying. What is even scarier is that it is likely their professional investment adviser doesn’t understand the alternative investment either. Investment advisers – 75 percent of them – admit they do not understand alternative investments. Notwithstanding their puzzlement, 50 percent of advisers said they intend to increase their use of them in their clients’ accounts this year. They could use some help, however, because of alternative investments are so confusing. (“Alternatives spur anxiety,” InvestmentNews).
Unsophisticated state and local government officials have been sold billions of dollars of flawed financial products by Wall Street banks, leaving taxpayers on the hook for even more. The banks advised the governments to issue auction rate bonds to lower their financing costs and purchase interest rate swaps to protect the governments if the market moved in the wrong direction. The officials did not understand that the market was controlled by the banks and that the banks could impose penalties when the products unraveled, which they did.
Continue reading "Wall Street Professionals Fleece Government Amateurs - Main Street Suffers" »
It is a basic principle of Good Government 101 that when a government issues a contract, it should be subject to competitive bidding rather than being doled out to a crony of some bureaucrat. Yet eighty percent of bond underwriting contracts that are issued by state and local governments to Wall Street banks are not done by competitive bidding. Instead “local governments just hand the bid over to the bank that tosses enough combined hard and soft money at the right politicians,” according to Matt Taibbi (“How Banks Cheat Taxpayers”).
Continue reading "Wall Street Continues to Cheat Main Street" »
It’s getting crazy out there in ETF land. Leveraged exchange traded funds like Direxion Funds that deliver two times the return of a benchmark are being jacked up to three times the return. Many market observers believe that the highly leveraged exchange traded funds are contributing to the market volatility that is causing investors to flee the stock market. (“Beware of ETFs On Steroids,” Bloomberg Business Week, Markets & Finance).
Continue reading "Some Exchange Traded Funds (ETFs) Are Morphing Into Monsters" »
Judge Jed S. Rakoff stunned the SEC and Citigroup by rejecting their proposed $285 million settlement of a case involving Citigroup’s sale to investors of a CDO that Citigroup allegedly “built to fail” and bet against. The judge’s decision made a dent in the SEC’s longstanding policy (“hallowed by history, but not by reason”) of allowing defendants to settle without admitting to any of the underlying facts. Judge Rakoff ordered the parties to be ready to try the case on July 16, 2012.
Continue reading "Judge Rejects Citi's Efforts to Buy Justice " »
Laurence D. Fink, chief executive officer of BlackRock Inc., blasted sellers of synthetic (derivatives-based) exchange traded funds as damaging to the industry, according to InvestmentNews (“BlackRock’s general, Societe Generale in ETF ‘street brawl’”). BlackRock is the world's largest ETF provider and one of the world’s largest money managers.
Continue reading "Are Certain ETFs Socially Irresponsible?" »
Morgan Stanley’s motion to dismiss a class action involving “built to fail” structured products has been denied as to the fraud claims against it, and the case will go forward. The plaintiffs – a group of Singapore retail investors – allege that Morgan Stanley committed fraud in selling them sold them $154.7 million of Pinnacle Notes. The notes, which lost almost 100 per cent of their value during the financial crisis, were linked to synthetic (i.e., derivatives-linked) collateralized debt obligations (CDOs) in 2006 and 2007.
Continue reading "Morgan Stanley Bitten by 'Built to Fail' Structured Products" »
The National Credit Union Administration (NCUA) announced that it has reached settlements with Citigroup and Deutsche Bank regarding potential claims relating to the sale of residential mortgage-backed securities to five failed wholesale credit unions. NCUA said that it is the first regulatory agency to recover losses on behalf of failed financial institutions that resulted from investments in residential mortgage-backed securities.
The Securities and Exchange Commission says it has stepped up its enforcement activities during the 2011 fiscal year ended September 30, filing a record 735 enforcement actions resulting in disgorgements and penalties totaling $2.806 billion, according to InvestmentNews (“SEC sets record in crackdown on advisers, B-Ds”). It reportedly filed 146 enforcement actions against investment advisers and investment companies in 2011, a 30% increase over last year and 200% more than 2002 when the SEC filed 52 cases. With regard to broker-dealers, the SEC says it filed 112 enforcement actions, a 60% increase over 2010.
Continue reading "Securities Violations Increase" »
When world markets move significantly in apparent response to major macroeconomic news, even supposedly “uncorrelated assets” move in unison with them, according to Jason Zweig’s Wall Street Journal article, “Caging Raging Contagion.” Such a significant move occurred last week when the Italian government and bonds collapsed over its fiscal problems, and everything else fell, too.
Continue reading "High Correlations Among Asset Classes Means There's No Place To Hide" »
Investors in Europe withdrew $1.9 billion from synthetic (i.e., derivative-based) exchange-traded funds last month, according to Bloomberg (“Synthetic ETFs Lose $1.9B in Europe”). On the other hand, physically backed funds had inflows $3.11 billion.
Continue reading "Investors Flee From Synthetic ETFs" »
Unfortunately, many investors are experiencing first hand the truism that hedge fund managers rarely outperform the market on consistent basis.
John Paulson, the hedge fund manager who made a killing when Goldman Sachs let him select bad CDO assets, which he turned around and bet against, is having a tough time in 2011. His hedge fund has declined nearly 50% this year as a result of a massive positions in Bank of America, which had lost half of its value by October, Rupert Murdoch’s scandal-plagued News Corp., which owns Fox News, and Sino-Forest Corp., which imploded after an accounting scandal.
Continue reading "Hedge Fund Heroes Getting Battered" »
MF Global Holdings, Ltd. (“MF Global”) filed the eighth largest bankruptcy petition in U.S. history on Monday November 1, seeking to reorganize its debt structure and continue to operate. MF Global, the broker-dealer unit, faces liquidation. The filings occurred after a potential buyer of MF Global’s assets, Interactive Brokers Group, “bolted over a discrepancy of hundreds of millions of dollars in the beleaguered securities firm’s books,” according to the Wall Street Journal (“MF Global Collapses as Books Questioned”).
Continue reading "Everything is not 'Fine' at MF Global Holdings" »
Many commentators have noted recently that the Wall Street meltdown of 2007-2008 was not a “black swan” – that is, an unprecedented and therefore unpredictable occurrence. Named for an influential 2007 book titled The Black Swan by investment fund manager Nassim Nicholas Talib, the black swan was used as a metaphor to explain why humans rely too much on the past to predict future events, and it has since been used as a defense by Wall Street to justify its inability to predict the 2008 crash. Talib himself maintains that the 2008 crisis was not a black swan event because, unlike the avian rarity of nature, it was predictable. The crisis was not only predictable, but it was actually predicted by many analysts whose voices were either ignored by the firms that employed them, or drowned out by the exuberant hype of brokers pushing the firms’ latest financial products without regard for their soundness.
Continue reading "The 2007-2008 Financial Crisis was not a 'Black Swan' Event" »
Reuters blogger Felix Salmon seems to see evidence of the SEC colluding with banks to let them off the hook for most of their “built to fail” synthetic (derivatives-based) CDOs (see “Is the SEC colluding with banks on CDO prosecutions?”). What has raised eyebrows was an email from a Citigroup spokesperson saying that Citigroup has settled all its potential liabilities with the SEC by agreeing to pay $285 million in a case involving a single collateralized debt obligation (CDO) transaction (i.e., Class V Funding III). According to this email, Citigroup believes “the SEC has completed its CDO investigation(s) of Citi” and will not be examining any of the dozens of similar CDO deals.
Continue reading "Is the SEC Selectively Enforcing the Securities Laws?" »
Many investors in alternative investments are in for unpleasant surprises. Alternative investments are very popular these days, as traditional stock and bond investments are not doing well. Alternative Investments include a wide variety of investments that fall outside the traditional stock and bond categories. Examples include structured products (such as principal protected notes and reverse convertibles); hedge funds; private equity; nontraded REITs; niche, leveraged, inverse leveraged, and synthetic exchange traded funds; and many others.
Continue reading "Alternative Investments - High Risk 'Pigs in a Poke'" »
Liquidity concerns are swirling around Morgan Stanley. Worries of defaults by European banks or governments are eroding the value of its assets and derivatives contracts. Hedge funds are so concerned that they have begun to withdraw cash from their prime brokerage accounts at Morgan Stanley. In the face of these developments, Morgan Stanley is telling investors not to worry, that its liquidity is strong.
Continue reading "Is Morgan Stanley Telling the Truth about its Condition?" »
Morgan Stanley’s credit default swaps and bond yields are climbing, signaling that investors are concerned about the firm’s creditworthiness. The price of a credit default swap on Morgan Stanley represents the price demanded to insure its debt against default. The higher the price, the greater the risk the bank will default, in the eyes of its insurers. According to Moody’s Analytics, Morgan Stanley’s credit default swap price level implies a credit rating of Ba2, which is non-investment grade, speculative – aka junk. That is down from Ba1 (also junk level) a month ago and vastly below the high-grade rating of A2 assigned by Moody’s Investors Service (a different Moody’s company).
Continue reading "Storm Clouds Over Morgan Stanley" »
