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.
Ordinarily, the evidence presented in a FINRA arbitration is kept “confidential” and secret from the public. That’s the way the securities industry likes it, because it really does not want the public to see the evidence against it. But in its zeal to try to overturn the largest amount ever awarded to individual investors in a FINRA arbitration, Citigroup inadvertently allowed New York Times columnist Gretchen Morgenson to have a look at the evidence that was presented to the arbitrators in that case. What she found is the subject of her recent article entitled “Secrets of a Sales Machine.”
Continue reading "MAT/ASTA Cases Reveal the Seamy Side of Wall Street" »
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" »
Just as a low tide near the seashore can reveal shipwrecks, a falling stock market often reveals misconduct by investment advisers. This is particularly true with respect to an investment adviser’s duty to recommend only investments to a customer that are suitable in light of the customer’s investment objectives, status in life and risk tolerance. Unfortunately many investors only learn that their advisers have violated this duty when adverse market conditions develop.
Continue reading "Market Turmoil Expected to Precipitate an Avalanche of Suitability Claims" »
On Friday, August 5, 2011, Standard & Poors, one of the three major credit rating agencies, downgraded U.S. Treasury obligations for the first time ever. The new grade is AA+, one notch below the highest AAA rating. The other two major ratings agencies, Moody’s and Fitch, have not announced a downgrade of U.S. debt at this time. Upon the announcement, investors heavily sold Treasuries, which dropped sharply sending yields higher.
Continue reading "S & P Downgrades U.S. Debt - Investors Remain Nervous" »
JP Morgan Chase will pay $228 million to settle SEC charges that it rigged nearly 100 transactions involving municipal-bond auctions, according to David Benoit’s and Jessica Holzer’s Wall Street Journal article entitled “J.P. Morgan Settles Bid-Rig Case.” There are concurrent settlement agreements with various states. The SEC has settled similar cases against Bank of America for $137 million and UBS AG for $160.2 million.
Continue reading "JP Morgan Pays $228 Million to Resolve Bid-Rigging Charges" »
During a recent appearance on CNBC, Meredith Whitney repeated her warning about the municipals market, but downplayed the timing of the wave of defaults she sees coming, according to a Wall Street Journal blog entitled “Meredith Whitney Defends Self on CNBC, Warns of Another Big Downdraft in Housing.” She was pressed about her earlier prediction about hundreds of billions of dollars in muni defaults, and responded that the timing was irrelevant.
Continue reading "Whitney Continues to Predict Huge Problems in the Municipal and Housing Markets" »
Meredith Whitney argues that States’ unfunded obligations threaten the economic recovery in her Wall Street Journal article “The Hidden State Financial Crisis.” Is she correct? While some experts dispute her analysis, people should remember that she called the subprime crisis in 2005 at a time when many of her counterparts scoffed. As she set them out, the essence of her current opinions are essentially as follows.
Continue reading "Do State and Local Government Debt Pose a Threat to the Economy?" »
Small unrated municipal bonds whose coupons are not backed by tax revenues (“mini munis”) are a class of troubled assets that are imbedded in some seemingly safe municipal bond funds, according to a SmartMoney article by Russell Pearlman entitled “The Growing Impact of ‘Mini Muni’ Bonds.” Thousands of them are missing payments and may impair the performance of municipal bond funds that hold them, according to the article.
Continue reading ""Mini Munis" Haunt Bond Funds that Own Them" »
In May of 2008 a small city of Vallejo, which is just north of San Francisco, filed for bankruptcy. According to an article by Roger Lowenstein in the NY Times, the cities bankruptcy could offer "a sneak preview of what could be the latest version of economic disaster." At the time, the nation paid little attention to what happen because the nation was "too busy watching banks fail." Now almost three years later, the banks have recovered but Vallejo still remains in bankruptcy.
A Financial Industry Regulatory Authority (FINRA) arbitration panel in Denver has ordered Citigroup Global Markets, Inc. to pay over $54 million in damages for its abusive conduct in marketing and managing various investments including municipal bond hedge funds known as MAT/ASTA. The arbitration panel issued their award on April 8, 2011.
According to an article from InvestmentNews.com, the Financial Industry Regulatory Authority (FINRA) has ordered Southwest Securities Inc to pay $650,000 to “resolve claims over improper short sales.” FINRA said that the improper sale caused a $6.3 million loss for the firm.
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Just as unscrupulous teachers manipulate student performance to increase their own fortunes, so some mutual fund managers are over-pricing their bond portfolios to attract investors. Bond values are not easy to determine in the current atmosphere of state and municipal budget shortfalls and fewer tax receipts. Generally traders and portfolio managers prefer to rely on comparables for proper bond values but that is not always possible. The Securities and Exchange Commission has noticed the problem and started an investigation into how bond funds price risk in their portfolios.
Continue reading "Some Municipal Bond Funds May Be Fudging Their Net Asset Values" »
As panic has come over the muni market with widespread fears of default at all levels, many municipal bond investors are still ignoring warnings forecasts of possible defaults and are relying on the fact that a huge portion of the municipal bonds issued are “general obligations” of the states and cities issuing the bonds. Although the default rate historically on general obligation bonds has been small - only three defaults have occurred since 1970, this may change.
Continue reading "Risk of Tax-Backed Municipal Bonds Grows" »
Citigroup's problems with its proprietary MAT/ASTA municipal arbitrage funds just keep growing. A recent Wall Street Journal article by Suzanne Barlyn entitled “Citi Units Must Pay $6.4 Million Over Muni-Arbitrage Loss,” which concerns Citi’s disastrous MAT/ASTA municipal arbitrage funds, reports a significant $6.4 million award issued against Citigroup in a MAT/ASTA case by a Financial Industry Regulatory Authority (FINRA) arbitration panel. Despite their high risks, the funds were marketed as an alternative to municipal bond portfolios. The funds also falsely emphasized their strong risk management and controls.
The quality and timeliness of information that state and local governments are disclosing about their finances is becoming a growing concern for both investors and regulators. The Securities and Exchange Commission (SEC) is searching for cases in which municipalities failed to warn investors of fiscal problems. Recently, the SEC brought a case against New Jersey, claiming that the state failed to give bond investors a full picture of its large pension obligations.
All is not well in the Land of Lincoln. The state’s governor’s office confirmed this week that the Securities and Exchange Commission (SEC) has launched an inquiry into public statements by Illinois officials concerning the state’s underfunded pension fund.
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Municipal bond funds are hemorrhaging. Investors removed $4 billion from municipal-bond funds in the week ended January 19, the largest outflow since Lipper began measuring muni fund flows in 1992, said Kelly Nolan and John Kell in their Wall Street Journal article, “Record $4 Billion Exits Muni Funds.” The previous record was a $3.1 billion outflow last November. $1.5 billion. It was the 10th consecutive week of outflows, which total approximately $20.6 billion. The four-week moving average was an outflow of $2.2 billion, up from $1.9 billion in the previous four-week period.
Continue reading "Investors Exit Municipal Bonds as Congress Explores Bankruptcy for States" »
According to an article by Charles Riley for CNN Money they are. Municipal bonds continued to sell off last week with investor worried about state and local government budget shortfalls highlighted by the media in recent weeks. States such as California and Illinois face budget shortfalls of billions of dollars, making the growing fears easy to comprehend. Meredith Whitney, a prominent bank analyst, went on 60 Minutes in front of a nation audience and gave a “doomsday prediction of up to 100 sizable defaults in the muni bond market”; adding to the growing concern that states, along with cities and small countries with default on their municipal bonds.
Continue reading "Are Municipal Bond Fears Overblown?" »
Recent moves by The Vanguard Group highlight the increasing risks in the municipal bond sector. As a result of volatility in the municipal bond market, Vanguard has withdrawn documents it filed with the Securities and Exchange Commission (SEC) to launch three new municipal bond index funds and three municipal bond exchange-traded funds.
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