Posts filed under “Finance”

Regulating Big Firm Bad Behavior

In today’s WSJ, we learn of the proposed shift in standards for retail stock brokers — from “Suitability” to “Fiduciary:”

“Buried in President Obama’s proposed regulatory overhaul is a change that could upend Wall Street: Brokers would be held to a higher “fiduciary” standard that would compel them to place their client’s interests ahead of their own.

Currently, brokers are only required to offer investments that are “suitable,” which means they can’t put clients in inappropriate investments, such as a highly risky stock for an 80-year-old grandmother. The move could change the way products are sold and marketed and even how brokers are compensated.”

While this is important, the entire structure of the brokerage industry — incentivized to be long only and fully invested at all times — is what destroyed so many investors in 2008.

As we have noted in the past, this manifests itself in many ways — but most egregiously, in the Penalty Box. It is a very misaligned incentive system, one that penalizes brokers who did the right thing. Back in March ’09, I noted two Merrill Brokers who had put 75% of their asset base is in money market funds early in 2008. This pays essentially nothing to the broker — but preserves the clients capital. When 2009 rolls around, their manager calls them into his office, and says: “Bad news, boys. Your revenues dropped so much last year you are in the Penalty Box. As per your contract, your payout for this year is down to 25-30%.”

That is a horrific misalignment of incentives. And while a fiduciary obligation on retail brokers is an okay idea, if it is going to be remotely effective, IT MUST ALSO BE APPLIED TO THE BROKERAGE FIRMS ALSO.

The Penalty Box is “Exhibit A” as to why.




Big Firm Conflict of Interest: The Penalty Box (March 3rd, 2009)

Big Change in Store for Brokers in Obama’s Oversight Overhaul
WSJ, JUNE 19, 2009

Category: Finance, Investing, Regulation

Green Shoots Everywhere ?

Two interesting articles in today’s NYT touch upon some of our favorite themes: Indebtedness of Consumers, the poor condition of bailed out banks, and the ongoing softness in the labor market. The first is a front page article on the Credit Card firms reducing debt for delinquent borrowers, noting “The creditors would rather have a…Read More

Category: Bailouts, Credit, Employment, Finance, Markets, Real Estate

Technology & Finance Bubble Aftermaths

Another pair of charts courtesy of the terrific Ron Griess of The Chart Store. The first looks at the 2000 bubble in Technology, and how stocks behaved after that crash. The second is a look at a similar boom and bust — the financial sector bubble and collapse. The technology boom was actually bigger than…Read More

Category: Finance, Markets, Technical Analysis, Technology

Worsening Bank Loans

Floyd Norris on the bad  — and worsening — loan problem: “OVERALL loan quality at American banks is the worst in at least a quarter century, and the quality of loans is deteriorating at the fastest pace ever, according to statistics released this week by the Federal Deposit Insurance Corporation. The report highlighted that even…Read More

Category: Credit, Finance

End of “Dumb Money” Era for Private Equity

Dan Gross:

“Nine of the 10 biggest leveraged buyouts were done between 2006-2007. They bought into cyclical industries right at the peak and loaded a ton of debt on them, which is not a winning proposition.”

May 01, 2009

Category: Finance, Video

How Over-Extended is FDIC Insurance ?

Very. At least, that’s according to Rolfe Winkler’s analysis of the Depositor Insurance reserve ratio: > Rolfe: [Look at] FDIC’s 12/31/08 balance sheet. Note at the bottom of that link the estimate for total insured deposits: from Q3 to Q4 it increased only a smidge, to $4.8 trillion from $4.6 trillion. Odd, no?  Why such…Read More

Category: Bailouts, Credit, Finance

Goldman Sachs, Morgan Stanley vs Rivals

> Source: Resurrection on Wall Street ANDREW BARY Barron’s March 16, 2009

Category: Bailouts, Digital Media, Finance

iBanks Grabbed $50 Billion in AIG Bailout Cash

Yesterday, in Backdoor Bailouts for Goldman Sachs?, we noted that GS, as well as Morgan Stanley, Merrill Lynch, and Deutsche Bank, were all made whole on their bad bets with AIG. That’s right, what was misleadingly described as systemic risk turned out to be in large part little more than a counter-party bailout — money…Read More

Category: Bailouts, Corporate Management, Finance, Legal, Markets, Politics, Really, really bad calls

Failings in Structured Finance Agency Conflicts

As we begin to address regulatory reform in the financial services industry there is a clear consensus view that the credit rating agencies played a role in fomenting the crisis environment. In February 2007, Joe Mason and I presented a paper warning of the risks that CDO market problems would present in the capital markets…Read More

Category: Credit, Derivatives, Finance, Markets, Real Estate, Really, really bad calls, Research

Volcker Urges More Transparency in Hedge Funds/Private Equity

Live! From Capitol Hill: Former Fed Chairman Paul Volcker Testifies in Front of Senate Banking Committee

Bloomberg, February 05, 2009

Category: Finance, Video