Posts filed under “Legal”

SEC: Brokerage Collapse Was Our Fault

“The last six months have made it abundantly clear that voluntary
regulation does not work."

-Christopher Cox,  Chairman Securities and Exchange Commission

Excellent timing — I have an editorial in this weekend’s Barron’s on exactly this sort of blind deregulation:

"The chairman of the Securities and Exchange Commission, a longtime proponent of deregulation, acknowledged on Friday that failures in a voluntary supervision program for Wall Street’s largest investment banks had contributed to the global financial crisis, and he abruptly shut the program down . . .

The program Mr. Cox abolished was unanimously approved in 2004 by the commission under his predecessor, William H. Donaldson. Known by the clumsy title of “consolidated supervised entities,” the program allowed the S.E.C. to monitor the parent companies of major Wall Street firms, even though technically the agency had authority over only the firms’ brokerage firm components.

The commission created the program after heavy lobbying for the plan from all five big investment banks. At the time, Mr. Paulson was the head of Goldman Sachs . . .

The announcement was the latest illustration of how the market turmoil was rapidly changing the regulatory landscape. In the coming months, Congress will consider overhauls to the regulatory structure, but the markets and the regulators are already transforming it in response to events . . .

The division’s “failure to carry out the purpose and goals of the broker-dealer risk assessment program hinders the commission’s ability to foresee or respond to weaknesses in the financial markets,” the report said."

Scathing stuff . . .

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Source:

S.E.C. Concedes Oversight Flaws Fueled Collapse   
STEPHEN LABATON
NYT, September 26, 2008    
http://www.nytimes.com/2008/09/27/business/27sec.html

Category: Bailouts, Legal, Politics, Taxes and Policy

Short Selling Ban Spreads Around the World

Category: Legal, Markets, Short Selling, Taxes and Policy

SEC Induced Mother-of-All Short Covering Rallies

Back in July, Bill King wrote up something called "SEC Induced Mother-of-All Short Covering Rallies." Its all the more relevant today, and is reprinted with permission after the jump . . .

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Category: Bailouts, Legal, Markets, Psychology, Short Selling

SIPC: Lehman To Be Liquidated

Category: Corporate Management, Credit, Legal, M&A, Short Selling, Valuation

How SEC Regulatory Exemptions Helped Lead to Collapse

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The losses incurred by Bear Stearns and other large broker-dealers were
not caused by “rumors” or a “crisis of confidence,” but rather by
inadequate net capital and the lack of constraints on the incurring of
debt.

Lee Pickard, former director, SEC trading and markets division.

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Is Financial Innovation just another word for excessive and reckless leverage?

Apparently so.

As we learn this morning via Julie Satow of the NY Sun, special exemptions from the SEC are in large part responsible for the huge build up in financial sector leverage over the past 4 years — as well as the massive current unwind

Satow interviews the above quoted former SEC director, and he spits out the blunt truth: The current excess leverage now unwinding was the result of a purposeful SEC exemption given to five firms.

You read that right — the events of the past year are not a mere accident, but are the results of a conscious and willful SEC decision to allow these firms to legally violate existing net capital rules that, in the past 30 years, had limited broker dealers debt-to-net capital ratio to 12-to-1.

Instead, the 2004 exemption — given only to 5 firms — allowed them to lever up 30 and even 40 to 1.

Who were the five that received this special exemption? You won’t be surprised to learn that they were Goldman, Merrill, Lehman, Bear Stearns, and Morgan Stanley.

As Mr. Pickard points out that “The proof is in the pudding — three of the five broker-dealers have blown up.”

So while the SEC runs around reinstating short selling rules, and clueless pension fund managers mindlessly point to the wrong issue, we learn that it was the SEC who was in large part responsible for the reckless leverage that led to the current crisis.

You couldn’t make this stuff up if you tried.

Here’s an excerpt from The Sun:

“The Securities and Exchange Commission can blame itself for the current crisis. That is the allegation being made by a former SEC official, Lee Pickard, who says a rule change in 2004 led to the failure of Lehman Brothers, Bear Stearns, and Merrill Lynch.

The SEC allowed five firms — the three that have collapsed plus Goldman Sachs and Morgan Stanley — to more than double the leverage they were allowed to keep on their balance sheets and remove discounts that had been applied to the assets they had been required to keep to protect them from defaults.

Making matters worse, according to Mr. Pickard, who helped write the original rule in 1975 as director of the SEC’s trading and markets division, is a move by the SEC this month to further erode the restraints on surviving broker-dealers by withdrawing requirements that they maintain a certain level of rating from the ratings agencies.

“They constructed a mechanism that simply didn’t work,” Mr. Pickard said. “The proof is in the pudding — three of the five broker-dealers have blown up.”

The so-called net capital rule was created in 1975 to allow the SEC to oversee broker-dealers, or companies that trade securities for customers as well as their own accounts. It requires that firms value all of their tradable assets at market prices, and then it applies a haircut, or a discount, to account for the assets’ market risk. So equities, for example, have a haircut of 15%, while a 30-year Treasury bill, because it is less risky, has a 6% haircut.

The net capital rule also requires that broker dealers limit their debt-to-net capital ratio to 12-to-1, although they must issue an early warning if they begin approaching this limit, and are forced to stop trading if they exceed it, so broker dealers often keep their debt-to-net capital ratios much lower.

Chalk up another win for excess deregulation . . .

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Source:
SEC’s Old Capital Approach Was Tried – and True
Lee A. Pickard
SECTION: VIEWPOINTS; Pg. 10 Vol. 173 No. 153
American Banker, August 8, 2008 Friday

http://www.americanbanker.com/article.html?id=20080807ZAXGNH3Y&queryid=2110207978&

Ex-SEC Official Blames Agency for Blow-Up of Broker-Dealers
They constructed a mechanism that simply didn’t work’
JULIE SATOW,
NY Sun, September 18, 2008

http://www.nysun.com/business/ex-sec-official-blames-agency-for-blow-up/86130/

American Banker excerpt after the jump.

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Category: Bailouts, Credit, Legal, Markets, Taxes and Policy

The Terrible Lessons of Bear Stearns

Category: Bailouts, Corporate Management, Credit, Federal Reserve, Legal, Taxes and Policy

Paulson: Congress Has No Authority Here

Category: Bailouts, Credit, Legal, Taxes and Policy

IndyMac Swift Boaters Strike Back!

Category: Corporate Management, Credit, Legal, Politics, Valuation

His Name is Mudd

Category: Bailouts, Corporate Management, Credit, Legal, Real Estate, Valuation

Nonfeasance in Financial Oversight

“The system is completely broken. It’s amazing that the system ever worked at all.” -Marc L. Weinberg, Acting Executive Director and General Counsel, Appraisal Subcommittee > Last night, we discussed various kinds of real estate related fraud; Appraisal fraud was front and center. This morning, I stumbled across an interesting Associated Press article on the…Read More

Category: Credit, Legal, Politics, Real Estate