Posts filed under “Regulation”
Way back when, I mentioned there was a surprise coming S&P’s way. Since it is now out there officially, I can discuss it publicly.
After the brouhaha with McGraw Hill began, I was contacted by numerous people — mostly readers emailing words of support. But a few West Coast lawyer types seemed to be asking lots of questions, and revealing little.
I poked around with some law firms in California, and started to pick up the rumor that California Public Employees’ Retirement System (CALPERS) was going to drop the bomb on S&P, Moody’s and Fitch. No one would say anything on the record, but it was clear that litigation was being considered as an option against the Ratings Agencies.
Here is the money quote:
The AAA ratings given by the agencies “proved to be wildly inaccurate and unreasonably high,” according to the suit, which also said that the methods used by the rating agencies to assess these packages of securities “were seriously flawed in conception and incompetently applied…”
“The ratings agencies no longer played a passive role but would help the arrangers structure their deals so that they could rate them as highly as possible,” according to the Calpers suit.
Now, here comes the fun part: Calpers doesn’t give a rat’s ass about the money. Sure, the financial instruments at hand (Cheyne Finance, Stanfield Victoria Funding and Sigma Finance) have defaulted on their payment obligations. The losses to Calpers are ~!$1 billion.
But that’s not what’s going on here: These Left Coasters want their pound of flesh. They don’t care for the Ratings Agency folks, and consider them a blight on the investment landscape.
The goal of the litigation (as I see it) isn’t to make the rating agencies pay a financial penalty; rather, it is to publicly try them just as the regulatory rules are being rewritten. I also predict that CALPERS is going to attempt to not just win, but humiliate these agencies, call them out in the most embarrassing way possible, trash the senior executives, and make things very uncomfortable in general for these firms.
They don’t want them to merely suffer — they want to destroy their unique position as an Oligopoly, to remove them from having a special status under the SEC rules.
In these sorts of litigations, plaintiff can be very often bought off cheaply. In this case, that won’t happen. An offer a few million dollars — or a few 100 million — won’t tempt them into taking the money and going away. They have as much money as they need to finance this litigation to the long, drawn out, bitter end.
If I was a Rating Agency lawyer, I would be very, very nervous . . .
Nice couple of charts that show correlation between what occurred when financial markets were deregulated and the outsized compensation packages that subsequently followed. The book does a nice job showing how one led to the other — that there was both Correlation and Causation. > chart via NYU ~~~ Here is a similar chart, with…Read More
One of the friends of TBP on Capitol Hill sent a note yesterday about two important hearings before the House Financial Services Committee: “Lots of interesting hearings coming up in the next month (next Monday is one on Too Big to Fail and one on Insider Trading by Government Officials). It’s a very critical month;…Read More
We are seeing belated glimmers of understanding of the credit crisis from the White House. Still nothing on the Ratings Agencies, and Glass Steagall, and too little on Derivatives and leverage, but at least there seems to be some recognition on TBTF (see The End of Too Big to Fail ?). However, where there is…Read More
If this turns out to be true, it could be vey encouraging: “They are the biggest of the big — the Citigroups, the Goldman Sachses, the AIGs and other financial behemoths. The Obama administration doesn’t want so many around anymore. Financial regulations proposed by the president would result in leaner and simpler institutions that don’t…Read More
We have a bull market excess stupidity.
Now that I think about it, this could very well be the longest bull market in history, running as it has for several 100,000 years.
The latest manifestation of this intellectual failure is the new government proposals to ban or radically restrict short selling.
Of all the anti-free-market proposals out there, turning equities into a one way bet is by far the least defendable, most ignorant, most damaging to the markets we have seen.
“They have been reviled as the bad hats of Wall Street, nefarious traders who cashed in on the market collapse and, some insist, helped precipitate it. Now short-sellers, the market skeptics who correctly called last year’s downturn, are coming under even more unwanted scrutiny, this time from federal regulators. The Securities and Exchange Commission appears poised to reverse itself and reinstate rules that would make shorting stocks — that is, betting their prices will decline — somewhat more difficult.
Whether the S.E.C. will go far enough to satisfy the many critics of short-sellers is far from certain. The controversial role of these investors has divided not only the financial industry, but also federal regulators. As the S.E.C. considers its options, the debate is heating up. Hedge funds and big pension funds argue that short-selling is vital to modern markets. Such trading not only enables investors to hedge their risks but also to ferret out weak companies or, as in the case of Enron, outright frauds.”
Short sellers are the messengers, and they tell the story of fraud, over-valuation, and irrational exuberance. They also act as a good counter balance to the Street’s inherent cheerleading. Short seller Jim Chanos explains why the SEC should not further restrain Short Selling in some recent commentary (Letter tp the SEC is here).
One of the factors that the lawyers at the SEC don’t understand is the importance short sellers play in cushioning collapses. A brief excerpt from Bailout Nation:
“In September 2008, with the crisis in full ﬂower, [SEC Chief Christopher] Cox made shorting ﬁnancial stocks illegal. Apparently, he was unaware that ﬁerce market sell-offs often end with short sellers covering their positions, locking in proﬁts on their bearish bets. With short sellers out of the market, the downturn became even ﬁercer. From the market highs of October 2007, the S&P 500 and the Dow Jones Industrial Average were cut in half in 12 months. Much of the damage came after the no-shorting rule went into effect.”
Here is a chart of the S&P500, showing when the ban went into effect and the subsequent result. The ban did not cause the sell off, but it removed natural buyers from the process that could have cushioned the blow:
S.E.C. May Reinstate Rules for Short-Selling Stocks
NYT, July 2, 2009
SEC Should Not Further Restrain Short Selling
JAMES CHANOS, PRESIDENT OF KYNIKOS ASSOCIATES LP,
Thursday, July 02, 2009 at 06:11 PM EDT
Fascinating story in USA Today on the banking system our neighbors to the North enjoy: Our northern neighbor sometimes seems so similar to the United States that it’s hard to tell where the USA ends and Canada begins. Here’s one way: Canada is the place with healthy banks, taxpayers unscathed by megabillion-dollar bailouts and no…Read More
Last week, UBS announced a 2nd Quarter loss “due to restructuring charges.” The banking giant is raising $3.45 billion in a stock sale. Partly owned by the Swiss government (for years prior to the crisis, if memory serves), UBS was one of the biggest losers in the financial crisis. After a huge expansion into riskiest…Read More