Commentaries

Madoff verdict: The SEC is plain incompetent

A lengthy report examining the many ways the Securities and Exchange Commission botched its investigations of Bernie Madoff tells us something we already knew: the SEC can be awfully incompetent.

The report by the SEC Inspector General quickly dispenses with the notion that regulators either protected Madoff or covered-up their investigatory failures. But that’s the best that can be said for the SEC in this massive undertaking.

For now, the IG has released a 22-page summary of his findings. But a full 450-page book, outlining all the gory details of regulatory bungling, will hit the shelves in the coming days.

SEC Chair Mary Schapiro commenting on the IG’s findings says Madoff is a “failure we continue to regret.” She says the agency is already reforming its ways and promises not to miss the next $65 billion Ponzi scheme.

Go away Hank

The Securities and Exchange Commission’s settlement with Hank Greenberg over allegations that he permitted the use of accounting tricks to manipulate earnings at American International Group comes way too late.

Oh sure, it’s great the SEC managed to squeeze $15 million out of Greenberg before agreeing to settle the more then four-year-old civil investigation. But if the SEC really had the goods on Greenberg, it should have gone after him years ago–settlement or not.

If the SEC had brought an enforcement action against the former AIG chieftain last summer, it might have saved us from watching Greenberg make frequent appearances on CNBC to  regularly boast about his skills as a risk manager. For months now, Greenberg has been going on CNBC to claim the giant insurer never would have gotten into so much trouble, if he was still running the show.

In Greenberg’s world, if it wasn’t for former New York Attorney General Eliot Spitzer driving him out of AIG in 2005, the big government bailout of the insurer never would have happened. Why? Well, according to Greenberg, he would have stopped AIG Financial Products from writing those reckless credit default swaps on tens of billions of dollars of now worthless CDOs.

And, as we all know, it was because of all those CDS contracts that the federal government had to come rushing in last September to prop-up AIG and prevent a global financial meltdown.

But here’s the hard truth that Maurice “Hank” Greenberg never liked to talk about during his seemingly endless roadshow to promote himself: he appointed Joe Cassano, the man most responsible for letting AIG Financial Products run the insurer into the ground.

Of course, Greenberg, 84, says if he had remained at the helm of AIG, he never would have permitted the kind of swaps writing that Cassano’s team was doing. And, to be fair, some of the worst CDS deals were done by AIG Financial Products in the latter part of 2005.

Schumer aka Flash Gordon

There’s an old joke in New York that the most dangerous place is the space between a TV camera and Sen. Chuck Schumer. And the New York Democrat’s love of the limelight certainly was on display late last week with regards to the increasingly controversial subject of high frequency trading.

Schumer’s staff didn’t waste time on Friday in announcing that the senator had sent a letter to the Securities and Exchange Commission, asking regulators to study some aspects of highly-automated stock and commodity trading.

Now rapid-fire trading, fueled by sophisticated computer programs, isn’t the kind of thing that naturally catches the attention of US senators. In all likelihood Schumer sent his letter to the SEC after reading a page one story in The New York Times, which focused on some of the concerns about HFT.

The Times story was a good one. Of course, I have to note  that the folks at Zerohedge have been writing about potential problems with HFT for a long, long time. And we at Reuters have aggressively covered the topic ever since we broke the news that Sergey Aleynikov was criminally charged with trying to steal some of the top secret compute code to Goldman Sachs’ proprietary HFT program.

But it was the Times story that got Schumer’s attention and I’m glad it did. After all, a few days earlier I wrote a column calling on the SEC to begin an investigation into allegations that this type of automated, lightening fast trading could play havoc with the markets.

Yet this is what troubles me about Schumer’s request: it focused almost exclusively on the issue of so-called flash trades. Schumer’s letter to the SEC didn’t touch on potentially bigger issues like the possibility of a few HFT players coming to dominate trading.

The letter also didn’t focus on the potential for a rogue mathematical formula manipulating trading in a stock or a commodity. Nor did Schumer address the issue of a misfiring algo accidentally sparking a massive market sell-off in a stock.

Was SEC slow to probe NIR Group?

The Securities and Exchange Commission is joining the hunt into just what is going on at NIR Group, a Roslyn, NY small-cap focused hedge fund run by Corey Ribotsky.

The Wall Street Journal reports today that the SEC has sent a subpoena to NIR, seeking information about the stellar returns Ribotsky had reported to investors throughout much of 2008. It appears the SEC wants to know why Ribotsky suddenly froze redemptions in his fund last October, in the wake of Lehman’s demise, if the fund had been doing so well.

The Journal is late to the NIR story. Dealbreaker contributor Teri Buhl has been on this story for a while and gets kudos for pushing it forward. Forbes also was early in reporting on investor suits against NIR.

At this point, it’s not clear where this story will go. NIR investors have been grumbling about Ribotsky’s funds, which claim to manage some $700 million in assets, for a while now. It’s possible the SEC investigation is merely a response to some disgruntled investors.

But what’s surprising to me is why the SEC is just looking into the NIR funds now, given that it has been a dominant player in so-called “death spiral” convertible market. These securities have gotten a bad rap over the years because they include a trigger that permits bonds to be converted into common shares whenever there is a precipitous drop in the prices of a company’s stock.

Back in 2004, the SEC launched a sweeping probe into the market for these and other so-called PIPEs–private investments in public equity. Most PIPEs are a form of a convertible bond, mainly sold by small-cap companies, with terms highly favorable to hedge fund investors.

The shorts love PIPEs because the flood of stock in these highly-illiquid small cap companies invariably pushes the share prices lower. Not surprisingly, death spirals are real popular with short sellers.

Tough questions after Madoff

Even as Ponzi king Bernard Madoff goes away to prison for the rest of his life and then some, there are still so many unanswered questions — both big and fundamental.

Were Madoff’s sons involved? What did his wife Ruth know? Were the operators of the giant feeder funds that sucked in tens of billions of dollars in investor money in on the charade?

Those questions, though important, ultimately pale when compared with the bigger ones that remain about the root causes of the worst financial crisis since the Great Depression.

Indeed, for all the misery Madoff and his Ponzi brethren have caused, none of those scam artists were the cause of the crisis that brought the financial system to the brink. If anything, it was the financial crisis that helped flush out Madoff and his scurrilous ilk, as many investors rushed for the exits at the same time.

So that’s why Congress needs to act quickly to get up and running a bipartisan commission to study the underlying causes of the financial crisis. House Speaker Nancy Pelosi likens this new 10-member panel to the Pecora Commission, the famous Depression-era investigative committee that led to passage of Glass-Steagall — the 1933 law that drove a wall between commercial and investment banking.

The 1999 repeal of Glass-Steagall contributed mightily to the current crisis by opening the door to an anything-goes mentality on Wall Street and allowing far too many banks to become too big to fail.

This new commission, armed with the power to subpoena witnesses and documents, is meant to investigate all aspects of the crisis, including regulatory lapses, Wall Street excesses and deceptive behavior by lenders and securities traders.