Commentaries

from Rolfe Winkler:

Morning Links 1-27

Note: Apologies for no links yesterday. Busy day writing columns!

SEC to vote on new money fund rules (Johnson, WSJ) Unfortunately, the SEC won't do away with $1 NAVs, price fluctuations will be published on a 60 day lag. So investors will continue to treat money funds as cash equivalents, even though they aren't, and the systemic risk they pose won't really go away.

Fed weighs interest on reserves as new benchmark (Lanman, Bloomberg) This will be a key interest rate to watch whether or not the Fed makes it the benchmark. The expansion of the Fed's balance sheet over the past year+ has stuffed banks full of excess reserves, reserves that banks will lend out if the economy -- and loan demand -- picks up. The Fed needs to keep those excess reserves sequestered in order to prevent inflation. To do so, it may have to pay higher rates. For a fuller explanation see this previous column.

Failed Senate vote on budget commission shows difficulty in cutting deficits (Faler, Bloomberg) So much for a fiscal commission based on the base-closing commission...

After three months, only 35 subscriptions to Newsday's website (Koblin, NY Observer) Print subscribers get free online access. But this is still not a good showing for selling online only subscriptions. The NYT needn't worry that it's pick up will be this small when they put up their pay wall. I, for one, will pay for their content, as I pay for WSJ. I 'd subscribe to FT too if their website wasn't so slow...

Top English central banker supports splitting banks (Thomas, NYT) This should come as no surprise. A speech by Mr. King in October laid out his support for steps similar to those Obama just released.

Roubini: Greece is bankrupt (Khan, CNBC) Thank you, Captain Obvious. ;)

from Rolfe Winkler:

Afternoon links 1-13

Must Read -- Kyle Bass: Testimony before the FCIC (fcic.gov) Bass is a hedgefunder that made big profits betting against subprime. His testimony has many fascinating facts and figures. [The pie charts on page 9 look familiar.]

Obama to push tax on too-big-to-fail banks (Nasiripour) Not a lot of details: "the planned tax would be imposed in a way that targets firms' riskiest activities, such as proprietary trading. It would be crafted in a way that doesn't affect a financial company's retail banking, so that the cost theoretically would not be passed on to retail customers -- but it wasn't clear exactly how that would work." And will it tax other TBTF firms besides banks? What about insurers? What about GE? Update: WSJ says the tax will target bank liabilities.

Earthquake in Haiti may have killed over 100,000 (Farie/Varner, Bloomberg) The epicenter of the 7.0 magnitude quake was 10 miles from Haiti's capital city.

Google China spat shines spotlight on cyberspying (Prodhan/Lee, Reuters) Google has consistently tried to thread the needle between the revenue opportunities provided by the Chinese market, and the censorship restrictions imposed by the Communist Party. This attack was so egregious that Google said it's had enough.

Prime jumbo RMBS delinquencies jump to 9.2%: Fitch (Golobay, HousingWire) ht Implode-o-Meter.

SEC proposes effective ban on naked access (Younglai/Spicer, Reuters)

FDIC's Bair blasts other regulators for reluctance on banker pay plan (Paletta, WSJ) I'd hoped to share the video archive with all of you but a day later it's still not available. There are good arguments that additional curbs on pay will be both tough to design and ineffective at curbing risk. A better regulator is failure. But that's not Dugan's point. He just wants to protect banks.

Finra messed up, what a shock

The report by Finra on its failure to detect the alleged Ponzi scheme at Allen Stanford’s offshore bank is no shock.

Finra makes the SEC look like an agressive regulator. And this should give anyone reason to pause when you consider that Mary Schaprio, the current Securities and Exchange Commission chairman, most recently headed-up Finra.

Schaprio tells us her mission is to beef-up the SEC’s enforcement procedures in the wake of its own failings on Stanford and more significantly its botched investigation–or non-investigation–of Bernard Madoff. Why didn’t she first do this when she was at Finra?

The report outling Finra’s missteps notes regulators failed to follow-up on claims made by former Stanford brokers that the CDs the firm’s offshore bank in Antigua was selling were either bogus or “too good to be true.” Going as far back as 2004, a number of brokers raised this claim in arbitration disputes they had with Stanford.

Late last year, after Madoff was arrested, I began investigating allegations that Stanford’s financial empire was a Ponzi scheme. I did this while I was still working at BusinessWeek and early on I came across a few arbitration cases in which brokers had alleged the returns Stanford CDs seemed too good to be true.

Soon after Stanford was charged by the SEC with civil fraud, a source pointed me to an old lawsuit filed in Florida state court where a former employee also claimed the operation was a Ponzi scheme.

All of of these legal filings were either in the public record or in Finra files, yet it appears the level of communication between Finra’s arbitration unit and its enforcement operation is poor. This has been a long standing complaint from brokers, investors and securities lawyers and it needs to be fixed.

Calling all HFT victims

Now that the SEC has rebuffed my request to gather information about investor complaints about high-frequency trading, I’m calling on you for help.

If you have sent a complaint in the past year complaining about HFT and the impact it is having on particular stocks, or the broader market, I’d like to hear from you. You can reach me by email: matthew.goldstein@thomsonreuters.com

Let’s make sure the regulators are doing their jobs.

SEC’s flash in the pan

Securities regulators will often settle for the proverbial low-hanging fruit — prosecuting easy cases that don’t make a big difference in the way Wall Street operates. But it does give the appearance they’re doing something.

And so it is with the Securities and Exchange Commission’s proposal to stamp out flash trading, an unsavory practice that has permitted some high-frequency trading desks to get a millisecond sneak peak at market trade orders.

Banning flash trading certainly makes sense, because there’s no reason that trading firms with lightning-fast, computer-driven buy and sell programs should get an advantage over the rest of the market.

But the furor over flash trading has always been something of a sideshow because it affects a minuscule percentage of the tens of millions of high-frequency stock trades made each day.

There’s reason to worry that after cracking down on flash trading, the SEC will consider its work largely done. Mary Schapiro, the commission’s chairman, says regulators are taking a hard look at a wide range of “market structure issues,” including high-frequency trading. But Schapiro has offered few specifics and largely spoken in generalities on the subject.

Schapiro hasn’t said much publicly on the two main criticisms of high-frequency trading: its ability to add unnecessary volatility to the markets, and its potential to spark a market meltdown because so many computer programs employ the same algorithmic strategies.

And Schapiro’s silence on the matter could leave one wondering just how rigorous this SEC review is going to be, and whether the ban on flash trading is all that regulators plan to take on.

from Rolfe Winkler:

Rakoff throws down the gauntlet

Judge Rakoff has rejected the settlement deal between the SEC and Bank of America. He clearly wasn't happy with it to begin with, and subsequent briefs from the two parties did nothing to allay his concerns. At the end of the day, he hated the idea that B of A shareholders, on whose behalf the SEC actually brought the case, would end up paying the fine for executives' wrongdoing.

So what's the next step? According to the Reuters story, "Rakoff directed the parties to prepare for a possible trial that would begin no later than February 1, 2010."

That doesn't mean there will be a trial. The parties could come back with a settlement more to Rakoff's liking.

But presumably that would have to involve naming names. Who were the executives responsible for misleading shareholders? B of A has refused to answer that question and the SEC seems to think it doesn't have the leverage to force it out of them.

I'm happy to see this development. I'm on-record saying the SEC should pick more fights. The truth of the matter is that we need more accountability at the top. The point behind Sarbanes-Oxley, for instance, was that executives would take more responsibility for their misdeeds, in this case Ken Lewis and John Thain.

Too often, "The Corporation" gets the blame and pays the fine. But that isn't justice, nor does it deter bad behavior.

(Here's the PDF of Rakoff's full order)

The SEC’s animal house

Mary Schapiro wants her lawyers and investigators at the Securities and Exchange Commission to go back to school. Specifically, she wants them to enroll in something she calls “fraud college.”

From what I gather, the SEC’s “fraud college” will be an intensive training program to help the agency’s employees better detect fraud. It’s not the worst idea. But as Bess Levin at Dealbreaker points out it does sound a bit silly.

Question: Will Schapiro put any investigators who flunk out of “fraud college” on double secret probation?

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.

Dude, what happened to my 10K Wizard

I’m a big fan of 10K Wizard. I have been for years. It’s a far better way to search SEC filings than using Edgar–even though it costs money.

 So it didn’t surprise me that Morningstar bought 10K Wizard about a year ago–someone was bound to. And up until this point Morningstar pretty much has left 10K Wizard alone, except for slapping its name on the website.

But suddenly today, when I went to 10K Wizard to do some document searching, I noticed that the site had been rebranded, “Morningstar Document Research.” Uggh.

For now. this boring name change appears to be the only thing different with 10K Wizard. On the blog for the search engine, Morningstar says it doesn’t plan any major changes beyond this “cosmetic” move.

I hope that’s true. But this new name is just so lame.

from Rolfe Winkler:

The infamous “disclosure schedule”

At the bottom is the SEC's latest brief for Judge Rakoff.

Having gone through BofA's, one finds --publicly disclosed for the first time -- the "disclosure schedule" that outlined bonuses BofA had agreed Merrill could pay:

“Variable Incentive Compensation Program (‘VICP’) in respect of 2008 ... may be awarded at levels that (i) do not exceed $5.8 billion in aggregate value (inclusive of cash bonuses and the grant date value of long-term incentive awards)...

It's also on page 10 of the SEC's brief.

Why does this matter?  Because this is the language that BofA conveniently forgot to include in the SEC filing detailing the merger before it was approved.

BofA's argument is that even though the filing said Merrill couldn't pay bonuses without its consent, the fact that the filing referenced the disclosure schedule means shareholders should have been aware Merrill would pay bonuses anyway.

You'd think shareholders would want to see something like that. So why wasn't the schedule included in the SEC filing?