The Trojan Horse of cost benefit analysis
By John Kemp The writer is a Reuters market analyst. The views expressed are his own.
LONDON – Should federal government agencies have to prove the benefits of new regulations outweigh the costs before introducing them?
It sounds like a simple question with an obvious answer. But the role of cost-benefit analysis in writing federal regulations (and even laws) is shaping up to be one of the biggest battles between the Obama administration and business groups in 2012.
On one side are business groups such as the U.S. Chamber of Commerce and the International Swaps and Derivatives Association (ISDA), backed by conservative lawyers such as Eugene Scalia (son of Supreme Court Justice Antonin Scalia) and a group of judges on the U.S. Court of Appeals for the District of Columbia Circuit who oversee most federal rule-writing.
On the other is the White House, the Treasury and a host of agencies stretching from the Securities and Exchange Commission (SEC) to the Commodity Futures Trading Commission (CFTC).
QUEST FOR QUANTIFICATION
What was once an esoteric legal dispute is turning fiercely political.
Making oil and mining dollars transparent
By Raymond C. Offenheiser The opinions expressed are his own.
For most of us, this July 15th will be the start of just another hot summer weekend. But for many, the day marks the one-year anniversary of Congressional approval of a landmark law that will lift the veil of secrecy on billions of dollars that flow every year from oil and mining companies to governments around the world.
Tucked into the massive Dodd-Frank Wall Street Reform and Consumer Protection Act is a provision requiring oil, gas and mining companies reporting to the US Securities and Exchange Commission (SEC) to disclose the payments they make to host governments.
From rural villagers in Africa to investors on Wall Street, the groundbreaking law casts the transparency net far and wide, arming the public with information it can use to track the amount of money governments receive from oil and mining companies. The provision, backed by a bipartisan group including Senators Lugar and Cardin, among others, requires annual reporting of taxes, royalties and other payments, and covers a broad range of US, European, Chinese, Brazilian and other companies. By law, the final regulation from the SEC — the regulatory agency responsible for implementing the law — should have been issued in April. However, no final rule has been issued.
One of the reasons for the financial crisis was a lack of public information about the real risks of investments. In the case of the oil and mining industries, investors need to know how and whether companies are exposed to political and expropriation risks in volatile resource-rich countries. In some places, companies can make up front payments of over a billion dollars before a drop of oil is produced and this information is not disclosed to investors. This disclosure provision — in addition to providing useful information to citizens in resource-rich countries — also provides valuable information to investors on how to assess risk. This is part of the SEC’s core mandate. As a display of investor interest, investors representing more than $1.2 trillion in assets under management, including TIAA-CREF and others, have called on the SEC to implement strong rules for this provision.
We at Oxfam America joined NGOs in the Publish What You Pay coalition, faith groups and investors representing over $1.2 trillion in assets to commend the SEC for drafting a regulation in December that followed Congressional intent. Industry and other stakeholders have had plenty of time to comment on the draft — the SEC even extended the comment period.
The time for the SEC to act is now. The world is waiting to follow our lead. The longer the SEC waits, countries such as Ghana, Africa’s newest oil producer, are at risk of falling victim to the resource curse. We’ve seen it happen in Sierra Leone, Nigeria and Libya and in mining towns across Latin America, where corrupt government officials squander oil and mineral wealth instead of investing in education, health services and food security.
How about the U.S. doing the something like the U.K. did. Ban corporations, unions, PACS, etc… from contributing to either political parties or candidates for any government office whether elected or appointed. As we are a global economy that prohibition should extend to all foreign interests as well. Paid for political adds should also be prohibited by all except the candidate’s campaign fund. Only voting United States citizens should be able to contribute and those contributions should be limited to a maximum of $1000 dollars in total per election year. The Constitution’s preamble reads “We the People” not “We the Corporations”.
For democracy to work there must be informed consent of the People. Incumbents have a tremendous advantage at raising funds(for political favor?) The House has a better than 90% reelection rate. As long as tens(Senate) or even hundreds of millions(President) or dollars are spent on political campaigns, it is clear to me politicians will say what brings in the money and not the truth as best as they understand it to be.
This is why I believe there is never a serious discussion of the issues our nation faces during election campaigns. Where is the Press in all of this? Perhaps newsrooms should go back to operating not for profit and fulfill their service to the People.
from Reuters Money:
Consumer cops: Why we need Mary Schapiro and Elizabeth Warren now
Two women are fending off a vicious man-handling of investor protection.
As Congress pettily wrangles over the debt limit and the next budget, Mary Schapiro and Elizabeth Warren are fighting to protect you against the ravages of Wall Street.
Wall Street and its Republican allies would like to make the Dodd-Frank financial reforms disappear. The money trust has been pouring millions into lobbying to eviscerate the budget of the Securities and Exchange Commission and blocking the formation of the Consumer Financial Protection Bureau.
Mary Schapiro, who chairs the SEC, said she can't kick start the myriad pro-investor rules of Dodd-Frank without adequate funding. Republicans, lead by Budget Committee Chairman Paul Ryan, want to "starve the beast" in their fiscal year 2012 proposal.
Ryan's new budget proposal wants to cut off the SEC budget at its knees by giving the SEC $112 million for fiscal year 2012. That effectively freezes the top securities regulator's funding at 2008 levels. The current budget deal gives the agency a slight increase in funding.
Remember what happened to Wall Street in 2008? The Obama Administration wants $308 million for the SEC to prevent another year like that from happening. The money trust has deliberate amnesia.
While the SEC gathers most of its revenue from fees and fines, it can’t seed key investor protections like an office of investor advocate without the additional funds. Its budget was supposed to double under Dodd-Frank over the next five years. The money trust wants to keep the status quo and de-fund the agency.
Until we have some decent watchdogs with integrity — backed by fiduciary duty mandates — Wall Street will remain the same and individual investors will continue to lose money on a regular basis. Warren and Schapiro are leading the charge to clean up Wall Street — a lonely crusade that we investors should support.
Goldman anger is misplaced
The following is a guest post by Dana Radcliffe, a senior lecturer of business ethics at the Johnson Graduate School of Management at Cornell University. The opinions expressed are his own.
The day after the Securities and Exchange Commission announced its $550 million settlement with Goldman Sachs, three noted business journalists appeared on a popular current affairs TV show. They concurred that the deal was a win for Goldman since the dollar amount was surprisingly low — equal to what the firm earns in just a few weeks. They felt the SEC’s case was weak and that, legally, Goldman had done nothing wrong and would have prevailed in court.
They also agreed that people were understandably appalled by some of the firm’s conduct in the subprime mortgage crisis in light of the flood of emails and other internal company documents released by Congress and Goldman. Grasping for a way to express what was repellent about such actions, one of the writers described them as “icky.” Another airily noted that they might be seen as wrong “in some ethical, moral, or philosophical sense.”
What is remarkable is while all three pundits shared the common view that Goldman had behaved offensively, they would not say that Goldman’s behavior was “unethical” or “morally wrong.”
This reminded me of the most notorious article ever published in the Harvard Business Review — a 1968 piece by Albert Carr, a former advisor to President Truman. In it, Carr argued that business is akin to poker, where bluffing is often legal and expected. While allowing that deception in one’s personal life violates “private morality,” Carr contended that business and poker are strategic competitions whose rules permit participants to profit from misrepresentations. Indeed, he wrote, being a skilled practitioner in either endeavor requires occasional bluffing.
Carr has been rightly faulted for ignoring crucial differences between poker and most commercial interactions, where asymmetries of power and information typically give executives a distinct advantage over customers, employees, and other stakeholders. However, what about business activities that do resemble those of players in a poker game in which sophisticated investors bet against each other? Could it be that when a type of business activity is truly analogous to poker some artful moves that don’t break any laws qualify as bluffs?
Well done Dana Radcliffe. It’s not a sarcasm. Contrary to the hotheads you have analysed the Abacus deal set in a (despicable) gambling environment where a zero sum transaction was executed.
A looser and a winner would emerge from transacting synthetic securities. No ‘serious’ cards were hidden under the table, i.e. as the long parties to the transaction would need to see or analyse before closing.
Talking about gangster-like methods indicate little, if any knowledge of previous gambling attitudes in the market. GS had no fiduciary duty to ACA and IKW Bank (the long parties) – two opportunistic and badly managed players, eventually loosing their shirts…. one of which led to mayhem for German tax payers and investors, but not for US tax payers.
This is not to say that GS are saints and without any negative impact on the former bubbling housing market and US pension funds’ wealth, but in other transactions. All up, GS had a very limited negative impact on the MBS market, while the big players such as Countrywide, Fannie, Freddie, Citi, Bear, Lehman and Washington Mutual, were the front runners in this bizarre circus fully supported by Alan Greenspan, Ben Bernanke, Democrats (for promoting home ownership for more people), some Republicans and indeed, by the SEC through this regulator’s lack of competence, (maybe integrity) and interest in the what they should regulate.
The Abacus case was merely a political stunt as the White House was in dire need for a case on which its current masters could build their case for new financial regulation initiatives. President Obama was scheduled to open the financial show case in New York only four days after the SEC announced the fraud case against GS.
Have a look at how out-of-money GS option puts traded the day before disclosure. Not even mad investor parties such as the ACA representatives would have bought such puts one day before expiry without some info of what was coming up the next day. Who was in possession of such info? Reportedly not the GS camp, but only people from the SEC environment. The profits made were in the thousands of per cent, while the put sellers were left with equivalent losses.
I encourage everyone to analyse the trades themselves. So, why didn’t the SEC and the NYSE launch an investigation? The answer appears to be obvious.
SEC’s fraud case was not a zero sum ‘transaction’, possessing the characteristics of a scenario where none of the parties could afford to loose the case. As such, an out of court settlement was required, all of which was evident from the outset.
The SEC would have had significant problems winning this Mickey Mouse initiative, so getting some money to the treasury without loosing face became a must.
Same for GS, as it’s loss of reputation was (and still is) significant, but unbearable for management and board should such a court ruling (in 2011 or 2012) not be heading their way…. without any distractions as to daily routines. This would have been a poker game to continue such a case in court all of which the SEC would have understood.
My business partners and I believe that GS was the best managed financial institution reducing their housing risk significantly by hedging initiatives. However, it appears that they did not hedge their exposure to AIG sufficiently, riding towards significant losses if AIG went into Chapter 11 or final bankruptcy.
We believe that the previous government made a significant error of judgement when the former GS executive Hank Paulson was left in charge in the September / October days of 2008 because of his potential conflicts of interest. Potentially, this cost the tax payers dearly and equally bad, has led to America’s declining financial market superiority in Europe and in emerging markets in Asia.
Blankfein performed in late 2008 a brilliant job from the perspective of GS’ shareholders by eliminating GS’ exposure to AIG. Who should or could blame him for doing so?
Goldman’s troubles will end when Blankfein goes
The following is a guest post by Christopher Whalen, senior vice president and managing director of Institutional Risk Analytics. You can also follow him on twitter. The opinions expressed are his own.
As Congress was approving financial reform legislation yesterday, Goldman Sachs agreed to pay $550 million to the SEC to settle a civil lawsuit that claimed Goldman had misled investors in a subprime mortgage product as the housing market began to collapse three years ago. The settlement marks the beginning of the end of Goldman’s public humiliation for its relatively small part in the subprime debacle, but the firm still has a great deal of work to do to satisfy the conditions of its settlement, repair its relationship with clients and mend its damaged public reputation.
I have had a “neutral” rating on the forward operating results of GS since Q1 of this year and will leave that rating in place for two reasons. First, the carry trade reflected in record net interest margins in the banking industry is going to slowly diminish at GS and many other banks. Unless the Fed allows interest rates to rise soon, all of the assets of banks and funds will gradually re-price to near-zero. When the media waxes euphoric over the “trading” results of firms like GS, they fail to realize that much of trading revenue comes from simple interest rate spreads over funding.
Second, despite the settlement, GS remains in the midst of a mini-crisis in terms of brand and reputation. As Felix Salmon noted in a post on blog post back in June, Goldman CEO Lloyd Blankfein and his lieutenants are playing customer relationship management in order to retain clients. While JPMorgan Chase is playing offense, looking outside the U.S. for growth, GS is still very much in a defensive posture. Indeed, JPM’s bankers have been aggressively trying to take business away from GS for months.
For GS, everything depends on how the firm manages the process of addressing the remaining financial and political risks that have erupted over the past year. Blankfein has done a reasonably good job in steering GS through the political minefield, but the firm still faces a lot of private litigation as well as the more daunting task of winning back the trust of the blue chip corporate clients. Part of the requirement is simply time, but I believe that GS will eventually need to replace Blankfein and other members of the GS management team to truly put this crisis behind them — but not for the reason most people might think.
Buy side investors don’t do business with GS or the other major sell side firms because they trust them; they do business with firms like GS because they believe that the firm has better access to information. The sad fact is that the trust that once made firms like GS and the old JP Morgan & Co special has long since been lost, leaving the marketplace that remains a hideous, barbaric place bereft of honor — and a source of infinite operational risk to all participants.
The reputation of GS as a firm for being smarter and better informed than the larger firms on Wall Street goes back many decades, to the turn of the last century when Wall Street was run by the white shoe securities firms in Boston, Philadelphia and New York. In those days, firms like GS had to be smarter than everyone else as a basic matter of survival. And in those days, GS protected and nurtured each client relationship because the trust that these clients put in the firm were considered to be a precious asset.
That’s right ppl. Financial firms fleeced you and and took all that hard earned money you ‘invested’ in that big second house you can’t afford. They conned you into spending on all those credit cards you didn’t wanted to use to buy that big home theater system that you didn’t really need.
Go on… blame them. It’ll make you feel better.
Senate vote exposes Wall Street impotence
Wall Street’s diminished influence in Washington was made plain yesterday when the Senate voted to approve financial reform legislation by 59 votes to 39.
Industry lobbyists will point out the bill only just managed to scrape the required votes needed to end debate and forestall a filibuster. It fell far short of a lopsided bipartisan majority.
But the formal tally on HR 4173 (Wall Street Reform and Consumer Protection Act 2009) as amended by S 3217 (Restoring American Financial Stability Act 2010) conceals a much wider bigger majority of 63-37 for enacting far-reaching reforms.
In the final vote on passage, the bill was backed by 53 Democrats, 2 Independents and 4 Republicans (Maine’s Susan Collins and Olympia Snowe, Iowa’s Charles Grassley and Massachusetts’ Scott Brown).
It was opposed by 37 Republicans and 2 Democrats (Maria Cantwell of Washington and Russ Feingold of Wisconsin). Two senators were not present (Democrats Robert Byrd of West Virginia and Arlen Specter of Pennsylvania).
But the two Democrats who voted “No” did so because they thought it did not go far enough and were registering a protest in a bid to get it toughened further. The two absent members were Democrats who had voted in favor of the legislation before.
All four votes should really be added to the “Yes” column to give an effective underlying majority of 63. By any measure that is a very high tally or a major piece of legislation.
“adverse” struck me,too. populist = equalitarian, not stupid masses. so many terms get rendered toxic in the “spin,” what’s needed is a reassertion of the “all [persons] are created equal . . . endowed with . . . rights to life, liberty and the pursuit of happiness” understanding of what it means to be a citizen. it isn’t “adverse” to reduce the size and impact of an exploitive paracitic oligarcy, is it?
Shorting the SEC’s case against Goldman Sachs
— Charles K. Whitehead is an Associate Professor of Law at Cornell Law School. He practiced in the United States, Europe, and Asia as outside counsel and general counsel of several multinational financial institutions, including as an associate in a law firm representing Goldman, Sachs & Co. The opinions expressed are his own —
The civil action brought by the SEC against Goldman, Sachs & Co. has placed it squarely in the cross-hairs of those who argue, in the debate over new financial regulation, that Wall Street needs a new moral compass. But it’s important, I think, to separate our frustration with Wall Street from the strength of the SEC’s case. The case for reform is relatively easy to make. After all, who needs smoke when we have just put out the fire? The case against Goldman Sachs, I argue, is not nearly as convincing. And, while there is – and, no doubt, will continue to be – a he-said, she-said quality to some important facts, it may be useful to consider the core case the SEC has brought.
The SEC’s charge, if proved, is fairly straightforward: Goldman Sachs defrauded investors in notes whose value was based on a portfolio of assets selected by a hedge fund, Paulson & Co., first, by failing to disclose Paulson’s involvement in the selection process, and second, knowing that Paulson had placed bets on the portfolio declining in value. To prevail, the SEC must show a substantial likelihood that the failure to disclose Paulson’s involvement and its short position was significant to a reasonable investor, considered within the total mix of information available at the time the purchase was made. That may be difficult to do in light of what was being sold.
The notes here were issued in a structured transaction known as a synthetic collateralized debt obligation (CDO). In a typical CDO, the proceeds are used to purchase a portfolio of assets whose value, whether up or down, determines the value of the notes. Not so in a synthetic deal. The notes continue to be tied to a portfolio of assets. But, instead of buying them, the issuer enters into a credit derivative with someone else (ultimately Paulson in this case) in order to replicate the credit quality of that same portfolio. If the portfolio does well, Paulson pays a premium to the CDO issuer that it uses to pay interest on the notes. If it tanks (as in this case), the CDO issuer must pay Paulson an amount that reflects the write-down in value.
What this means is that every investor in a synthetic CDO – and, certainly, the sophisticated investors in the Goldman Sachs deal – knows there is someone else taking the opposite bet on the portfolio they invested in. In fact, very often these deals are driven, not by the note investors, but by the short-seller, who is looking to the synthetic CDO as one means to bet against a portfolio of assets.
Was the fact it was Paulson material to investors? Others have argued that Paulson was not nearly as well known in early 2007, when the notes were sold, as the fund is today. More troubling, however, is the suggestion that – regardless of how well known – Goldman Sachs was obligated to disclose Paulson’s short position to the note investors.
It’s not uncommon for clients to have opposite views about the same asset. It happens daily. If, instead of sponsoring a synthetic CDO, Paulson decided to sell the identical assets to Goldman Sachs, and Goldman Sachs then sold the portfolio to the note investors, would Goldman Sachs be obligated to disclose that Paulson was the seller? No – in fact, doing so would be a breach of confidentiality under the SEC’s own rules. But that is a key element of the fraud alleged to have occurred here.
Wow, I do apologize for the mess of comments here from myself. The test post was put up before all of the secondary postings, so that is just wrong! It seems that long postings are checked after short ones, which is ridiculous. Moderators should check in sequence.
Also, if you have moderation, why is it I report 2 to 3 spam messages for dating sites daily.
Embrace reality, not fight speculation
Stock up on canned goods, the authorities appear to be opening a new front in the War Against Speculation; this time taking aim at the people who might profit from Greece and its European partners’ woes.
Just days after the U.S. Securities and Exchange Commission voted new limits on short selling, Germany is investigating the credit default swap trading of speculators to try to prevent them from profiting from any bailout of Greece.
“It would be bad if it were to emerge after a rescue that the money had gone into the pockets of speculators,” a source with knowledge of the efforts told Reuters.
“The result of the ‘Greek tragedy’ is that the political environment has become such that the Credit Default Swap (debt insurance) problem has come to the fore.”
French Economy Minister Christine Lagarde on Sunday said that derivative trades on sovereign debt should be tightly regulated, limited or even banned.
That’s right, apparently there is a big problem out there and it is that greedy speculators are betting that governments that look like they will have difficulties paying their debts might, well, have difficulties paying their debts. Even worse, some are betting that since there is no tenable alternative to Greece being bailed out that it will be, well, bailed out.
I’m not sure if this is a war against speculation, against lese majeste or just against reality.
Here in the UK, we were on the receiving end of a “speculative attack” in the early 1990′s. We’re still here! There are even some who think it was one of the best things that happened to us. And the money that George Soros made on Black Wednesday ended up, in part, endowing charitable and academic institutions in Easter Europe….
Investor confidence not too helpful
Once again someone in charge — Mary Schapiro of the U.S. Securities and Exchange Commission this time – is going on about how they are making changes in order to “preserve investor confidence.”
As if this were in some way a good thing.
I would feel a whole lot better if instead the SEC were talking about making investors more sceptical.
The SEC on Wednesday moved by a 3-2 vote to place additional limits on short selling of stocks, the practice of betting on a decline in a given stock by borrowing shares, selling them and contracting to buy them back later at what the seller hopes will be a lower price.
The new curb would serve as a so-called circuit breaker for shares that have fallen 10 percent or more in a trading session.
“It is a rule that is designed to preserve investor confidence and promote market efficiency,” said Schapiro, the SEC’s chairman.
Now Schapiro is in part talking about confidence among investors that markets are fair, efficient and not subject to abuse. That’s absolutely crucial and the SEC should be ferocious in going after abuse and in ensuring transparency. The SEC’s reason for existing is to ensure that U.S. markets are places where everyone gets a fair shake. That makes people willing to give their capital to strangers who have promised to use it productively and share the fruits.
The word psychology appears at the very end of this excellent article. It is astonishing that the matters of poor mental hygiene and poor intellectual integrity, which are at the heart of the problems with the financial sector, are not being addressed in their proper psychological context. The financial sector actively recruits and attracts individuals who practice poor mental hygiene and who forego intellectual integrity, as if these dispositions were positive and reliable attributes. The disease is indeed far deeper than assumed: technical adjustments and new regulations could not cure the system from what is sickening it.
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)
Executives will never be financially liable… might get a fraud charge that will mean a few months in Club Fed but will never pay out of pocket. These corps are too big and all executives have a ‘plausible deniability’, though the use of that kind of defence implicity states negligence and therefore liability. But I don’t think shareholders should be spared… they voted these men in and the books are open to them. Due diligence means something and no one really does it anymore. Laziness and greed shouldn’t be forgiven, be it a greedy executive or a greedy investor. Just because there are more investors than executive one can’t say one is any worse than the others. Can’t one argue it’s the shareholders lust for profits and therefore higher dividend, higher share prices that led executives to reach or be purged? Seems reasonable to me, but for now it’s all executive avarice and malicious greed exclusively.
OK, I’ve rambled, but while these top guys deserve punishment I would honestly say they were only chasing the profits their shareholders demanded and rather than saying ‘we’ve gone as far as we can go’, they decided to keep going and give themselves a parachute for the inevitable fall. Just an opinion, I could be totally off-base.
@Mott,
Correction: Third paragraph should have read “Only to such extent as unelected and unaccountable government bureaucrats unreasonably and without appropriate justification impose artificial and unnecessary “qualifications” on the accomplishment of projects or employment of people is there any connection between the adverse effect of ill-considered and arbitrary bureaucratic actions and inactions and the reciprocal and adverse effect on American’s “cost of living”.