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Posts Tagged ‘U.S. Securities and Exchange Commission’

At The End of Another Decade

In Financial Engeneering, Financial Markets, Health and Environment, International Econnomic Politics, Law & Regulations, National Economic Politics, Philosophy, Quantitative Finance, Technology, Views, commentaries and opinions on 02.01.11 at 01:29

New Years Eve 2010 (around midnight): It’s not only another year, it’s also the beginning of a new decade. Looking back at the past 10 years, the stage is set for a mind-blowing decade of technological breakthroughs that have the potential to change or lives completely. unfortunately, we’re probably also in for a long period of financial instability and high levels of unemployment.

“It is possible that we are facing one of the most important decades in a very long time.”

econotwist


I remember New Years eve of 2000; dot-com-mania, emerging markets,Y2K. However, I also remember 1990; deregulation, digital revolution and another collapse in our financial system. I think I’ve detected two major screw-ups over the last two decades.

I covered the stock market crash in 1987, as one of my first assignments as a financial reporter.

By 1989 economists and politicians had declared the troubles were over, the major  global economies was back on track, producing new jobs.

In my mind, the most memorable from headlines from 1991 was delivered by the Swedish newspaperDagens Industri.”

Like the page 2 editorial:

“Dear God, please cool down our economy.”

And the – now historical – headline from the day the Swedish bank central bank kicked up its key interest rate to 500%:

“Good Night, Sweden”

This was about six months before the crisis hit the Scandinavian banks like a Norwegian heat-seaking Penguin missile, and forced the governments in both Sweden, Denmark and Norway to take public control over the private banks.

They were downsized, sliced up, sold out and merged, and the result was five, six   major banks who orderly divided the Nordic home markets between them, and have so far managed to keep any serious competition out of the region.

All three governments still holds significant ownership in the Nordic banking sector.

The Scandinavian banking crisis was recently held up as an example on how to handle a crisis in the financial industry.

Well, we now have five or six banks in three small countries that have become so “systemically important” that they are “too big to fail,” and will have to be bailed out of “no matter what.”

On a global scale; the creation of financial companies that are of “systemically importance” so they cannot be allowed to default must be (at least one of the) “Biggest Screw-up of the Decade – 1990/2000.”

As for the decade now ending, not keeping up with the developments in the financial industry, allowing it to become an invisible, almost uncontrollable, monster, and not putting a stop to it, is a really heavy regulatory blunder.

In the aftermath of 2001, several financial companies and their executives were accused or convicted of fraud for misusing shareholders’ money, and the U.S. Securities and Exchange Commission fined top investment firms like Citigroup and Merrill Lynch millions of dollars for misleading investors.

Thinking back, it seems like we’ve been moving around in a circle.

Systemically we’re right back where we was in 1992, financially we’re in even deeper trouble.

The new international regulations, as they emerge in the final reports from the Basel Committee (Basel III), doesn’t provide anything that will make any significant and systemically changes.

So, my guess is that we’ll have to struggle with a dysfunctional financial market, debt and “systemically important”banks for still a long time – perhaps another decade.

Sadly, this means that the much debated economic recovery, in form of a helluva lot of new jobs, probably not is going to happen anytime soon.

I’m afraid it could take about another decade to get where we would like to be last year, in terms of labor market conditions.

But I’m also sure the next decade will bring a boom in one particular sector:

On this new years eve, we have more people using Facebook than Google, 60.000 new pieces of malware released on the internet every 24 hours and the banks are setting up high frequency information systems, with super fast connections from major central banks, financial authorities and government offices directly into their high frequency trading machines.

It’s all set for another golden age for computer engineers.

As far as the financial industry goes, it reflects the new market conditions imposed by law makers worldwide.

It’s not that amusing to engineer new financial derivatives, so the focus have shifted to the technical side.

The danger is that the financial markets grows even more complex and unpredictable, tied together in an unofficial, unregulated intranet of dark fiber cables.

And this goes beyond the markets and the economy.

Judging by the rapid pace of development over the last 10 years, the next 10 is definitively not gonna be slower.

With the so-called quantum computers just three to five years away, the computer technology, and our whole way of life, is destined for another evolutionary quantum leap, practically.

It is possible that we are facing one of the most important decades in a very long time.

I wish you all the very best.

Happy New Year!

PS:

I’d like to add a special greeting to all new readers/follower in 2010. Thanks for all your encouraging comments.

This summer the econotwis’t blogs (Swapper and Econotwist’s) blasted above  20.000 unique readers per month.

Many of you follow my Twitter, and I’m specially honored to welcome among my followers; the State of Israel, US Homeland Security and the EU Council.

Now that I got your attention; will you please tell the State of Kuwait to stop trying to hack into my computer!?

.

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Evolving Use of Leverage and Derivatives

In Financial Engeneering, Law & Regulations, Quantitative Finance, Technology, Trading software on 28.09.10 at 11:25

Many US closed-end funds (CEFs) continue to utilize traditional forms of cash-funded leverage such as bank loans, debt or preferred stock in order to enhance yields and returns for their common shareholders.

“Fitch expects that use of cash-funded leverage and derivatives by CEFs will continue to evolve and, as such, will remain an important consideration for investors in CEFs, affecting their return and risk profiles.”

Fitch Ratings


Additionally, CEFs may also utilize various types of derivatives to meet their investment objectives, either for purposes of hedging or as means to more efficiently achieve return and leverage targets, according to a special report published by Fitch Ratings, Monday.

As of July 30, 2010, 416 leveraged CEFs in the U.S. had issued $55.4 billion of cash-funded leverage against $180.4 billion in assets under management, according to the statement.

Additionally, 71 Fitch-rated CEFs had utilized $4.7 billion in notional of derivatives as an alternative to cash-funded leverage (termed “economic leverage”) and, to a lesser extent, for hedging purposes.

While leverage strategies enhance equity returns in favorable markets with rising asset returns and positively-sloped yield curves, leverage may also amplify the downside risk to debt, preferred stock and common stock investors in less favorable markets.

The report, entitled “Closed-End Funds: Evolving Use of Leverage and Derivative” discusses the extent to which different forms of leverage and derivatives are utilized by US CEFs, contrasts derivatives used for hedging purposes from those used for economic leverage purposes, highlights the Securities and Exchange Commission‘s (SEC) current and evolving regulatory treatment of derivatives, and summarizes Fitch’s treatment of derivatives when rating CEF debt and preferred stock issues.

“Current regulatory requirements for derivatives vary, however, and may not appropriately capture the potential for increased off-balance sheet leverage in excess of that allowed for more traditional forms of cash-funded borrowings,” the rating agency says.

Recognizing the evolution of derivatives usage by investment companies (including CEFs), both the SEC and American Bar Association continue to examine the issue to determine appropriate methods of measuring and reporting derivatives activity by applying a risk-based approach.

“Fitch believes that derivatives can be an effective tool for CEFs to manage existing risks and/or take on new risk exposures, provided that the marginal risk contribution is appropriately identified and measured.”

Further, Fitch expects that use of cash-funded leverage and derivatives by CEFs will continue to evolve and, as such, will remain an important consideration for investors in CEFs, affecting their return and risk profiles.”

“Regardless of the form that fund leverage takes (cash or derivatives), Fitch seeks to account for the risk to fund investors.”

For derivatives, Fitch seeks to recognize any additional economic leverage by ‘grossing up’ the CEF balance sheet, while also taking into account potential differences in the price volatility of the reference assets, the agency says.

“Conversely, hedges are viewed as a reduction in the overall risk profile of CEFs, to the extent the hedge is well-matched.”

The special report entitled “Closed-End Funds: Evolving Use of Leverage and Derivatives” was published on Sept. 27, 2010 and is available at http://www.fitchratings.com.

Additional research: Closed-End Fund Debt and Preferred Stock Rating Criteria

Example of use, Direct Market Access (DMA):

Ex-Physicist Leads Flash Crash Inquiry

In Financial Markets, International Econnomic Politics, National Economic Politics on 21.09.10 at 14:37

As a doctoral candidate in physics two decades ago, Gregg E. Berman spent most of his time in a laboratory searching through subatomic data for an elusive particle called the heavy neutrino. Today, from his office at the Securities and Exchange Commission, the former physicist is supervising a team of more than 20 investigators who have spent the last five months scrutinizing stock-trading data interview transcripts in an effort to figure out why stock prices went into free fall for 20 terrifying minutes on May 6th.                       

“What everybody would love to hear from the SEC is that XYZ trader blew up the market and made a gazillion dollars and is now in jail.”                       

Larry Tabb                 

Gregg E. Berman, head of an inquiry into the crash, said he will show how conditions and events led to an abrupt drop. (Photo: The New York Times).

 

Their long-awaited report on the so-called flash crash, in partnership with the Commodity Futures Trading Commission, is due to be published in the next two weeks, the New York Times reports.                

Mr. Berman (44) will not say exactly what will be in the report, but he says that it will not simply restate what regulators have already said — that markets were volatile because of worries over the debt crisis in Europe, causing some computerized trading programs to stop trading, and finally causing computers on other exchanges to misread the pullback as a rapid bidding down of stock prices.                       

Instead, he says, the report will focus on a specific sequence of events that preceded the crash.                       

He says it will tell a clear story about what happened in the markets on that stomach-churning day, beyond simply pointing a finger at the perils of the kind of high-speed computer trading that dominates today’s markets.                       

“The report will clearly demonstrate how  market conditions and events prior to the flash crash led to the extreme price moves.”                       

Some blame the high frequency trading for the so-called "flash crash" on May 6th.

 

When pressed, he adds, notably, that he had found no evidence of a deliberate attempt by anybody to disrupt markets.                   

The implications of the report are not merely academic.                       

Ordinary investors, shaken by the brief stock plunge and the lack of an official explanation, have withdrawn money from stock mutual funds every week since the crash.                       

The Berman report will not be the final word on the matter. Its findings will be used by a group of advisers to the S.E.C. and the commodity futures commission, which will make policy recommendations.                       

Still, some analysts question whether the report can deliver a simple answer that will satisfy everyone eager for reassurance.                       

“What everybody would love to hear from the S.E.C. is XYZ trader blew up the market and made a gazillion dollars and is now in jail,” says Larry Tabb, chief executive of the Tabb Group, a specialist on the markets.                       

“The answer, I think, is much more complicated and nuanced and has to do with a lot of different things. I am not sure that everybody outside the industry is going to have the patience to understand that.”                       

Market analysts say investors want to be reassured about the integrity of the nation’s markets so they can be confident that a nose dive will not happen again.                       

Visit The Swapper to read the rest of this story.                       

Related by the Econotwist.                       

May 6. 2010: “The Black Thursday”                       

SEC Expand Single Stock Circuit Breakers for Russell 1000 Index And Others                       

Wall Street Collapse: Did Somebody See It Coming?                       

David Rosenberg: “The Weirdest 20 Minutes Of My Life”                       

U.S. Stock Crash Compels Further Investigation of Wall Street Scam                       

Testimony Of A High Frequency Trader                       

The Ultimate Trading Weapon                       

The Rise Of The New Market Makers                       

US Stock Markets Infected By Malicious Software?                       

Update: Day Traders Crack The Timber Hill Trading System                       

Living In A Derivative World                    

Ex-Physicist Leads Flash Crash Inquiry

In High Frequency Trading, Law & Regulations, Quantitative Finance, Technology, Trading software on 21.09.10 at 12:57

As a doctoral candidate in physics two decades ago, Gregg E. Berman spent most of his time in a laboratory searching through subatomic data for an elusive particle called the heavy neutrino. Today, from his office at the Securities and Exchange Commission, the former physicist is supervising a team of more than 20 investigators who have spent the last five months scrutinizing stock-trading data interview transcripts in an effort to figure out why stock prices went into free fall for 20 terrifying minutes on May 6th.

“What everybody would love to hear from the SEC is that XYZ trader blew up the market and made a gazillion dollars and is now in jail.”

Larry Tabb

Gregg E. Berman, head of an inquiry into the crash, said he will show how conditions and events led to an abrupt drop. (Photo: The New York Times).

Their long-awaited report on the so-called flash crash, in partnership with the Commodity Futures Trading Commission, is due to be published in the next two weeks, the New York Times reports.

Mr. Berman (44) will not say exactly what will be in the report, but he says that it will not simply restate what regulators have already said — that markets were volatile because of worries over the debt crisis in Europe, causing some computerized trading programs to stop trading, and finally causing computers on other exchanges to misread the pullback as a rapid bidding down of stock prices.

Instead, he says, the report will focus on a specific sequence of events that preceded the crash.

He says it will tell a clear story about what happened in the markets on that stomach-churning day, beyond simply pointing a finger at the perils of the kind of high-speed computer trading that dominates today’s markets.

“The report will clearly demonstrate how market conditions and events prior to the flash crash led to the extreme price moves.”

Some blame the high frequency trading for the so-called "flash crash" on May 6th.

When pressed, he adds, notably, that he had found no evidence of a deliberate attempt by anybody to disrupt markets.

The implications of the report are not merely academic.

Ordinary investors, shaken by the brief stock plunge and the lack of an official explanation, have withdrawn money from stock mutual funds every week since the crash.

Market analysts say investors want to be reassured about the integrity of the nation’s markets so they can be confident that a nose dive will not happen again.

The Berman report will not be the final word on the matter. Its findings will be used by a group of advisers to the S.E.C. and the commodity futures commission, which will make policy recommendations.

Still, some analysts question whether the report can deliver a simple answer that will satisfy everyone eager for reassurance.

“What everybody would love to hear from the S.E.C. is XYZ trader blew up the market and made a gazillion dollars and is now in jail,” says Larry Tabb, chief executive of the Tabb Group, a specialist on the markets.

“The answer, I think, is much more complicated and nuanced and has to do with a lot of different things. I am not sure that everybody outside the industry is going to have the patience to understand that.”

Mr. Berman acknowledges that his team’s explanation will involve a number of things happening at once.

.

It may strike many people as painfully complex, but that is an undeniable result of the byzantine nature of today’s disparate electronic markets and the many players who take part in them.

The report’s conclusions will involve “market participants doing very different things and for very, very different reasons,” Berman says.

Central to all of this is the fact that stock trading is no longer centralized but instead takes place on dozens of exchanges, all with varying policies and procedures.

For example, the New York Stock Exchange has circuit breakers that prevent stocks from rising or falling so quickly that they disrupt the broader market.

Trading was slowed on several listings on that exchange on May 6, while other markets kept trading lower.

That lack of coordination created confusion during the flash crash.

Since then, the SEC has extended circuit breakers for individual stocks across all markets.

In investigating the crash, Mr. Berman says he finds himself in a position similar to his physics work 20 years ago, when he was collecting huge amounts of data and comparing the competing views of many laboratories on a question dividing particle physics — whether the neutrino, one of the least known and most common elementary particles, actually had mass.

Today he finds himself in familiar territory, sifting through huge amounts of messy and disjointed data, and at the same time reading blogs and e-mails from a wide range of observers, each with a theory about what happened on May 6th.

Read the rest of the article at The New York Times.

Related by The Swapper:

May 6. 2010: “The Black Thursday”

SEC Expand Single Stock Circuit Breakers for Russell 1000 Index And Others

Wall Street Collapse: Did Somebody See It Coming?

David Rosenberg: “The Weirdest 20 Minutes Of My Life”

U.S. Stock Crash Compels Further Investigation of Wall Street Scam

Testimony Of A High Frequency Trader

The Ultimate Trading Weapon

The Rise Of The New Market Makers

US Stock Markets Infected By Malicious Software?

Update: Day Traders Crack The Timber Hill Trading System

Living In A Derivative World

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SEC Expand Single Stock Circuit Breakers for Russell 1000 Index And Others

In Financial Engeneering, High Frequency Trading, Law & Regulations, Quantitative Finance, Technology, Trading software on 13.09.10 at 19:31

The Securities and Exchange Commission approve new rules submitted by the national securities exchanges and FINRA to expand a recently-adopted circuit breaker program to include all stocks in the Russell 1000 Index and certain exchange-traded funds. The SEC also approved new exchange and FINRA rules that clarify the process for breaking erroneous trades, according to a press release.

“These circuit breakers and this more objective guidance on breaking erroneous trades will help our markets retain the confidence of investors and companies.”

Mary L. Schapiro


A list of the securities included in the Russell 1000 Index, which was rebalanced on June 25, is available on the Russell website. The list of exchange-traded products included in the pilot is available on the SEC’s website. The SEC anticipates that the exchanges and FINRA will begin implementing the expanded circuit breaker program early next week.

The circuit breaker pilot program was approved in June in response to the market disruption of May 6 and currently applies to stocks listed in the S&P 500 Index.

Trading in a security included in the program is paused for a five-minute period if the security experiences a 10 percent price change over the preceding five minutes.

The pause gives the markets an opportunity to attract new trading interest in an affected stock, establish a reasonable market price, and resume trading in a fair and orderly fashion.

The circuit breaker program is in effect on a pilot basis through Dec. 10, 2010.

A list of the securities included in the Russell 1000 Index, which was rebalanced on June 25, is available on the Russell website.

The list of exchange-traded products included in the pilot is available on the SEC’s website. The SEC anticipates that the exchanges and FINRA will begin implementing the expanded circuit breaker program early next week.

“These circuit breakers and this more objective guidance on breaking erroneous trades will help our markets retain the confidence of investors and companies,” SEC Chairman Mary L. Schapiro says in a statement.

“We have worked quickly with the exchanges to take these steps, and we will continue to be very focused on addressing weaknesses exposed on May 6.”

The markets will continue to use the pilot period to make appropriate adjustments to the parameters or operation of the circuit breakers as warranted based on their experience.

The erroneous trade rules were developed in response to the market disruption of May 6.

The rules will make it clearer when — and at what prices — trades will be broken by the exchanges and FINRA.

As with the circuit breaker program, these rules will be in effect on a pilot basis through Dec. 10, 2010.

For stocks that are subject to the circuit breaker program, trades will be broken at specified levels depending on the stock price:

  • For stocks priced $25 or less, trades will be broken if the trades are at least 10 percent away from the circuit breaker trigger price.
  • For stocks priced more than $25 to $50, trades will be broken if they are 5 percent away from the circuit breaker trigger price.
  • For stocks priced more than $50, the trades will be broken if they are 3 percent away from the circuit breaker trigger price.

Where circuit breakers are not applicable, the exchanges and FINRA will break trades at specified levels for events involving multiple stocks depending on how many stocks are involved:

  • For events involving between five and 20 stocks, trades will be broken that are at least 10 percent away from the “reference price,” typically the last sale before pricing was disrupted.
  • For events involving more than 20 stocks, trades will be broken that are at least 30 percent away from the reference price.

On May 6, the markets only broke trades that were more than 60 percent away from the reference price in a process that was not transparent to market participants.

By establishing clear and transparent standards for breaking erroneous trades, the new rules should help provide certainty in advance as to which trades will be broken, and allow market participants to better manage their risks.

At Chairman Schapiro’s request, the SEC staff is also:

  • Considering whether market makers should be subject to more meaningful obligations to promote fair and orderly markets.
  • Working with the exchanges to prohibit the use by market makers of “stub” quotes that are not intended to indicate actual trading interest.
  • Studying the impact of multiple trading protocols at the exchanges, including the use of trading pauses and self-help rules.

The SEC staff also intends to work with the markets and CFTC staff to consider recalibrating market-wide circuit breakers currently on the books — none of which was triggered on May 6.

These circuit breakers apply across all equity trading venues and the futures markets.

Related by The Swapper:

May 6. 2010: “The Black Thursday”

Testimony Of A High Frequency Trader

Thursday May 6. – Busiest Day Ever On CBOE

Wall Street Collapse: Did Somebody See It Coming?

David Rosenberg: “The Weirdest 20 Minutes Of My Life”

U.S. Stock Crash Compels Further Investigation of Wall Street Scam

The Rise Of The New Market Makers

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Texas Billionaires Charged With Fraud

In Financial Markets, International Econnomic Politics, National Economic Politics on 30.07.10 at 12:19

Sam and Charles Wyly, billionaire Texas brothers who gained prominence spending millions of dollars on conservative political causes, committed fraud by using secret overseas accounts to generate more than $550 million in profit through illegal stock trades, the Securities and Exchange Commission said.

“They are among the biggest of the big when it comes to campaign bank-rollers, and their donors list is a who’s who of the Republican Party over the past decade.”

Dave Levinthal


The Wylys, who have been generous contributors to the Republican Party and GOP candidates, have spent the past several years facing questions, including from a Senate investigative committee, about whether they hid millions of dollars in tax shelters abroad.

Through their lawyer, the Wylys denied all charges.

According to the SEC, the brothers, who live in Dallas, created an elaborate and clandestine network of accounts and companies on the Isle of Man and in the Cayman Islands. The brothers then used these accounts and companies to trade more than $750 million of stock in four public companies on whose boards they served, not filing the disclosures required for corporate insiders, the SEC said.

Charles Wyly

In one case, the SEC alleges that the Wylys traded based on insider information they learned as board members, netting a profit of $32 million.

“The cloak of secrecy has been lifted from the complex web of foreign structures used by the Wylys to evade the securities laws,” Lorin L. Reisner, deputy director of SEC enforcement, said Thursday in a statement announcing the civil charges.

The agency is seeking unspecified financial penalties and a variety of other sanctions, including barring the Wylys from serving as directors or top executives of public companies.

According to The Washington Post, William Brewer III, a lawyer representing the Wylys, said they intend to clear their name.

“After six years of investigations, the SEC has chosen to make claims against the Wyly brothers — claims that, in our view, are without merit,” Brewer said in a statement. “It will come as little surprise to those who know them that the Wylys intend to vigorously defend themselves — and expect to be fully vindicated,” he says.

“They are among the biggest of the big when it comes to campaign bank-rollers, and their donors list is a who’s who of the Republican Party over the past decade,” says Dave Levinthal, a spokesman at the nonpartisan Center for Responsive Politics.

“It’s almost hard to find prominent Republicans who haven’t been a beneficiary of their financial largess. They’ve definitely been very kind, financially speaking, to a number of Republicans,” Levinthal says.

Both brothers, according to Forbes magazine, are billionaires who amassed their fortune by founding a computer company and investing in a wide range of interests including oil, insurance and restaurants.

In 1979, Sam Wyly faced sanctions by the SEC for improper regulatory disclosures.

They have been the subject of probes into potential financial wrongdoing since then. In 2006, the Senate permanent subcommittee on investigations completed a report on tax havens that focused on the Wylys.

Over 13 years, the Wylys used an “armada” of lawyers, brokers and other professionals to manage hundreds of millions of dollars in transactions that amounted to “the most elaborate offshore operations reviewed by the Subcommittee,” according to the panel’s report.

The regulators alleges that the Wylys committed fraud and various other violations of securities laws while sitting on the boards of four companies over the course of a decade: Michaels Stores, Sterling Software, Sterling Commerce and Scottish Annuity & Life Holdings.

The SEC says that by using offshore accounts to trade shares of these public companies, the Wylys were able to escape filing the regulatory disclosures required of board members when they buy or sell shares.

By keeping their trading activity secret, the Wylys deprived outside investors of information they could use “to gauge the sentiment of public companies’ insiders and large shareholders about the financial condition and prospects of those companies,” the SEC says.

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Unintended Consequences of Reform Hinder ABS Issuance

In Financial Engeneering, Law & Regulations, Quantitative Finance on 22.07.10 at 10:27

The repeal of Section 436(G) of the Securities Act of 1933 —  what the Wall Street Journal in an article this morning called an “unintended consequence” of the Dodd-Frank Wall Street Reform and Consumer Protection Act —  is likely to open rating agencies to unprecedented liability for the quality of their ratings on ABS transactions, according to Barclays Capital analysts.

“Thus, disclosure of ratings in offering documents of publicly registered securitizations is required, but consent of the agencies to include them is not.”

Barclays Capital

Asset-backed Securities

With difficulty assessing this new liability, Moody’s  Investors ServiceStandard & Poor’s and Fitch Ratings have already pulled back from the new – issue securitization market. Barclays analysts expect this to impact consumer ABS more than residential credit ABS, where issuance volumes have been generally lower and issuance that has come to the market has generally been privately placed as 144A deals .

In light of the support previously shown by Congress and the Obama Administration for consumer ABS, Barclays analysts doubt that the intent was to hinder securitization.

They believe that the repeal is an unintended consequence of the larger legislation and will be solved in a “mutually beneficial way” by the industry and the Securities and Exchange Commission (SEC).

According to Barclays, Rule 436(G) currently provides a carve-out for rating agencies from the consent requirements with respect to the provision and use of expert information in offering materials.

This protects rating agencies from liability for their ratings, which are considered opinions rather than expert advice.

To close an ABS  transaction, it  must have a rating from one or more nationally recognized statistical rating organizations (NRSROs).

When ratings are mandated, SEC regulations require the ratings to be disclosed and released by the agency in the public offering documents.

Analysts said that failure to disclose this information could be considered a material omission and would potentially subject the issuer and underwriter to further liability.

“Thus, disclosure of ratings in offering documents of publicly registered securitizations is required, but consent of the agencies to include them is not,” says Barclays analysts in the report released Wednesday.

As a result of the appeal, which will be effective one day after the legislation is signed into law by President Obama, rating agencies will need to consent to the use of their ratings in public offering materials.

If provided, this will likely open the agencies to liability under Section 11 of the 1933 Act under which they were previously not exposed.

Moody’s, Fitch, and S&P have each suggested that they are not likely to provide such consent at this time.  Their hesitation has put the brakes on new publicly registered ABS issuance, Barclays analysts says .

“While we will continue to publish credit ratings, given the potential legal consequences, we cannot consent to the inclusion of ratings in prospectuses and registration statements without further study. Issuers should discuss this change for the use of credit ratings in public offerings registered under the ’33 Act with their legal advisers,” Moody’s reported in a press release this week.

A statement by S&P highlighted some of the steps taken to provide transparency in light of the reform.

“We are currently examining the proposed legislation and expect to provide additional information to you in the future about any related new procedures or changes to our processes,” the agency states.

Fitch have issued a similar statement, indicating that the potential liabilities would prohibit them from providing consent.

“While Fitch will continue to publish credit ratings and research, given the potential consequences, Fitch cannot consent to including Fitch credit ratings in prospectuses and registration statements at this time,” the credit rating agency reports.

DBRS, too, comments on the rule’s repeal, adding: “In view of the unprecedented treatment of credit ratings resulting from the repeal of Rule 436(g), DBRS is not willing to consent to the inclusion of its ratings in registration statements or prospectuses at this time. Of course, DBRS will continue to make its credit ratings and research available to the public through its normal distribution channels.”

The intent of the repeal was to make rating agencies more accountable for the quality of their ratings.

It appears, however, that the issuance of public securitization is likely to “come to a halt” in the near term as a result of their hesitation, analysts says.

Consumer ABS has generated new- issue activity in the securitization market for the past 18 months.

Analysts do not believe that Congress was trying to reverse those gains. They view the repeal of Section 436(G) as a “temporary speedbump” that will likely cause a temporary decline in issuance volume.

Meanwhile, solutions include a move by issuers to the private/144A  market, where public filings with the SEC are not required, Barclays analysts says.

However, Bank of America Merrill Lynch analysts said in a report this week that limiting ABS issuers to the 144A market could reduce the options available to many investors.

With a substantial portion of consumer and commercial ABS issuance stemming from the public market, many investors can not participate in the 144A market and it would therefore not be a long-term solution, the analysts noted.

Additionally, a shift to the 144A market could also have the potential of increasing funding costs to issuers — which would eventually be passed on to consumers.

Some issuers may choose to reduce origination volumes if faced with rising funding costs, BofA analysts observes.

Alternatively, says Barclays analysts, the SEC could also collaborate with the industry to alleviate the unintended results of the repeal.

Analysts expect the former to take place initially, but the latter to be the eventual long-term result.

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6 U.S. Banks Collects 93% Of Industry's Trading Revenue

In Financial Markets, International Econnomic Politics, National Economic Politics, Views, commentaries and opinions on 09.06.10 at 19:05

Jepp, it’s the same big banks who have recivied the most of the bailout money. Of the remaining 1236 U.S, banks in 2008, 250 have gone bankrupt, the rest are not making any profit at all. About 700 of them is still in danger of being closed down by the regulators. And here’s an interesting question for you: Which of these banks would you trust the most in handling your money? The big ones? Or the smaller banks?

“If there’s one thing you should have learned during the past four years it is this. Large global commercial investment firms are about as trustworthy as a used car salesman.”

J.S. Kim


My guess is that we probably never will know the full truth about what’s been going on in the financial industry over the last decade. Most likely we have no clue on what is going on at the moment, either. But here are some facts; the three most profitable U.S, banks in 2009 was at the brink of collapse a year earlier, they’ve all recivied an unknown amount of bailout money from American tax payers and they are all under criminal investigation for alleged fraud and market manipulation.

The absurdity of the situation is becoming more clear every day.

The latest smelling evidence of a rotten system is to be found in the documents of the U.S. Security and Exchange Commission, based on the banks latest earnings reports.

As the figures below shows, the top 15 U.S, banks collected 97,8% of the total revenue in the American financial industry in 2009, mounting to USD 62,8 billion.

The remaining 986 banks had to share 2,2%, or USD 1,4 billion.

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* The top 6 bank holding companies have significant investment banking operations and account for 93% of industry trading revenue. 

* The next 3 bank holding companies are traditional trust and custody banks. Including those 3, the top 9 banks account for 96% of industry trading revenue.

* The next 2 bank holding companies are not community banks but rather an insurance company and an automotive financing company. Those 2 included, the top 11 banks accounts for 97% on industry’s trading revenue.

* The remaining 4 banks on the top 15 list account for less than 1% of industry trading revenue.

* The remaining 971 bank holding companies that filed FR Y-9C reports for the year ending December 31. 2009, and approximately 6.800 commercial banks accounted for the remaining 2,2% of the financial industry’s trading revenue.


51 Billion Dollar Profit (Of 60 Billion Revenue)

The top 6 bank holding companies made a total pre-tax profit of USD 51 billion in 2009.

The remaining 980 bank holding companies lost about USD 19 billion.

Moreover; aggregated 2009 trading revenue for the top 6 bank holding companies is USD 60 billion, and exceed their aggregated pre-tax income of USD 51 billion.

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Top 3 Criminals?

According to the original document the three most profitable bank holdings companies in 2009 were:

1. Morgan Stanley (Growth, y/y; 176,8%)

2. JP Morgan Chase (Growth, y/y; 127,3%)

3. Goldman Sachs (Growth, y/y; 61,3%)

Among the other top 6 banks, Bank of America had a marginal growth of 0,7% in 2009, while Citigroup and Wells Fargo had negative growth – around -30%.

And just to put a final touch on the picture:

Morgan Stanley and Goldman Sachs are now under criminal investigation, suspected of misleading investors and rating agencies in order to inflate the grades(ratings) of certain mortgage securities before the whole thing collapsed in 2008.

JP Morgan is being investigated for manipulation of the silver market.

This brings me to the question I asked at the top of the article; which one of these banks do you trust with your money?

It’s a kinda important question as a substantial number of banks (excluding those on the top 15 list) are about to disappear.

Since the “house of cards” fell apart in 2008, 250 banks have gone bankrupt and have been closed by the FDIC.

The regulators still have about 700 companies on their list of  banks in danger of default.

That makes it even harder to come up with a definitive answer.

However, J.S. Kim at SmartKnowledgeU has a very clear opinion.

3 Reasons to Cut All Ties with Commercial Banks

“If there’s one thing you should have learned during the past four years it is this. Large global commercial investment firms are about as trustworthy as a used car salesman,” Mr. Kim writes in his latest letter to clients.

Adding: “This has been the case since the birth of Wall Street, but people are only waking up to this reality today after the ugly secrets of the industry have finally been revealed to the outside world in the past several years. The lesson the public-at-large is learning today is one that old-school American gangster Lucky Luciano learned after spending a day on the floor of the New York Stock Exchange, an eye-opening lesson that allegedly induced him to comment: “I realized I’d joined the wrong mob.”

“In this article, you will be reminded of how firms bundled mortgages they knew were toxic into CDOs, sold them as solid investments to clients, and then shorted them behind their clients’ backs. You will further learn how under Congressional inquiry, only 25% of all investment bankers believed that it was their duty to act in the best interests of their clients. Sure, these bankers may tell you in face to face meetings that they always put your interests first, but according to their testimony in Congress, in reality, they think of you as a sucker more than anything else. Furthermore, I’m betting that more than half of the 25% of investment bankers that stated they should act in the best interests of their clients only stated this because they knew their statements would become part of the public record.”

“In this second article, you’ll be reminded of how JP Morgan somehow commingled $8.6 billion of their clients’ money with the firm’s own assets – an act that JP Morgan’s internal audits did not catch for seven years and an act that would have left their clients penniless if the firm had gone bankrupt during the time they did not separate their clients’ assets from the firm’s investments.”

“Finally, although almost every single US commercial investment firm adviser shuttles their clients that desire gold and silver into the paper ETFs GLD and SLV, I’m guessing that almost ZERO of these advisers properly explain the risks of the GLD and SLV, as paper proxies for real gold and silver, to their clients. Remember that bottom line profits to the firm from purchases of the GLD and SLV will be much higher than the zero profit that would result if clients opted to buy physical gold and physical silver on their own. As this third article explains, the probability is extremely high that these two funds will offer little of the protection that physical gold and physical silver will afford its owners, should the second phase of this monetary crisis progress in the manner we believe it will progress.”

Read the rest at TheUndergroundInvestor.com.

Related by the Econotwist:

Banks Face Multi-Hundred-Million Dollar Settlements

You Sue Me, I Sue You, Oh Peggy, Peggy Sue

Civil And Criminal Probes Against JP Morgan For Silver Manipulation

How To Create A 3 Trillion Dollar Bubble And Burst It

SEC To Take Action Against Moody’s

U.S. Stock Crash Compels Further Investigation of Wall Street Scam

The Truth, Some Truth And Something Like The Truth

Goldman Sachs Charged With Fraud – Here’s The SEC filing

Goldman’s Collateralized, Securitized And Synthesized Fraud

Obama: “It Is Time”

AIG: What Did FED Bail Out and Why?

EU Wants Answers From Wall St. On Greek Debt

Italy Charge Foreign Banks With Fraud

Where Exactly Is “Money Heaven”?

Organizing Financial Rebellion

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