Fixing Wall Street is complicated, but a piece at the core of Dodd's bill is very simple: Don't let these jerks ever again make bets with 2 percent capital and 98 percent debt. Leverage was the poison that caused the Great Recession, starting with home "owners" putting zero percent down and extending all through the system. Capital is what cushions everybody against unforeseen reverses. With no equity in the system in 2008, the whole thing collapsed.

Dodd says his bill will prevent another catastrophe by "imposing tough new capital and leverage requirements that make it undesirable to get too big."

Good idea. But it's hard to say at this point what that means. But it sounds like the Financial Stability Oversight Council would make "recommendations" to the Fed for ratcheting up capital requirements as companies get big and complex, "with significant requirements on companies that pose risks to the financial system." I'd rather see statutory or at least permanent regulatory capital requirements than some squishy advisory power, but this is hard to do in a global economy.

Posted by Jay Hancock at 3:13 PM | Permalink | Comments (0)
Categories: Finance
        

Currency-trade billionaire and Open Society Institute benefactor George Soros tells Davos Man that gold is due for a fall. "When interest rates are low we have conditions for asset bubbles to develop, and they are developing at the moment," he told the World Economic Forum in Switzerland, according to The Telegraph. "The ultimate asset bubble is gold."

Gold bubble talk has been with us for a while, and people listen to Soros. The problem is: What will burst the bubble? If the economy stays in the tank and central banks keep the money supply pumped up like Mark McGwire in 1998, gold should stay elevated. If the economy starts growing vigorously and refuels inflation, that could be good for gold, too.

UPDATE: Here is Soros, wearing a Dr. Zhivago hat, talking to Bloomberg in Davos.

Posted by Jay Hancock at 11:46 AM | Permalink | Comments (16)
Categories: Finance
        

Legg Mason boss Mark Fetting advanced an interesting thesis when he spoke to folks at Johns Hopkins' Carey School of Business Carey Business School this month. Places such as Baltimore, with clusters of smart folks geographically apart from the lemmings and group-thinkers in the mega-towns, can deliver superior ideas -- whether in investing, tech innovation, policy or other areas, he says. Email me if you want the whole speech. I can't find an online copy. UPDATE: Here's a link to a video.  

From the speech:

Leadership can not be limited to so-called global centers like New York, London and Tokyo. Because ideas don’t have zip codes or country codes global leadership also comes from a Baltimore, a Pasadena, a Melbourne, or a Sao Paulo. In fact, the traditional bastions of leadership may be a bit tarred or tired or even jaded these days, often blamed for today’s woes rather than being incubators of solutions.

Would we trust policy on financial reform that comes from Wall Street or is there more credibility if it comes from the Economic Opportunity Institute in Seattle? Would we be more open to a political perspective from the National Peoples Congress in China or from the independent International Peace Research Institute in Oslo? Do we look to Tokyo for new ideas or do we turn to the Silicon Valleys and incubators in mid-sized cities like Ann Arbor and Raleigh-Durham-Chapel Hill or the biotech and medical centers in Baltimore and Boston?

 

Continue reading "Baltimore: The Sundance Channel of investing" »

Posted by Jay Hancock at 8:45 AM | Permalink | Comments (3)
Categories: Finance
        

Here's a landmark in modernity. Centuries after Italian bankers started honoring paper drafts issued by faraway merchants, Britain's bank payment overseers have voted to phase out paper checks by 2018, reports Reuters.

"There are many more efficient ways of making payments than by paper in the 21st century, and the time is ripe for the economy as a whole to reap the benefits of its replacement," Paul Smee, the council chief executive, said in a statement.

Of course the use of checks in the United States is declining, too. It's a huge challenge for check-printer Harland-Clarke, which has a plant in Glen Burnie. Harland and Clarke used to be competitors but merged as the demand for checks fell. In the Reuters story, advocates for the elderly complained about abolishing checks, which is a legitimate concern. Many old folks as well as lower-income families don't use ATMs or debit or credit cards.

Harland-Clarke says checks are alive and bouncing:

According to popular lore, Mark Twain once called the reports of his death greatly exaggerated. The same might have been said about radio, back when TV made its appearance. Or about snail mail, when email became inescapable. But radio and the U.S. Postal Service are still very much alive, despite the invention of new electronic ways to communicate. It is no different for the good old-fashioned paper checking account, as new electronic payment options enter the scene. While the use of electronic payments has increased in recent years, the truth is that checks are far from obsolete.

Posted by Jay Hancock at 6:44 AM | Permalink | Comments (10)
Categories: Finance
        

The defense of the behavior of Wall Street bankers leading up to last year's collapse is to say that they didn't see it coming. After all, the likes of Dick Fuld & Co. had billions tied up in stock and options at their companies, so why would it be in their interests to take undue risks? They lost more than anybody in the collapse, so at least the incentive structure was properly aligned. Some profs connected to Harvard Law School give the lie to this idea by analyzing the dough banking execs pulled out of their operations before the music stopped.

The execs got away with so much loot beforehand (including bonuses based on "profits" that proved illusory), the study shows, that they were well rewarded for ruining the shareholders. Even if those shareholders included themselves.

In 2000-07, the top five executives at Bear and Lehman pocketed cash bonuses exceeding $300m and $150m respectively (adjusted to 2009 dollars). Although the financial results on which bonus payments were based were sharply reversed in 2008, pay arrangements allowed executives to keep past bonuses.

Furthermore, executives regularly took large amounts of money off the table by unloading shares and options. Overall, in 2000-08 the top-five teams at Bear and Lehman cashed out close to $2bn in this way: about $1.1bn at Bear and $850m at Lehman. Indeed, the teams sold more shares during the years preceding the firms’ collapse than they held when the music stopped in 2008.

Altogether, equity sales and bonuses over that period provided the top five at the two banks with cash of about $1.4bn and $1bn respectively (an average of almost $250m each). These cash proceeds considerably exceed the value of the executives’ holdings at the beginning of 2000 (which we estimate to be in the order of a respective $800m and $600m).

Posted by Jay Hancock at 11:22 AM | Permalink | Comments (2)
Categories: Finance
        

Good piece at Citibiz List by Doug Schmidt of Chessiecap on Stanley Works' buyout of Black & Decker. He's unhappy about the deal, especially about the millions being reaped by Black & Decker CEO Nolan Archibald as well as Stanley exects: The gist:

It is clearly legal, but it is one of the seedier sides of our markets that the SEC seems powerless to expose or control. Not only will Mr. Archibald receive a bonus worth scores of millions of dollars to make this deal work, the top two Stanley executives are also issuing themselves almost 1.8 million "merger equity grants." There is something for everybody in this deal as long as you work at the top.

As Schmidt points out, it's not just lower-level Black & Decker employees who are getting the shaft. Shareholders haven't done that well, either. Nevertheless,

In addition, Mr. Archibald has enriched himself enormously in his twenty years as CEO, becoming the largest individual Black & Decker shareholder with approximately 2.5 million shares or over 4% of the total ownership. He ranks as the 7th largest institutional shareholder behind funds such as Fidelity and AllianceBernstein. Even before the incentives and pay package provided in the transaction, Mr. Archibald's current stake is worth approximately $150 million. [Emphasis Schmidt's.]

UPDATE: That didn't take long. The time stamp on this post is 12:04. At 12:30 Black & Decker spokesman Roger Young was on the line, noting that Schmidt substantially overstated Archibald's pile by saying it's worth $150 million. Young is right. Archibald controls 2.5 million Black & Decker shares, but more than 2 million shares of this are in the form of options, with strike prices varying from $30 to $92. (An option gives you only the difference between the strike and the market prices.) Today BDK stock is about $62. So the options are worth a lot less than the $60 figure Schmidt used, and some are worthless. Still, they come to many millions. At the same time, it looks like Archibald owns BDK shares worth about $11 million. In any event you don't feel sorry for him.

Posted by Jay Hancock at 12:04 PM | Permalink | Comments (1)
Categories: Finance
        

Note to self: Do not ever again use the MetaBank "Get Cash Now!" ATM in The Sun's lobby. $4.25 in fees to get $100 in cash.

Posted by Jay Hancock at 2:59 PM | Permalink | Comments (2)
Categories: Finance
        

Ed Hale's 1st Mariner Bank has its headquarters in 1st Mariner Tower, but the building itself is owned by Hale's personal real estate company. Now that Corporate Office Properties Trust has bought the tower from the financially distressed Hale, where does that leave him? Hard to know exactly at this point. He has lost the tower, in which he may once have had equity of tens of millions of dollars, and the development potential of nearby land. He has to move out of the penthouse apartment that he claimed when he built the tower. (COPT says it's going to turn the pad into more offices.)

But Hale avoided foreclosure proceedings. The fact that he agreed to sell to COPT suggests that the deal was on terms more favorable than he would have gotten if he had lost the property involuntarily. We don't know the terms at this point. My guess: COPT paid off Hale's $84 million loan from Natixis at some slight discount and let Hale walk away with a minor amount of cash. Hale wasn't talking to my colleague Hanah Cho on Wednesday, but COPT chief Randall Griffin told her that "it's a win-win for everyone involved" and that "Ed gets to strengthen his financial position."

We may find out what that means during a COPT conference call today. In any event it seems doubtful that Hale will raise enough capital from the deal to rescue 1st Mariner, which is in its own difficulties.

UPDATE: Hanah Cho reports on the conference call. You can't tell how much Hale got out of the deal, if anything, because COPT, while it disclosed the gross price, won't break down which money went where. COPT did buy the Natixis note at a discount.

Posted by Jay Hancock at 6:50 AM | Permalink | Comments (8)
Categories: Finance
        

The stock market crash of 1929 got cranked up on Black Thursday, Oct. 24. But it really took off the following Monday. Investors read about the Thursday drop in Friday's papers, and they fretted about it over the weekend. On Monday they bailed. The Dow plunged 13 percent on Oct. 28 and another 12 percent the next day, says Wiki.

On dshort.com's graph below of four bad bear markets, the trauma of October 1929 can be seen at the far left of the gray fever line. As you can see, the pain had only just begun. The blue line represents stocks' performance in this particular crisis. We can be thankful that it has diverged from the pattern of 1929 and the 1930s.

Posted by Jay Hancock at 12:21 PM | Permalink | Comments (0)
Categories: Finance
        

Legg Mason, the money-running firm whose assets under management have fallen from $1 trillion to less than $700 million, billion, thanks to falling stock values and withdrawals from its funds, has entered a new phase. Underperforming public firms such as this are always under risk that an outside investor will decide he has better ideas about how to build shareholder value than the guys in charge.

Nelson Peltz, who has a long record of such agitation, has taken on that role at Legg. He has 4 percent of its stock now. Expect him to accumulate more. Financial types I talk to around town believe there is a decent chance that the firm Chip Mason built will not be independent in a couple years. If this turns out to be the case, Peltz's arrival will be the first step in this process.

But the sale of Legg is far from guaranteed. Legg is recovering on its own -- faster than the economy. Peltz may be satisfied with less-drastic outcomes. Here is part of today's column. Read the whole thing here.

The arrival of Peltz and his 4.3 percent ownership stake increases the uncertainty. Given what Legg has been through, it was hard to imagine that the pressure on Bill Miller and the firm's other money managers to perform could have been any greater. But it just intensified. "His appearance is not good news for management," says Charles M. Elson, a business professor and corporate governance expert at the University of Delaware. "But it may be good news for the shareholders."

Posted by Jay Hancock at 8:21 AM | Permalink | Comments (4)
Categories: Finance
        

The Dow Jones Industrials and the S&P 500 are diverging even more than usual today. As I write the Dow is up 75 points, or .8 percent, while the S&P is up only 2 points, or .2 percent. The difference is accounted for by only four Dow stocks, all of which are having a great day. 3M and Travelers are both up by about $2.50 per share. McDonald's is up $1.65 and IBM is up $1.20. Between them those four stocks account for 60 points in the Dow's increase today.

It's another example of how the Dow is a lousy indicator for the overall market. The S&P is a better gauge of what's going on with big-cap stocks.

Posted by Jay Hancock at 2:00 PM | Permalink | Comments (0)
Categories: Finance
        

Greedy Wall Street was the talking point for the White House on Sunday's talk shows. As America's unemployment rate approaches 10 percent, big financial companies sit comfortably on billions in taxpayer bailouts and bankers rake in what may be record pay, "the bonuses are offensive," David Axelrod told ABC's "This Week," according to the Washington Post.

"Not only do they come for a bailout," said Rahm Emanuel on CNN's State of the Union. "They're now back trying to fight a consumer office and the type of protections that will prevent another type of situation where the economy is taken over the cliff by the actions taken on Wall Street and financial market."

But nobody's really talking about doing anything about the pay. The White House is trying to use outrage over the bonuses as leverage to get finance-reform legislation passed. The unspoken offer: We'll shut up about pay if you guys stop blocking efforts to set up a consumer financial safety agency. Treasury Department pay czar Kenneth Feinberg gets lots of headlines but what he's doing is symbolic rather than substantial -- getting Bank of America's Ken Lewis to give back his 2009 pay, waving a stick at AIG, etc.

Go ahead, Goldman Sachs partners. Sign the contract on that mansion in Bimini. Those bonuses are money in the bank.

Posted by Jay Hancock at 8:44 AM | Permalink | Comments (7)
Categories: Finance
        

Finally Ed Hale has sold 1st Mariner Bank's consumer finance unit, which he badly needed to do to raise cash to bolster the bank's capital ratios.The stock market is unimpressed. 1st Mariner stock is up only a nickel, to $1.27, as I write this. On low volume.

That's because Hale has to come up with at least another $10 million by the middle of next year to avoid having the bank seized by federal regulators. It's not clear how he's going to do that. Earlier this year 1st Mariner officials and analysts who follow the bank were thinking Hale could get $20 million for the consumer unit. But no. To make up the other $10 million he probably has to sell new stock in the bank -- to board members or somebody else. But a price of $1.27 is not predicting big things for today's shareholders. $1.27 says they'll either get the heck diluted out of them when new shares are issued or wiped out when the FDIC steps in. Still, the stock has recovered from pennies territory earlier this year, which bespeaks some hope.

Posted by Jay Hancock at 3:50 PM | Permalink | Comments (2)
Categories: Finance
        

When big disasters happen we want a big solution. It's human nature to want a remedy that is seemingly proportionate to the disease. So after the terrorist attacks of Sept. 11, 2001, we didn't just ban box cutters from airplanes and rest assured that in the future no passengers would ever again allow their plane to be turned into a guided missle. (Even if terrorists overpowered the crew, passengers would gang up and thwart the mission, like the heroes on United Flight 93.) No. Instead we invaded two countries, spent more than $1 trillion, formed the Department of Homeland Security etc.

Little things can make a big difference, as Malcolm Gladwell taught us in The Tipping Point. Often they make a bigger difference than big things. The reaction to last year's financial disaster is big. We're talking about founding a consumer financial safety agency. We're going to regulate hedge funds, require new forms to be filled out, enable the hiring of even more lawyers etc. I wrote in favor last week.

But, reacting to the column, reader Mark Adams had another idea. How about if we just enforce the fraud and perjury statutes already on the books? The subprime mortgage crisis might never have happened, or at least it wouldn't have been as bad, without "liar loans'' -- borrowers and mortgage originators basically defrauding lenders by lying about their incomes and assets. Is it not astonishing that none or few if these lying borrowers are being prosecuted? Here is Mark:

Hi Jay,

The best financial regulation that could be created would be mandatory prosecution and jail time for perjury. None of the financial crises you spoke of could have been accomplished without multiple acts of perjury. In order for mortgage backed securities to go south, it took an entire network of perjurers -- borrowers, loan officers, appraisers, brokers, rating agencies. None of them ever gets prosecuted for perjury, unless a particular prosecutor is trying to leverage them for some other crime. The whole concept of having something called a "liar's loan," which originates with a sworn financial statement and application, is just insane.

When Bill Clinton was in the jackpot for perjury, I was one of the people who thought he should have been prosecuted. I voted for the guy...

Continue reading "Radical finace reform: How about enforcing the law? " »

Posted by Jay Hancock at 8:34 AM | Permalink | Comments (0)
Categories: Finance
        

Barry Ritholtz has the answer to the question that Nobelists, professors, economists and soothsayers have been asking for for 300 years. What drives the stock market?

Such is the result of giving two million primates lots of money and keyboards and a belief they can make a living based on numbers and letters moving around — on a screen, in a futures pit, on an exchange floor, or even under a buttonwood tree.

Posted by Jay Hancock at 11:20 AM | Permalink | Comments (0)
Categories: Finance
        

This week both New York City and Maryland's Prince George's County sold bonds subsidized by the February federal stimulus package. Bond blogger Accrued Interest poses a bond wonk's version of a zen koan: Assuming both paid the same interest yield, which is the better deal? Ie., which municipality is less likely to default?

Accrued Interest chooses PG, and here's partly why:

I like Prince George's better. First, much of the County's employment is based around the Federal government, which is the one part of the economy that is still growing. New York on the other hand is in the eye of the storm in terms of finance lay-offs. But more importantly to me, New York has a more complicated budget.

In reality, neither is likely to actually miss any bond payments. So the risk is a California-style budget battle, where the situation is unresolved for months and months causing spreads on bonds to widen dramatically. Isn't that much more likely to happen in the Big Apple? Prince George's just doesn't have a complicated enough budget to create this kind of problem. New York does. Hell, New York has gone through such budget battles multiple times in the past.

Posted by Jay Hancock at 10:16 AM | Permalink | Comments (2)
Categories: Finance
        

Federal regulators are turning up the heat on First Mariner Bank, which got blasted by the housing collapse and has been unable to rebuild its balance sheet to the extent wanted by regulators despite months of trying. Last week the bank got a cease and desist order from the FDIC and Maryland regulators, which it reported today to the SEC. It's not time to assume a federal takeover of First Mariner. The bank has a couple options that could end up raising the money it needs. Nevertheless, the feds don't seem to have seen any progress and are giving the bank and boss Ed Hale some deadlines.

It has 30 days to present a plan showing it can raise its Tier 1 leverage capital ratio from the 6 percent range to 6.5 percent by April and 7.5 percent by July. (First Mariner says it has already presented such a plan.) Early next year it also has to submit a plan on cutting costs and otherwise improving the bottom line on the income statement.

The key components of the order:

Within 30 days of the end of the calendar year 2009, the Bank shall formulate and submit to the Regional Director of the New York Regional Office of the FDIC (“Regional Director”) and the Commissioner for review and comment a written profit plan and a realistic, comprehensive budget for all categories of income and expense for calendar year 2010. The plan required by this paragraph shall contain formal goals and strategies, be consistent with sound banking practices, reduce discretionary expenses, improve the Bank’s overall earnings and net interest income, and shall contain a description of the operating assumptions that form the basis for major projected income and expense components.

Within 30 days after the effective date of this ORDER, the Bank shall submit a written capital plan to the Regional Director and the Commissioner. The capital plan shall require the Bank, after establishing an Allowance for Loan and Lease Losses, to achieve and maintain, on or before June 30, 2010, its Tier 1 Leverage Capital ratio equal to or greater than 7.50 percent of the Bank’s Average Total Assets and its Total Risk-Based Capital ratio equal to or greater than 11 percent of the Bank’s Total Risk Weighted Assets.

Beginning on March 31, 2010, the Bank shall maintain its Tier 1 Leverage Capital ratio at a level equal to or greater than 6.5 percent and its Total Risk-Based Capital ratio at a level equal to or greater than 10 percent.

Posted by Jay Hancock at 7:05 PM | Permalink | Comments (6)
Categories: Finance
        

Washington threatens to make reforming the financial system more complicated than it needs to be. The Treasury Department's white paper for reform is 89 pages long. The bills are a lot longer. True, there is much to tackle -- derivatives, executive pay, consolidation of regulators. But pols ought to start by focusing on two key factors -- capital ratios and transparency. If they do, much good will follow without needless small print.

Many causes went into last year's meltdown, but what made it deadly and cascading were numerous examples of excess leverage -- far too much borrowed money and far too little solid capital in the vaults. Banks are typically capitalized at a 10 to 1 ratio. Lehman Brothers was something north of 30 to 1. At 30-to-1 ratios it takes only a 4 percent loss on your invested position to wipe out the firm. The solution is simple. Don't allow 30 to 1. And really really don't allow 30 to 1 when the maturity on the debt can be measured in months or weeks, not years.

Second, regulators need to have quick and clear views of what giant financial firms are doing. This means greater disclosure by hedge funds and other private equity, to the extent that they are using significant borrowed money to invest. I would use debt -- leverage -- as a trigger for private-equity regulation both because debt often signals risk and because this approach would leave venture capital alone.

Venture capital is the investment that breeds innovation and creates economic engines such as Google or Microsoft. Venture capital employs little debt. Venture capital must not be punished with new red tape and expenses for the sins of AIG and Lehman. Under Treasury's white paper, it looks like it would be.

Posted by Jay Hancock at 7:00 AM | Permalink | Comments (1)
Categories: Finance
        

The inspector general looking into the SEC's baffling failure to investigate Bernard Madoff finds no corruption -- no strings pulled at high levels to call off the dogs, no bribes, no cronies helping cronies. It does find ridiculous, maddening and repeated failures to respond to extremely specific allegations, as far back as 1992. We knew much of this already, of course. But seeing it in print from the IG is still amazing. If the SEC and its nearly $1 billion budget can't respond to tips such as these, what the #&%!!*$ were they doing down there?

The first complaint, brought to the SEC's attention in 1992, related to allegations that an unregistered investment company was offering "100%" safe investments with high and extremely consistent rates of return over significant periods of time to "special" customers. The SEC actually suspected the investment company was operating a Ponzi scheme...

The second complaint was very specific and different versions were provided to the SEC in May 2000, March 2001 and October 2005. The complaint submitted in 2005 was entitled "The World's Largest Hedge Fund is a Fraud" and detailed approximately 30 red flags indicating that Madoffwas operating a Ponzi scheme, a scenario it described as "highly likely."

In May 2003, the SEC received a third complaint from a respected Hedge Fund Manager identifying numerous concerns about Madoffs strategy and purported returns, questioning whether Madoff was actually trading options in the volume he claimed, noting that Madoffs strategy and purported returns were not duplicable by anyone else, and stating Madoffs strategy had no correlation to the overall equity markets in oyer 10 years. According to an SEC manager, the Hedge Fund Manager's complaint laid out issues that were "indicia of a Ponzi scheme."

Continue reading "The SEC on Madoff: Corrupt? No. Incompetent? Yeah" »

Posted by Jay Hancock at 4:26 PM | Permalink | Comments (3)
Categories: Finance
        

Here in the newspaper business we're painfully familiar with comments pertaining to the editing process making it into final print. The Boston Globe is still famous for publishing a jokey headline that was intended only as a temporary placeholder on an editorial about Jimmy Carter: "MORE MUSH FROM THE WIMP." When I was an overworked editor at another paper years ago I once published a reporter's story without removing my notes from the copy: "WHAT DOES THIS MEAN?" and "??????" etc.

Never seen it with financial reports, however, until now. One of the accountants at NZ Farming Systems Uruguay apparently gave a helpful bit of advice to a colleague so s/he could make the books balance. In the table reconciling the income and cash statements, somebody wrote on the depreciation line: "fudge this to equal depn in FA note 11S 2391."

Oops.

NZ Farming Uruguay replied to regulators:

While the words in the comment were not well chosen, they were merely a prompt for the author of the Financial Statements to reconfirm the rounding difference expressed in an early draft of the Financial Statements where there was a minor rounding discrepancy.

HT Barry Ritholtz.

Posted by Jay Hancock at 9:12 AM | Permalink | Comments (0)
Categories: Finance
        

Almost every Friday is failure Friday for the FDIC. This week it's Towson's Bradford Bank. The usual reassurances apply: deposits are safe up to the insured limits etc. etc. Here is the FDIC release. Now all we need is the haiku from Soylent Green is People.

Bradford Bank, Baltimore, Maryland, was closed today by the Office of Thrift Supervision, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Manufacturers and Traders Trust Company (M&T), Buffalo, New York, to assume all of the deposits of Bradford Bank.

The nine branches of Bradford Bank will reopen on Saturday as branches of M&T. Depositors of Bradford Bank will automatically become depositors of M&T. Depositors will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage. Customers should continue to use their existing branches until M&T can fully integrate the deposit records of Bradford Bank.

This evening and over the weekend, depositors of Bradford Bank can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

UPDATE: As promised. SGP, who has become the poet laureate of bank failures, writes haiku for every institution seized by the federales.

Summer heat scorches
Three...four hundred...one thousand???
Bradford bank now toast.
by Soylent Green is People

Continue reading "Bradford bank fails; assets sold to M&T" »

Posted by Jay Hancock at 6:24 PM | Permalink | Comments (3)
Categories: Finance
        

The Securities and Exchange Commission has reached a $33 million settlement with Bank of America for allegedly misleading its shareholders about bonuses paid to Merrill Lynch employees late last year. Bank of America and CEO Ken Lewis asked shareholders to approve the purchase of Merrill as the financial markets caved, giving cooing reassurances about bonuses. In fact it was a bonus jackpot.

So: The government that pressured Lewis to go through with the Merrill acquisition is now penalizing Bank of America for allegedly hiding information that might have caused shareholders to reject the deal. Damned if BAC does/doesn't. Such is the legal confusion when the law is abused as it was last fall. And who has to pay the $33 million? Bank of America shareholders -- the ones who were suppoesdly the victims.

WASHINGTON (AP) — Bank of America has agreed to pay a $33 million penalty to settle government charges that it misled investors about Merrill Lynch's plans to pay bonuses to its employees.

In seeking approval to buy Merrill, Bank of America told its shareholders that Merrill agreed not to pay year-end bonuses without Bank of America's consent. But the Securities and Exchange Commission says Bank of America had authorized New York-based Merrill to pay $5.8 billion in bonuses.

Posted by Jay Hancock at 1:59 PM | Permalink | Comments (1)
Categories: Finance
        

Yet again we're talking about computerized trading, in this case "high-frequency trading" as described in various mainstream and trade media outlets. This sort of conversation has been going on since the 1980s, when program trading helped cause the 1987 stock market crash.

Here's the description from the NYT:

Powerful computers, some housed right next to the machines that drive marketplaces like the New York Stock Exchange, enable high-frequency traders to transmit millions of orders at lightning speed and, their detractors contend, reap billions at everyone else’s expense... Powerful algorithms — “algos,” in industry parlance — execute millions of orders a second and scan dozens of public and private marketplaces simultaneously. They can spot trends before other investors can blink, changing orders and strategies within milliseconds.

If trading firms are really "front running" their clients -- buying securities for which clients trades have been ordered but not executed, knowing that the price will rise when the client order is put in -- it's wrong and probably illegal. Even if they aren't, it's hard to believe rapid trading is economically efficient or fair. Short-term thinking is at the heart of too much of what's wrong with Wall Street and society. Fast trading is destabilizing and says nothing about the long-term returns of whatever is being bought and sold in milliseconds.

Tyler Cowen disagrees:

I'm not a believer in the strong versions of efficient markets hypotheses, so I do admit that high-frequency trading, like just about every other trading strategy, can bring short-run "whiplash" effects on market prices. But if you don't like it, you can trade yourself at much lower frequencies, which is probably what you should be doing anyway. At the same time high-frequency trading smooths out or shortens many other cases of price whiplash. High-frequency trading brings more liquidity into the market. Call it "low quality liquidity" if you wish, but it still looks like net liquidity to me.

Good for Andy Brooks at T. Rowe Price for voicing concerns about HFT in the NYT article:

“You want to encourage innovation, and you want to reward companies that have invested in technology and ideas that make the markets more efficient,” said Andrew M. Brooks, head of United States equity trading at T. Rowe Price, a mutual fund and investment company that often competes with and uses high-frequency techniques. “But we’re moving toward a two-tiered marketplace of the high-frequency arbitrage guys, and everyone else. People want to know they have a legitimate shot at getting a fair deal. Otherwise, the markets lose their integrity.”

Posted by Jay Hancock at 10:45 AM | Permalink | Comments (1)
Categories: Finance