the finance industry / wall street

Curious whether Hurting 2 watched the Frontline episode? I got the impression from some of his posts that Hurting 2 thinks its was nearly impossible to bring criminal charges against the Wall Street folks; so I wonder what he thinks of Lanny Breuer, based on that show?

― curmudgeon, Thursday, January 24, 2013 2:02 PM Bookmark Flag Post Permalink

will watch when I get home if I have time, very interested

Thought the bump would be for this:
http://dealbook.nytimes.com/2013/01/23/financial-crisis-lawsuit-suggests-bad-behavior-at-morgan-stanley/

On March 16, 2007, Morgan Stanley employees working on one of the toxic assets that helped blow up the world economy discussed what to name it. Among the team members’ suggestions: “Subprime Meltdown,” “Hitman,” “Nuclear Holocaust” and “Mike Tyson’s Punchout,” as well a simple yet direct reference to a bag of excrement.

So I watched a good bit of it but not all of it. I can't say it really changed my mind about the criminal side, although I did not get a good impression of Breuer at all -- comes off as a mealy-mouthed coward. He just stepped down fwiw. New SEC head also being brought in - rep as a tough prosecutor: http://dealbook.nytimes.com/2013/01/24/mary-jo-white-to-be-named-new-s-e-c-boss/

Maybe the second term will see more aggressive investigation and prosecution. I still think that it's going to be very difficult to prove that any senior executives committed crimes.

The revolving door may also prevent anything from happening. Not that Treasury could prevent Justice from doing something but it doesn't help:

Lew did not appear to have any role during the negotiations over Citigroup’s bailout. When asked whether they crossed his path at any point in 2008, Henry M. Paulson Jr., former Treasury secretary; Sheila C. Bair, former FDIC chairman; and Robert K. Steel, former undersecretary for domestic finance at the Treasury, all said they had not.

By early 2009, Lew’s brief experience with Wall Street was over. He left Citigroup to become a deputy secretary of state and joined the Obama administration, where he has worked ever since.

“It’s striking the way in which the Obama administration has been staffed by Citigroup expatriates,” said Simon Johnson, a professor at MIT and frequent critic of big banks.

http://www.washingtonpost.com/business/economy/treasury-nominee-lews-history-with-citigroup-raises-questions/2013/01/24/f63ae880-60e9-11e2-9940-6fc488f3fecd_story_2.html

Well Mary Jo White also did defense side for Wall Street at one point. I'm not necessarily concerned about that though -- where I work (plaintiffs' side, a lot of cases against banks), we have several ex-defense people and I see no evidence that they're compromised by it. Maybe working for a law firm that defends a company is different than actually working for the company in terms of loyalties.

While seen as a strong enforcer as a United States attorney, she went on in private practice to defend some of Wall Street’s biggest names, including Kenneth D. Lewis, a former head of Bank of America. She also represented JPMorgan Chase and the board of Morgan Stanley.

I'm not as trusting as you that she will suddenly be fair and tough re people she used to be paid to defend

Citi’s alternate investment group lay at the epicenter of the financial crisis. Under Lew’s tenure, it lost $509 million in the first quarter of 2008 alone. More than 50,000 employees, or one-seventh of Citigroup’s global workforce, were laid off in November, and the stock price dropped about 75 percent. Despite these horrendous losses, Lew was paid $1.1 million in 2008 for less than a year’s work, according to financial disclosure statements. Citigroup’s risky hedge fund activities resulted in huge losses, requiring massive “too big to fail” bailouts from the federal government. Shortly after he left Citigroup but before he began work at state, Lew received a one million dollar bonus.

from a conservative blogpost on Forbes but the facts in this paragraph look accurate

http://www.forbes.com/sites/paulroderickgregory/2013/01/17/wall-street-bonus-lew-to-replace-tax-avoider-geithner-at-treasury/

http://www.bloomberg.com/news/2013-01-28/watchdog-says-u-s-treasury-failed-to-curb-aig-gm-pay.html

Patricia Geoghegan, the Treasury’s acting special master for TARP executive compensation, said she disagreed with the special inspector general’s findings.

The Treasury “has limited excessive compensation while at the same time keeping compensation at levels that enable” the three companies to remain competitive and repay their bailout money, Geoghegan said in a Jan. 25 letter to Romero.

"Competitive"

http://www.newrepublic.com/article/112209/michael-lewis-goldman-sachs#

Michael Lewis reviews a book by a former Goldman Sachs employee, and says Goldman needs to be broken up

I wonder what you think of this:

http://www.nytimes.com/2013/02/03/world/europe/iceland-prosecutor-of-bankers-sees-meager-returns.html?pagewanted=1&_r=0

given Iceland's facebook meme fame as the country that "goes after the banksters" or whatever.

Yes, it supports your argument about how difficult it is to go after the the big players, and maybe also your argument re greed. Ok

my larger belief is that the pursuit of "justice" in this situation will be of little benefit to anyone. Justice works well for the single bad apple, the insider trader, etc. "Justice" isn't really equipped to deal with entire corrupted banking systems. "Why hasn't anyone gone to jail?" makes a nice refrain to stir up outrage, but what's needed is radical changes to finance itself, because it's the system that's the problem, not just some bad players.

old documentary I watched last weekend about the May 2010 Flash Crash; the automated trading algorithms which entered a feedback loop & dropped the market 10% / nearly one trillion dollars in five minutes, before spontaneously recovering.

first five and last five minutes are the essential sections if you're pressed for time but I found the whole thing interesting.

https://www.youtube.com/watch?v=aq1Ln1UCoEU&noredirect=1

x-post

And with Robert Rubin/Citigroup proteges running the White House economic team, and the current crew at the Fed and SEC, and the current Congress, its doubtful anything will happen.

http://dealbook.nytimes.com/2013/02/04/u-s-and-states-prepare-to-sue-s-p-over-mortgage-ratings/?hp

I have very mixed feelings about going after the ratings agencies. On one hand, it's probably true. On the other hand, focusing on them gives nice cover to all the banks and institutions who "relied" on the ratings (even though they presumably knew, in many cases, that they were complete bullshit).

I don't think it really gives cover to the banks. It will probably illuminate how the banks put pressure on the agencies to give them the ratings they wanted.

Also, I kind of thing you have to start at the weakest point if you want to chip away at the wall of silence. Right now no one's pointing fingers at anyone, but if the rating agencies start to really feel the heat, maybe they'll start to incriminate the banks that mislead them.

oh the banks definitely knew, talked about here - http://blogs.reuters.com/felix-salmon/2012/11/09/mining-the-australian-cpdo-decision/

Here's another article focusing on one of the worst deals that got the AAA stamp of approval:

http://www.bloomberg.com/news/2013-02-05/octonion-cdo-links-s-p-lawsuit-to-mortgage-collapse-firm-enabled.html

Ironically, in some cases, the banks that put the deals together also ended up suffering a large share of the losses because they held onto the AAA tranches, which were supposedly the safest. So it's not just banks trying to defraud investors - in some cases the banks defrauded themselves, due to conflicting incentives for individuals structuring deals (to maximize fees) vs. those tasked with managing risk.

If the SEC / FBI had enough white-collar crime enforcement personnel (most were reassigned to counter terrorism duties tracing Al Qaeda funding in '01-'02), my understanding is they still wouldn't have found much criminal activity at the investment banks and rating agencies. The prosecutable fraud was largely, mostly at the grass roots, with fraudulent loan applications, or kickbacks for favorable real estate appraisals. There's no law against security securitization, there's no law against using then novel risk pricing formulas. Investment bank sales forces have been pushing unwanted securities on their less favored and less knowledgeable customers for as long as there have been investment banks. That may be ethically repugnant, but its not illegal. The buyers of the ultimately trash AAA tranches of MBS deals were were degreed professionals who should have known better. Look at the prospectus for any of these OTC structured finance deals, they're mostly legal boilerplate that screams caveat emptor. And as o. nate comments, many of the bankers were drinking the kool-aid right to the end.

You guys been reading the Bank of America series at Naked Capitalism? So, so solid.

http://www.nakedcapitalism.com/2013/02/bank-of-america-foreclosure-reviews-how-the-cover-up-happened-part-ivb.html

RG: This lady happened to call in, and I’m not exaggerating, she – I think she must have probably set up a reminder in her – like I do – in my Outlook and it pops up every two weeks or 10 days or whatever it was, and she would call in religiously, even though they would tell her, “You know, it’s going to take 30 days, you don’t have to call back” – she would still call back, and kept calling back. And there would be notes that she’d call back and hear, “It’s still in the review, it’s still in review, it’s in underwriting for review,” you know, all this stuff. And then finally it comes to this – it came to, I think it was December 17th, if I remember right. She had called in and she’s asking what’s the status of her modification, and they go, and the person says, “Ma’am, you can’t get a modification, it’s an REO property.” [Real Estate Owned, which means the bank has already foreclosed on it]

YS: What?!

RG: That’s exactly. She’s like, “What is an REO property?” Now I had read these all in chronological order. I started at the bottom, read them straight up, and I did the exact same thing you just did. I’m like, “What?! Where did I miss this?” She’s calling in, and now, keep in mind, she also had, she’s making these trial payments by auto debit. Auto debit. They had been debiting her account for all these payments and the girl says, “Ma’am, your property went to foreclosure sale in September.” Now they had taken her September, October, November and December payment. And yet they foreclosed.

YS: Oh my God. How could they have done a foreclosure when she’s still living there? How c– she wasn’t evicted?

RG: I know…And she ended up, January, like January 7th I think it was, because this was December 17th – holidays – she ended up filing bankruptcy to keep from being evicted. So he comes to me and goes, “It’s okay, because there’s no harm done to her, because ultimately she got her modification.”

I said, “Well, wait a minute. The C reviewer missed this. It went to QC [quality control]. QC missed it. Promontory reviews it and their notation is, “Borrower is currently in a modification.” Well, because when they reversed it, rescinded it, they put her in a permanent mod then. So by the time Promontory reads it, they’re seeing – all they looked at was that she was in a permanent mod at the time. Not that she had gone through all this prior to that. And I said, “How can you say there’s no harm?”

http://www.huffingtonpost.com/2013/02/14/elizabeth-warren-bank-regulators_n_2688998.html

I have very mixed feelings about going after the ratings agencies.

There are a great many institutions which cannot legally invest in any bonds other than those rated AAA by one of the ratings agencies. These would include many governmental and quasi-govermental institutions. Those institutions should all be suing the ratings agencies for heavy losses they incurred on misrated bonds, based on the many damning internal emails from the ratings agecies that have been made public since 2008.

Wow, Elizabeth Warren

http://www.boston.com/news/politics/2013/02/14/senator-elizabeth-warren-grills-regulators-ending-quiet-first-month-office/rEHdymDsEVcT5yW52LD93M/story.html

Hurting 2, I thought your response to her grilling would be to say "but the laws are not set up in such a way as to bring charges against people and to then bring people to trial"...

That might sound snarky, but I am trying to understand the difference between the various points of views on the subject and if there is anything in addition to breaking up the banks that can or should have been done.

And yes I know that Glass-Stegall was not specifically relevant in the recent problems but I nevertheless found it interesting that Jack Lew in his testimony re being the next Treasury Secretary would not support bringing it back.

His defense of his Citigroup bonus and Cayman islands tax shelter investment was pretty weak I thought.

http://www.salon.com/2013/02/13/wall_street_wins_again/

White House task force very quiet after a year in existence

If theyre too fucking lazy to prosecute everyone on the behalf of the american ppl they should take that settlement money and cut everyone a check

sadly we'd probably get like $2 each but whatevs..

There are a great many institutions which cannot legally invest in any bonds other than those rated AAA by one of the ratings agencies. These would include many governmental and quasi-govermental institutions. Those institutions should all be suing the ratings agencies for heavy losses they incurred on misrated bonds

gotta say, just because they could invest in some janky tranched junk doesn't mean that they shouldn't have known better. basically if you say "i invested in this on the basis of its rating" then you're saying "i do no independent research or thinking".

that's true in theory, s.clover. but a lot of governmental/quasi-governmental types who make investment decisions and policies on behalf of their agencies are no match for the Wall Street types who cooked up these investments. it's not unreasonable for those people to rely heavily on the rating agencies -- or at least it was before the meltdown exposed the agencies' conflicts of interest and rank incompetence.

i think people way "complexity" with regards to these products about a little loosely. the formulas are sort of complex and react differently depending on different inputs. but there are models that are basically available to everyone who can afford them, and you can toss scenarios into these models and watch the valuation change even if you can't work through all the formulas carefully yourself. the basis of the ratings was basically one set of projections for average future behavior as far as property values, interest rates, default rates. but any institutional investor would have been able to run the model for themselves (otherwise there's no _way_ they should have been touching this stuff), and they could have decided that the assumptions used by the ratings agencies (that past behavior was a good predictor of future behavior) were dumb, and that there was more risk involved. Lots of people did make such decisions, and they either didn't invest in or shorted these bonds.

also basically everyone knows that price reflects perceived market risk. so if a certain class of stuff has the same rating but is way cheaper than other stuff, then the only possible reason for this is that lots of people think it is actually riskier. you basically can't _not_ know this. so in my mind you can't run off chasing risky yield, not carefully examine the consequences, then scream how you were duped when this turns out to be a terrible idea.

lots of good points, clover. only caveat would be is that i wonder how many government agencies -- or whomever was making their investment decisions -- have access to the models to which you refer. i honestly dunno -- they may be as common as mud for all i know, or super-proprietary/expensive (and out of reach of some podunk county in North Dakota).

basically everyone knows that price reflects perceived market risk

By the same token, everyone 'knew' that bond ratings reflected the sober judgment of risk by experts whose expertise was implicitly endorsed by the government, because the government used those same ratings as a proxy for assessing a bond's safety. otoh, even investors who perceived themselves as sophisticated were unlikely to look at two AAA bonds paying different interest rates and think, "the market is telling me to take the lower interest rate bond, because this other AAA bond is really a piece of junk". The AAA endorsement by a ratings agency tended to completely obscure this risk signal.

That's ridiculous. If I tell you "this apple is 2$ and this other one is 70 cents, buy one" you'll ask "wait, why is this one less than half the cost of the other?" And if I say "this apple rating agency I paid to rate the apple said that they're both good" then you probably wouldn't accept that as the full story.

If you are an investment advisor and say "I advise everything rated AAA uniformly" then I mean, wtf, obviously you shouldn't have a job.

The idea that price is always the most accurate reflection of value and can be implicitly trusted, but a presumed expert opinion should always be heavily discounted and mistrusted, just doesn't jibe with the reality I know. This doesn't even hold true with apples, let alone extremely complex financial instruments with very little history in the marketplace. At least with an apple, you can taste it.

oh, price isn't trustworthy. But it tells you what the market thinks! The relationship between perceived risk and returns is like the first thing they teach to any trader or investment manager. similarly, any trader of investment manager should know that the information provided to them by people who want to sell them things has a certain innate bias, and that ratings vary by the class of product they're rating. none of this is obscure.

You make a good case that no one knows what they are doing.

oh, _some_ people cleaned up :-)

last week’s details of the undisclosed settlement between the New York Fed and Bank of America are remarkable. Not only do the filings show the New York Fed helping to thwart another institution’s fraud case against the bank, they also reveal that the New York Fed agreed to give away what may be billions of dollars in potential legal claims.

http://www.nytimes.com/2013/02/17/business/dont-blink-or-youll-miss-another-bank-bailout.html?nl=todaysheadlines&emc=edit_th_20130217&_r=0

this much we can agree on, i think: a lot of stuff that went on pre-2007 that we see as face-palm obvious (such as "if bond A is as safe as bond B, then why is bond A more expensive than bond B? perhaps we need to do some more research before plunking our municipal pension money in bond A") went on as "normal course of business."

also, i don't underestimate sheer human laziness, even amongst professional investors and others w/ fiduciary obligations. how all of that will look to a court or administrative tribunal is another messy kettle of fish.

yeah, i totally agree on all this. its just hard to make an argument for a lawsuit based on the idea that you're incompetent. especially when with these sorts of products you typically have to sign off on some form claiming that you're a "sophisticated institutional investor capable of assessing risk" or etc.

This is a really interesting debate, and I think all of you guys are making really smart points.

My takeaway about the ratings agencies is that they're not really experts at all, more like a third party marketing agency -- AAA rating = the Better Homes and Gardens Seal of Approval for bonds. Or at least, once they got asked to rate more complicated securities than your standard corporate and government bonds, that's what they became.

One other thing I'd point out, although this doesn't resolve the price/risk/rating issue, is that a lot of these securities were too complex and individual to have an active enough market to price them properly. AAA may have been even more important for securities that didn't really trade.

Also, it's easy to say this with hindsight, but there are a wide variety of levels of financial "sophistication," and a quant guy at Goldman Sachs is on quite a different plane from someone managing a pension fund for the tallahassee fla police dept.

http://dealbook.nytimes.com/2013/02/26/wall-street-pay-rises-for-those-who-still-have-a-job

eventually there will just be one person on wall st and for his bonus he gets everything in america

but damn did he earn it, he worked late nights even

http://firstread.nbcnews.com/_news/2013/02/26/17102636-senate-panel-approves-lew-nomination?lite

Other Jack Lew news from earlier:

http://nymag.com/daily/intelligencer/2013/02/did-citi-pay-jack-lew-a-government-job-bounty.html

there is indeed something odd, to the untrained eye, about the revelation that likely next Treasury secretary Jack Lew had a contractual agreement with Citigroup, where he worked from 2006 to 2008, that guaranteed he would get to keep his bonus payment in the event that he left the bank to take "a full-time high level position with the United States government or regulatory body."

Various people have taken this odd contractual clause as evidence of a vast Citigroup conspiracy, whereby the bank rewards its employees for zooming through the revolving door to Washington, where presumably they will continue to do Citigroup's bidding in a shadowy, unofficial capacity.

Now, perhaps I'm being too charitable here, but I don't read much between the lines of Lew's Citigroup contract, other than that he's a fairly skilled negotiator who was able to get himself a beneficial clause in his contract.

First, it's useful to clarify: Jack Lew didn't get a "bonus" for leaving Citigroup to go to the public sector. There was no extra money involved. Instead, by taking a high-ranking government job, Lew simply got to keep the bonus money he had already been paid.

uhhh. weird.