Category Archives: Investment management

Calpers Waves Wet Noodle at Murdochs, While DoJ Appears to Be Sitting On Its Hands

It’s a bit curious that l’affaire Murdoch, which has dominated the news in England, has gotten some air time here, but not in proportion to its importance in the UK and potentially in the US. True, you have to know a bit of who has done what to whom over time, but stuff like hacking the voicemails of dead little girls and live major government officials, lying in Parliamentary investigations, paying hush money, and suborning the police isn’t that hard to explain. And it’s also hard to imagine that a culture that the US operations didn’t share at least some of the aggressive and reckless habits of its siblings across the pond.

At least one party, Calpers, which is the largest pension fund in the US, appears to have decided to use this revelation of the Murdochs’ feet of clay to open up an issue that was worth airing a long time ago: the hold the family maintains on News Corp.

Are Self-Dealing Parties Settling $242 Billion of Bank of America Liabilities for Way Too Little?

A petition filed by some unhappy investors on Tuesday raises some serious challenges to the so-called Bank of America mortgage settlement. The embattled bank hopes to shed liability for alleged misrepresentations made by Countrywide on loans sold in 530 mortgage trusts with $424 billion in par value. We said it was a bad deal for investors because, among other things, it included a very broad waiver of a very valuable right, that of being able to sue over so-called chain of title issues (in very crude terms, whether the parties to the deal did all the things they promised to do to convey the loans properly to the mortgage trust).

This action raises three sets of different issues: the conflicts of interest among the parties trying to push this deal through, the process used to finalize the deal, which this pleading contends were devised to give the other investors short shrift; and the inadequate amount of the settlement, not only for parties that have tried to move their own putback litigation forward, but arguably for all parties.

Bank of America Likely to Settle Case with NY Fed, Pimco, Blackrock for $8.5 Billion

I must confess I am surprised that Bank of America is close to settling a litigation threat by a group of investors headed by the New York Fed, Pimco, and Blackrock, which was discussed in the media quite a bit last fall for a reported $8.5 billion.

While most threatened litigation is settled out of court, this case in theory had to overcome procedural hurdles for any suit to be filed, and no group of investors had ever surmounted this impediment. Chris Whalen similarly noted that BofA could simply tell the investors to “pound sand.” However, we had noted that if it moved forward, that this type of case, a representation and warranties case, is always settled because they are too expensive to fight in court.

Two Supreme Court Rulings Give Big Companies “Get Out of Liability Free” Cards

If you had any doubts that the US has become a corpocracy, two fresh rulings by the Supreme Court should seal any doubt. They are stunningly bad, in that they reduce or gut the reach of well-settled law over large companies, to the degree that it will take very little in the way of effort for companies to organize their affairs so as to escape liability for their actions in areas that affect large numbers of citizens.

The through line in both rulings is the creative and selective use of the notion of corporate “personhood”. That personhood has been the basis for the extension of a whole raft of rights to corporations, including, perversely, the Constitutional right of free speech. Yet the same notion which has been used to confer privileges that companies lack in other countries is at the same time being construed so as to vitiate accountability, when ordinary people find it mighty hard to escape the consequences of their actions. I’m certain the Founding Fathers, who were wary of concentrated power, would be spinning in their graves at the logic and effect of recent decisions on this front.

Guest Post: Overruled

Cross posted from MacroBusiness

Ok, we all know that anyone who says “this time it is different” is to be treated at best as misinformed, at worst as a fool. “They are the five most dangerous words in the English language” etc. etc. But, to repeat my question: “Are things always the same?” Mostly, yes. Modern housing bubbles are not unlike 17th century Holland’s Tulipmania, government debt crises have not changed all that much since Henry VIII reduced the gold in coinage, greed, profligacy, irresponsible plutocracies are always with us.

But in global finance there are some things happening that are genuinely different. Dangerously so.

Marshall Auerback: Get Ready for a Global Growth Slowdown

By Marshall Auerback, a portfolio strategist and hedge fund manager. Cross posted from New Deal 2.0.

Governments across the globe are headed for a disaster entirely of their own making.

Though capital markets remain strong, the global economic backdrop continues to deteriorate as fiscal retrenchment takes hold. Commodity markets have rallied in tandem with the fall in the dollar even though there are signs that growth in the emerging world is slowing. Japan’s economy is in the soup, the U.S. economy has failed to pick up as many thought (with a mere 2% growth rate expected to be released for Q1 shortly), and the European economy is overdue for its own slowdown. The U.S. stock market has also rallied despite the threat of a very high gasoline price, disappointing economic growth data, and a fairly mixed earnings picture.

ETFs as Source of Systemic Risk?

Surprisingly little note has been paid to the discussion of ETFs in three reports issued last week by international regulatory heavyweights, namely, the IMF, the BIS, and the G20 Financial Stability Board.

Make no mistake: the authorities are worried. The BIS report, for instance, has an unflattering comparison on its first page, noting that now ETFs seem to be serving the same function for institutional investors now as structured credit products did in 2002-2003, with dealers pushing the envelope as far as “innovation” is concerned. The Financial Stability Board was more straightforward, flagging its concerns that ETFs could pose a threat to stability in its report title.

The regulators discussed the fact that “ETF” no longer stands for a single product. Most investors probably assume that an ETF is more or less a mutual fund, when in fact Eurobank affiliated groups’ products are typically synthetic (that is, they use derivatives rather than securities. There are even more structural variants, but we’ll stick to these two for the purpose of this post). And too often, the relationship between the ETF and the sponsor is not arm’s length.

David Apgar: Is That a Horse’s Head Under the Sheets or Are You Just Happy to Fleece Me?

By David Apgar, the Director of ApgarPartners LLC, a new business that applies assumption-based metrics to the performance evaluation problems of development organizations, individual corporate executives, and emerging-markets investors, and author of Risk Intelligence (Harvard Business School Press 2006) and Relevance: Hitting Your Goals by Knowing What Matters (Jossey-Bass 2008). He blogs at WhatMatters. The […]

Sleaze Watch: NY Fed Official Responsible for AIG Loans Joins AIG As AIG Pushes Sweetheart Repurchase to NY Fed

The corruption in high places is getting more and more brazen with every passing day. The only thing that separates the US from conventional banana republic status is that no one leaves keys to new luxury cars on the desks of officials to secure their cooperation. It’s just not enough of an inducement to get anyone to take action.

Is the Proposed NYSE-Deutsche Börse Merger All It’s Cracked Up to Be?

The financial media is duly falling in line and giving a thumbs up to the proposed merger between the New York Stock Exchange and Deutsche Börse. Mayor Bloomberg contends it is both good for New York City and provides customers better service in an era of increasingly global equity trading. Industry analysts approved. Not surprisingly, stocks of other exchanges are up based on takeover speculation.

Your truly is wary about concentrations of power in the financial arena, and consolidation of stock exchanges has the potential to go in that direction. One critic of the deal was former Goldman Sachs co-chairman John Whitehead. Admittedly, some of his objections sound quaint, echoing the hand wringing of the 1980s when the Japanese acquired trophy assets such as the Rockefeller Center. From Bloomberg:

“I speak out rarely, and this is one time when I can’t hold myself back,”

Satyajit Das: Derivatives Regulation Dance

By Satyajit Das, the author of “Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives.” Cross posted from Wilmott

A question of values …

Derivative contracts are valued on a mark-to-market (“MtM”) basis. This requires valuation of the contracts based on the current market price.

OTC derivatives trade privately. Market prices for specific transactions are not directly available. This means current valuations rely on pricing models.

There are significant differences in the complexity of the models and the ability to verify and calibrate inputs. More complex products used sophisticated financial models, often derived from science or statistical methodology. There are frequently differences in choice, exact factorisation and even numerical implementation of the models. Different dealers may use different models.

Some required inputs for the models are available from markets sources. The nature of the OTC market and the limited trading in certain instruments mean that key input parameters must frequently be “estimated” or “bootstrapped” from available data. In certain products, the limited number of active dealers means that “market” prices are sometimes no more than the dealer’s own quote being fed back after being collated and “scrubbed” by an external data provider. This is referred to prosaically as “mark-to-myself”.

Is Incoming New York Attorney General Schneiderman Going to Be Too Soft on Bank Abuses?

An article in the Wall Street Journal says that the incoming New York state attorney general, Eric Schneiderman, is going to be nicer to Wall Street than his predecessors Eliot Spitzer and Andrew Cuomo. Given that Cuomo decided to take financial firm chicanery seriously only fairly late in his term of office, the Wall Street Journal assessment does not bode well for the prospect of tough enforcement.

The reason this matters is that the New York state AG has a particularly effective weapon, the Martin Act. One of the continuing frustrations I have as a writer and a citizen is the use of the word “fraud”. Activities that by any common-sense standard are fraudulent probably don’t meet the legal standard for fraud. In very crude terms, one of the hurdles that needs to be overcome is intent. If a perp can argue that he thought what he did was not improper (his attorneys or accountant blessed it, it never occurred to him it was an abuse, etc.) or he can claim it was a mistake, he can get off scot free. The very fact that Joe Cassano, the head of AIG’s Financial Products Group, has not been prosecuted serves as an illustration of difficulties involved.

“The 20 Most Influential Blogs in Financial Media”

Thanks to Minyanville for publicizing this study by MindfulMoney on the nature and reach of social conversations in the investment arena. But even bigger thanks go to loyal readers and contributors for their frequent comments, leads, and critiques. The success of a blog depends on its community and I am very grateful for all the input so many of you have generously provided.

Perhaps the most interesting finding (boldface ours):

The research confirms the existence of a network of investment super-connectors with extraordinary media influence and reach. These super-connected new influentials are, for the most part, not well established voices in the media but individual bloggers who fiercely champion their independence….In the US, the network functions as the unofficial voice of Wall Street & the US federal bank with no mainstream media players at the centre of the network.

NJ Public Pension Slugfest Reporting Omits 15 Years of Governors Stealing From Workers

If you live in the world according to the mainstream media, the row between state executives and unions is all about (by implication) greedy unions trying to preserve their perquisites when budget “realities” demand that they suffer. Consider this excerpt from a recent article New York Times article about the fight in New Jersey:

Across the nation, a rising irritation with public employee unions is palpable, as a wounded economy has blown gaping holes in state, city and town budgets, and revealed that some public pension funds dangle perilously close to bankruptcy.

And how exactly did the crisis “reveal” that some pension funds were close seriously under water? A more accurate rendition would be that, at least in New Jersey, the state has been raiding the pension kitty for over 15 years.