SEC investigating brokerage firms role in market selloff

The New York Times - WASHINGTON — The enforcement division of the Securities and Exchange Commission is investigating whether market makers and brokerage firms fulfilled their legal obligations to provide liquidity in the markets by buying and selling stock during the sharp market drop of May 6, the chairwoman of the agency said Thursday.

The S.E.C. is also looking into whether market makers and brokers executed investors’ trades correctly.

Mary L. Schapiro, the S.E.C. chairwoman, said the agency was also considering whether to establish market participation mandates for professional traders like high-frequency traders who were not obligated to continue trading during periods of extreme market stress.

The comments came during testimony to the Senate Subcommittee on Securities, Insurance and Investment, which, like a House subcommittee last week, had called the leaders of various market regulators and exchanges to testify on the causes of the May 6 market plunge.

On May 6, stock prices fell by about 6 percent in a matter of minutes before recovering nearly as quickly. Earlier this week, the S.E.C. said that in reaction to the market tumult, circuit breakers would be installed for individual stocks in the Standard & Poor’s 500-stock index on a six-month test basis beginning in June. Those circuit breakers would halt trading for five minutes in stocks that fell or rose by more than 10 percent in a five-minute period.

Ms. Schapiro said the commission would also re-examine its rules concerning circuit breakers for the overall market, which were not tripped on May 6 because the Dow Jones industrial average did not drop by 10 percent. In addition to reviewing whether that percentage level was appropriate, Ms. Schapiro said, the agency would examine whether the trigger should be based on a broader stock index, like the Standard & Poor’s 500.

Gary Gensler, the chairman of the Commodity Futures Trading Commission, said that his agency would also examine its circuit breakers, as well as whether there should be new rules governing the use of computer-driven, or algorithmic, trading.

Mr. Gensler noted that while human traders could react to an unusual event like the one that occurred on May 6, computers simply did what they were instructed to do, repeatedly. That, he added, was part of the problem on May 6.

During the period of highest market stress on May 6, many institutional investors stopped trading, according to a review of the day’s trading activity by the S.E.C. and the C.F.T.C. .

Among those that legally stepped back from the market during that time were several of the firms that employ computer programs to trade millions of shares a second and that are usually the biggest providers of liquidity in the stock market.

Naked Truth on Default Swaps

Great column on credit-default swaps by Floyd Norris. - MT

The New York Times - Should people be able to bet on your death? How about your financial failure?

In the United States Senate, Wall Street won one this week when the Senate voted down a proposal to bar the so-called naked buying of credit-default swaps. If that were the law, you could not use swaps to bet a company would fail. The exception would be if you already had a stake in the company succeeding, such as owning a bond issued by the company.

On the other side of the Atlantic, Germany announced new rules to bar just such betting — but only if the creditors were euro area governments.

None of this argument would be taking place if regulators had done their jobs years ago and classified credit-default swaps as insurance. 

Credit-default swaps are, in reality, insurance. The buyer of the insurance gets paid if the subject of the swap cannot meet its obligations. The seller of the swap gets a continuing payment from the buyer until the insurance expires. Sort of like an insurance premium, you might say.

But the people who dreamed up credit-default swaps did not like the word insurance. It smacked of regulation and of reserves that insurance companies must set aside in case there were claims. So they called the new thing a swap.

http://www.nytimes.com/2010/05/21/business/economy/21norris.html

Close Call

Last Wednesday, Arkansas Senator Blanche Lincoln took to the Senate floor and delivered about as fiery a speech as you’ll hear in the chamber, at least on the subject of financial reform. “Currently, five of the largest commercial banks account for ninety-seven percent of the [derivatives market],” she said. “That is a huge concentration of economic power, which is why I am in no way surprised that several individuals are seeking to remove it from the bill.”

The “it” these unnamed individuals were bent on removing is a provision Lincoln wrote that would force banks to spin off their derivatives business if they want access to federal deposit insurance and other safeguards. Lincoln stunned the financial world when she unveiled the hawkish proposal last month and promptly pushed it through the Senate Agriculture Committee, which she chairs. (Derivatives are essentially a bet on the direction of financial data, like bond prices and interest rates.)

Economy | The New Republic

More Corruption: Bear Stearns Falsified Information as Raters Shrugged

The Atlantic - Made up FICO scores? Twenty-minute speed ratings to AAA? If government prosecutors like New York Attorney General Andrew Cuomo want answers to why the mortgage-backed securities market was so screwed up, they should talk to Matt Van Leeuwen from Bear Stearn's servicing arm EMC.
Reports indicated on Thursday that Cuomo is pursuing a criminal investigation surrounding banks supplying bad information to rating agencies about the quality of the mortgages they signed off on. But so far he hasn't been able to prove where in the chain of blame the due diligence for the ratings broke down.
What Cuomo needs to establish is: whose shoulders does it fall on to verify the information lenders were selling to investment banks about the quality of their loans? And who was ultimately responsible for the due diligence on the loans that created toxic mortgage securities that were at heart of our financial crisis?


False Information and the Grey Area
Employed during the go-go years of 2004-2006, and speaking in an interview taped by BlueChip Films for a documentary in final production called Confidence Game, Van Leeuwen sheds some light onto the shenanigans going on during the mortgage boom that might surprise even Cuomo. As a former mortgage analyst at Dallas-based EMC mortgage, which was wholly owned by Bear Stearns, he had first-hand experience working with Bear's mortgage-backed securitization factory. EMC was the "third-party" firm Bear was using to vet the quality of loans that would purchase from banks like Countrywide and Wells Fargo.
Van Leeuwen says Bear traders pushed EMC analysts to get loan analysis done in only one to three days. That way, Bear could sell them off fast to eager investors and didn't have carry the cost of holding these loans on their books.

Jim Cramer During the Market Meltdown

YouTube For Traders - Searchable News Video Streams

One reason why local TV can start packing its bags. Video will be big and dominate  the landscape, but it will be video streamed via the Internet as NYT media writer David Carr points out in this column. Journalism schools need to start training students for this market. -MT

New York Times -For half an hour last Thursday afternoon, CNBC was the most exciting place on television. Watching Erin Burnett and Jim Cramer try not to freak out — they acquitted themselves nicely — while the market tumbled like a drunken rag doll down a long staircase was amazing television, David Carr writes in The New York Times.

The rest of the time, as when the market is not suffering the largest drop within a single day of trading? Um, not so much. Even if you are an avowed business bobble-head, most of the time, CNBC and other financial channels are a kind of wallpaper. Business people mostly live in narrow verticals. If you follow and trade in uranium, it’s not going to pop up all that often on the linear channels of television.

So Thomson Reuters is trying to change television. Its new product, Reuters Insider, is a Web-based video service that captures myriad streams of information produced by the company’s reporters and 150 partners. The service, which will begin Tuesday, is something like a You Tube for the financially interested, albeit one that is available only to Reuters subscribers, who pay as much as $2,000 a month.

Using the main window of the service, called Channel One, subscribers can navigate by sector, date, markets or region, or apply filters to create their own personalized channels.

Thomson Reuters, which was formed in a merger in 2008, creating a $30 billion behemoth in financial news and information, is making a big bet on Insider, about $100 million. While its chief competitor, Bloomberg, is making inroads into consumer media with its purchase of Businessweek, Thomson Reuters is going in the opposite direction.

Why try to sell advertisers on a broad television network when you can get subscribers — investment banks, analysts, market players — to pay and pay dearly for the information ginned up by 2,800 reporters from 200 bureaus around the world, not to mention lots of other technical business intelligence from a curated group of partners?
The effort also tells us something about the place online video now occupies. “The trend that we are seeing in professional information is not all that different than consumer media,” said Devin Wenig, chief executive for the markets division of Thomson Reuters. “People are increasingly visual, and they expect to access information in that way. They want to be able to look at a chief executive and see the expression on the analyst’s face.”

Of course, just about anybody could go out on the Web and find gobs of people spouting off about financial matters. But Reuters Insider also produces almost real-time transcripts through voice recognition technology — the renderings are pretty rough, but useful — and then humans come behind and clean up some of those transcripts, while adding additional tags, links and other relevant information.

Exxon Valdez Lessons

Regulators Warnings Weren't Act On

WASHINGTON — Federal regulators warned offshore rig operators more than a decade ago that they needed to install backup systems to control the giant undersea valves known as blowout preventers, used to cut off the flow of oil from a well in an emergency.

The warnings were repeated in 2004 and 2009. Yet the Minerals Management Service, the Interior Department agency charged both with regulating the oil industry and collecting royalties from it, never took steps to address the issue comprehensively, relying instead on industry assurances that it was on top of the problem, a review of documents shows.

In the intervening years, numerous blowout preventers and their control systems have failed, though none as catastrophically as those on the well the Deepwater Horizon drilling rig was preparing when it blew up on April 20, leaving tens of thousands of gallons of oil a day spewing into the Gulf of Mexico.

Agency records show that from 2001 to 2007, there were 1,443 serious drilling accidents in offshore operations, leading to 41 deaths, 302 injuries and 356 oil spills. Yet the federal agency continues to allow the industry largely to police itself, saying that the best technical experts work for industry, not for the government.
Critics say that, then and now, the minerals service has been crippled by this dependence on industry and by a climate of regulatory indulgence.
“Everything that’s done by the oil industry is done for profit,” said Senator Bill Nelson, Democrat of Florida, who demanded this week that the Interior Department investigate these backup safety systems. “Throw in the fact that regulators have taken a lax attitude toward overseeing their operations, and you have a recipe for catastrophe.”

Last year, BP, the owner of the well that blew up in the gulf, teamed with other offshore operators to oppose a proposed rule that would have required stricter safety and environmental standards and more frequent inspections. BP said that “extensive, prescriptive” regulations were not needed for offshore drilling, and urged the minerals service to allow operators to define the steps they would take to ensure safety largely on their own.

Computer meltdown on Wall Street still baffles officials

Traders applauding Duncan L. Niederauer, chief of NYSE Euronext, on Friday. He had defended his exchange in an interview.

 The New York Times - A day after a harrowing plunge in the stock market, federal regulators were still unable on Friday to answer the one question on every investor’s mind: What caused that near panic on Wall Street?

Through the day and into the evening, officials from the Securities and Exchange Commission and other federal agencies hunted for clues amid a tangle of electronic trading records from the nation’s increasingly high-tech exchanges.

But, maddeningly, the cause or causes of the market’s wild swing remained elusive, leaving what amounts to a $1 trillion question mark hanging over the world’s largest, and most celebrated, stock market.

The initial focus of the investigations appeared to center on the way a growing number of high-speed trading networks interact with one another and with venerable exchanges like the New York Stock Exchange. Most investors are unaware that these competing systems have fractured the traditional marketplace and have displaced exchanges like the Big Board as the dominant force in stock trading.

The silence from Washington cast a pall over Wall Street, where shaken traders returned to their desks Friday morning hoping for quick answers. The markets remained on edge, as the uncertainty over what caused Thursday’s wild swings added to the worries over the running debt crisis in Greece.


In a joint statement issued after the close of trading, the S.E.C. and the Commodity Futures Trading Commission said they were continuing their review. And the two agencies indicated they were looking particularly closely at how different trading rules on different exchanges, which temporarily halted trading on some markets while activity in the same stocks continued on other markets, might have contributed to the problem.

Derivatives Dividing Democrats

The Wall Street Journal - WASHINGTON—Ahead of a pivotal vote Monday on financial regulation, divisions are emerging among Senate Democrats over how best to strengthen oversight of the market for the exotic financial instruments known as derivatives.

All 59 members of the Democratic caucus are still expected to stand together Monday on whether to begin action on legislation overhauling regulation of the financial system. But the differences underscore the complexity of the coming debate, and will have to be resolved later this spring.

At issue is whether the derivatives oversight bill written by Senate Agriculture Chairman Blanche Lincoln (D., Ark.) will be folded into the broader regulatory overhaul. The Lincoln measure would beef up oversight and increase transparency of the market, and includes a proposal that could push Wall Street banks to spin off their derivatives trading operations.

"I want to make sure that without a doubt...I have a privileged ability to be able to be a part of this bill," Sen. Lincoln said in a statement forwarded Friday by her office.

Sen. Chris Dodd (D., Conn.), who is leading the broader overhaul effort, has pushed a competing proposal that would increase oversight but not push banks to spin off derivative operations. He's opened negotiations with Sen. Lincoln.

Arizona signs tough new immigration law

The New York TImes - PHOENIX — Gov. Jan Brewer of Arizona signed the nation’s toughest bill on illegal immigration into law on Friday. Its aim is to identify, prosecute and deport illegal immigrants.

The move unleashed immediate protests and reignited the divisive battle over immigration reform nationally.
Even before she signed the bill at an afternoon news conference here, President Obama strongly criticized it.
Speaking at a naturalization ceremony for 24 active-duty service members in the Rose Garden, he called for a federal overhaul of immigration laws, which Congressional leaders signaled they were preparing to take up soon, to avoid “irresponsibility by others.”

The Arizona law, he added, threatened “to undermine basic notions of fairness that we cherish as Americans, as well as the trust between police and our communities that is so crucial to keeping us safe.”

The law, which proponents and critics alike said was the broadest and strictest immigration measure in generations, would make the failure to carry immigration documents a crime and give the police broad power to detain anyone suspected of being in the country illegally. Opponents have called it an open invitation for harassment and discrimination against Hispanics regardless of their citizenship status.

Work Force Fueled By High Skilled Immigrants

ST. LOUIS — After a career as a corporate executive with her name in brass on the office door, Amparo Kollman-Moore, an immigrant from Colombia, likes to drive a Jaguar and shop at Saks. “It was a good life,” she said, “a really good ride.”

As a member of this city’s economic elite, Ms. Kollman-Moore is not unusual among immigrants who live in St. Louis. According to a new analysis of census data, more than half of the working immigrants in this metropolitan area hold higher-paying white-collar jobs — as professionals, technicians or administrators — rather than lower-paying blue-collar and service jobs.

Among American cities, St. Louis is not an exception, the data show. In 14 of the 25 largest metropolitan areas, including Boston, New York and San Francisco, more immigrants are employed in white-collar occupations than in lower-wage work like construction, manufacturing or cleaning.

The data belie a common perception in the nation’s hard-fought debate over immigration — articulated by lawmakers, pundits and advocates on all sides of the issue — that the surge in immigration in the last two decades has overwhelmed the United States with low-wage foreign laborers.

Over all, the analysis showed, the 25 million immigrants who live in the country’s largest metropolitan areas (about two-thirds of all immigrants in the country) are nearly evenly distributed across the job and income spectrum.
 http://www.nytimes.com/2010/04/16/us/16skilled.html

ST. LOUIS — After a career as a corporate executive with her name in brass on the office door, Amparo Kollman-Moore, an immigrant from Colombia, likes to drive a Jaguar and shop at Saks. “It was a good life,” she said, “a really good ride.”

As a member of this city’s economic elite, Ms. Kollman-Moore is not unusual among immigrants who live in St. Louis. According to a new analysis of census data, more than half of the working immigrants in this metropolitan area hold higher-paying white-collar jobs — as professionals, technicians or administrators — rather than lower-paying blue-collar and service jobs.

Among American cities, St. Louis is not an exception, the data show. In 14 of the 25 largest metropolitan areas, including Boston, New York and San Francisco, more immigrants are employed in white-collar occupations than in lower-wage work like construction, manufacturing or cleaning.

The data belie a common perception in the nation’s hard-fought debate over immigration — articulated by lawmakers, pundits and advocates on all sides of the issue — that the surge in immigration in the last two decades has overwhelmed the United States with low-wage foreign laborers.

Over all, the analysis showed, the 25 million immigrants who live in the country’s largest metropolitan areas (about two-thirds of all immigrants in the country) are nearly evenly distributed across the job and income spectrum.

Lehman Hid Risks by Channeling Billions of Dollars Through Alter Ego

Lehman Brothers’ headquarters in Midtown Manhattan in 2008. It is now the offices of Barclays Capital.

The New York Times - It was like a hidden passage on Wall Street, a secret channel that enabled billions of dollars to flow through Lehman Brothers.

In the years before its collapse, Lehman used a small company — its “alter ego,” in the words of a former Lehman trader — to shift investments off its books.

The firm, called Hudson Castle, played a crucial, behind-the-scenes role at Lehman, according to an internal Lehman document and interviews with former employees. The relationship raises new questions about the extent to which Lehman obscured its financial condition before it plunged into bankruptcy.

While Hudson Castle appeared to be an independent business, it was deeply entwined with Lehman. For years, its board was controlled by Lehman, which owned a quarter of the firm. It was also stocked with former Lehman employees.

None of this was disclosed by Lehman, however.
Entities like Hudson Castle are part of a vast financial system that operates in the shadows of Wall Street, largely beyond the reach of banking regulators. These entities enable banks to exchange investments for cash to finance their operations and, at times, make their finances look stronger than they are.

Critics say that such deals helped Lehman and other banks temporarily transfer their exposure to the risky investments tied to subprime mortgages and commercial real estate. Even now, a year and a half after Lehman’s collapse, major banks still undertake such transactions with businesses whose names, like Hudson Castle’s, are rarely mentioned outside of footnotes in financial statements, if at all.

Distorted Jobless Numbers Loom