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Apr 28
2010

Newsflash: The SEC isn't suing Goldman over fiduciary violations

Posted by Ron F in Securities and Exchange CommissionRegulationGoldman Sachsfinancial crisisfat cat bankersCongresscomplianceBanksbanking reform

Ron F

One bit of commentary I've noticed in the blogosphere following yesterday's Goldman show is that the bank could toggle back and forth between being an investment advisor and a broker dealer when it came to any fiduciary duty it owed to investors in its crappy mortgage deals.

That may or may not be a loophole that needs closing, as Senator Collins' line of inquiry suggested. Surely, banks like Goldman shouldn't be able to use it as such.

Apr 28
2010

The real lesson in the Goldman case

Posted by Ron F in RiskRegulationJohn PaulsonGoldman Sachsfinancial crisisderivativesCongresscomplianceBanksbanking reform

Ron F

I didn't catch yesterday's Beltway circus act over Abacus et al except for a few silent TV close-ups afterward of sweaty, tight-knitted brows and Carl Levin's 40-year old reading glasses perched perfectly at the tip of his warty nose, this while downing a few with Matt Quinn and a couple of former colleagues. Oh, and I did notice that the senator has a potty mouth.

So I will leave the lawyering as well as the moralizing to others.

Apr 28
2010

Why corporate users of derivatives should favor reform

Posted by Ron F in RiskRegulationGoldman Sachsfinancial crisisfailurederivativescredit-default swapcost of capitalcorporate treasurersCFObanking reformbailoutsAIGAccounting

Ron F

It's hard to see why CFOs who want to use derivatives to hedge risk would oppose efforts to improve the transparency and collateral backing swap trades. But according to this New York Times article, such opposition persists.

As we reported last week, however, proposals to require trading of standardized derivatives through exchanges or at least settle the transactions through central clearinghouses would require counterparties to post more collateral but mitigate, at minimum, any increase in cost through narrower spreads between bid and asked prices.

Apr 27
2010

More hype about a bellwether's results

Posted by Ron F in unemploymentjobsjoblessnesshealth careGeneral ElectricGEemploymenteconomycost reductionconsumer spendingconstructionChinaCareers/ManagementbubblesAccounting

Ron F

By this point, press cheerleading for the economy is hardly newsworthy, and I'm not the first to notice the latest example.

But the down-is-up spin on Caterpillar's results cannot escape mention.  As the Business Insider notes, the Bloomberg story is tame by comparison with the ravings on CNBC yesterday.

Apr 23
2010

Financial innovation inevitably leads to crisis, says new research

Posted by Ron F in WorldcomTroubled Asset Relief ProgramRiskRegulationinnovationGoldman SachsFedEnroncomplianceBanksbanking reformBankingbank failuresbailout

Ron F

Paul Krugman's column today called my attention to a paper that anyone interested in financial reform should check out.

The paper completely contradicts the conventional wisdom that innovation in finance is a good thing.

Apr 22
2010

The Naked and the Dead? New bill would limit OTC swaps to hedging

Posted by Ron F in RiskRegulationfinancial crisisderivativescredit-default swapcomplianceCDSbanking reformbank failures

Ron F

The bill that was approved yesterday by the Senate Agriculture Committee correctly would let the Commodities Futures Trading Commission defer to state laws that limit the use of derivatives for purposes of speculation.

By doing so, the bill would effectively curb so-called "naked swaps," those that aren't traded on exchanges or cleared centrally and where neither party has an insurable interest at stake, because those swaps would no longer be enforceable in court. In other words, only a party using a swap to hedge could sue to go after its counterparty's assets if it failed to hold up its end of a deal.

Apr 21
2010

Goldman's other disclosure problem

Posted by Ron F in Wells NoticeSecurities and Exchange CommissionRegulationJP Morgan ChaseGoldman SachsGeneral Electricfinancial crisisfinanacial reportingcredit-default swapCongresscomplianceBanksbanking reformBankingBank of AmericaauditingauditAIG

Ron F

This is seriously speculative stuff on my part. But I wonder if the other shoe that Carl Levin says is about to drop on Goldman has to do with its failure to disclose the fact that it received a Wells Notice from the SEC last July about the Abacus deal.

Yes, the bank claims it was immaterial, just as it claims was its lack of disclosure of hedgie John Paulson's role in helping to design the CDO to go south so he could profit by shorting the deal was immaterial.

Apr 21
2010

Yes, Virginia, taxpayer subsidies encourage banks to ignore risk

Posted by Ron F in RiskLehman BrothersGoldman Sachsfinancial crisisFDICBanksbanking reformBankingbank lendingbank failuresbailouts

Ron F

The banking crisis may have made the phrase "moral hazard" a household term, at least in finance quarters. But there's actually a theoretical argument against the idea that providing banks with taxpayer subsidies encourages them to take risks they wouldn't otherwise shoulder.

The theory that subsidies do not (emphasis on "not") create moral hazard rests on the notion that banks will actually take less risk as a result of such guarantees against failure because taking more would jeopardize the future value of their banking charters.

Yes, that sounds strange to me, too. But there's a body of academic research that supports the idea. And it smacks of the same logic behind other theorizing about so-called "real options." 

Apr 21
2010

Shedding no further light on Lehman

Posted by Ron F in Securities and Exchange CommissionRiskRepo 105RegulationNew York FedLehman BrothersGeithnerGAAPfinancial crisisFederal ReserveFedCongresscomplianceBernankeBarney FrankBanksbank failuresbailoutsAccounting

Ron F

I have to say that today's House Financial Services Committee hearing into Lehman Brothers' collapse leaves me confused in more than one respect.

Ben Bernanke told the committee that regulatory authority over Lehman rested with the Securities and Exchange Commission under a voluntary program set up in 2004.

Apr 19
2010

Goldman case another sign of need to curb naked swaps

Posted by Ron F in Securities and Exchange CommissionRiskRegulationGoldman Sachsderivativescredit-default swapCDSBanksbank failuresbailoutsAIG

Ron F

It seems as if Goldman Sachs' essential defense in the SEC's fraud case against the bank is that it did nothing differently than other banks typically do in failing to disclose to investors that a hedge fund that wanted to short the securities the bank sold helped design them.

But if the "everybody-does-it" line gets Goldman off the hook, then what does that say about Wall Street? Simon Johnson argues that it means that fraud is now its very basis.

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