Financial Pros Say Nay on Prop Trading

From CFA Institute Investor Update:

While the gridlock in Washington, DC, last week was the result of a snow storm, the unprecedented shutdown of the federal government may have given Senators the break they needed to end the impasse on financial regulation reform.

What do CFA Institute members, who are all individual investment professionals, think about the pace and proposals to reform financial industry regulation?

In a recent, week-long poll, 68 percent out of 1,471 respondents said they strongly support/support proposals to separate proprietary trading and insured commercial banks. Members were then asked whether they support efforts to rein in U.S. banks that are considered too big to fail. 

Another majority – 58 percent – replied that they strongly support/support these efforts. “Our members are acutely aware of the potential dangers and conflicts of interest that come with commercial banks engaging in proprietary trading,” said Jim Allen, CFA, head of capital markets policy at CFA Institute.

“They want banks to focus on their specialty—taking deposits and making loans.” CFA Institute members were also asked if the U.S. government has made adequate progress on regulatory reforms aimed at preventing another crisis… 67 percent said the government had made “little progress.” Only 24 percent indicated “some progress” had been made. In July 2009 the Investors Working Group (IWG), co-sponsored by CFA Institute and the Council of Institutional Investors, brought together prominent investors, former regulators and investor advocates who recommended that proprietary trading at commercial banks be restricted and that financial institutions not be permitted to become “too big to fail.” (Read more.) The IWG recommended imposing careful constraints on proprietary trading at depository institutions and their holding companies. “It took the IWG four months to compile several investor-friendly reform recommendations,” said Allen. “In four months, this bipartisan group made sound proposals on issues such as regulating OTC derivatives, the oversight of systemic risk, limiting proprietary trading, and uniform fiduciary duties for investment advisers. Investors would be thrilled to see the same action and deliberate speed occur in the halls of Congress.” The CFA Institute Investor Update strives to give journalists the investor perspective on an issue-of-the-day.

To receive this report from the CFA Institute containing commentary on top regulatory, legislative, and market-making activities, please contact Kathy Valentine: Suggestions and follow up questions are welcome (contact Kathy Valentine at kathy.valentine@cfainstitute.org).

Finally, the Rest of America Speaks

For at least a year now I’ve been telling my more Right of center friends to beware the revolution. I said this because the financial Meltdown is attacking some mainstays of American Life, our homes, our jobs, our families — now even whole communities. Mazlow warned us, after all. Something happens to people when these basic securities are threatened. In the end it was the shattering quiet out there.

In retrospect I bet it was the silence of a people thinking, sorting,  trying to unwind the ball of wax that’s been rolling out of those congressional hearings. Derivatives and debt obligations, counterparties and pools of mortgages who’ve left no following addresses. What does it all mean to the average guy or gal? They must’ve been wondering. Now reality is setting in.

Still, I recall one friend in particular laughing at my prediction of revolt simmering somewhere out there. Why would these rich chiefs of finance care? But what about the consumers out there who can’t buy the equities and bonds, or the merchandise that makes our economy tick, I argued. But someone answered that, saying a very small percentage of people consume the greatest amount of goods. In other words they don’t need our piddling purchases. 

Maybe revolution was a bit too hard — or not. The recent marchers in Chicago to protest the banks — people of all ages and colors chanting, “Goldman Sucks”, and camping outside Wells Fargo’s offices are apparently part of a growing movement. Organizations such as Americans for Financial Reform, National Peoples Action, Our Financial Security.org and Showdown in America.org may be the keys to harnassing the anger that seems suddenly everywhere, like static electricity.

Check out PBS; tonight’s Bill Moyers Journal. His guests talked about making  political contributions from financial firms and banks too toxic for our elected leaders to keep consuming.  Wish I could be that optimistic. Guess it could happen with next year’s elections hovering over them. 

But the real joke may be that by soaking the public for every dime, the greedy banks created a reality of nothing left to lose. Even filthy rich banks can’t survive long amid anarchy. I hope it doesn’t come to that.

Banks Changing Due Dates

Watch your credit card bill for a different due date.  As you know missing a payment can unleash the demons of hell these days – trigger excessive interest rates and lofty late fees.

I’m basing this warning on my own experience. I transferred nearly my whole balance onto another card. When I got the first bill for the new lower monthly minimum, the due date had taken a shave too, of about 10 days. The next payment is due 10 days earlier than  the last payment. So my automatic payment, which I set up through my online banking to protect me from the above mentioned calamity, would have proved a truly false security.

Check those statements!

Mortgage Services = $3.6Bn Profit for Wells Fargo

The Financial Times reports today that Wells Fargo, recipient of billions in government money, including rewards for helping administer President Obama’s home mortgage Meltdown recovery efforts, posted record breaking profits.

However, the bank that services mortgages for many lenders, including Fannie Mae, lost 5 per cent from its share price  when an analyst, Dick Bove of Rochdale Securities, pointed out that the bank’s third-quarter profit was “largely driven by a $3.6Bn hedge gain on Wells’ mortgage servicing portfolio”, which he didn’t think the bank could sustain.

Compare this to President Obama’s tirade not long ago against Wells and Bank of America for not administering his HAMP or Home Affordable Modification Plan fast enough to keep people from losing their homes across the country.

If Wells isn’t keeping homeowners in their homes, what is it reaping its billions in profits for?

Planet Finance Called It

Red October, as Planet Finance predicted in July, is here and Bank of America’s irresponsible credit card lending is out in the lead with $2.24 billion in credit card losses the bank reported today!

BofA behaved stupidly, but they wouldn’t have had the ready, eager market they did without the stupid actions of others. When mortgage lenders refused desperate requests from homeowners who needed to borrow on their home equity due to reducd or no employment, the lenders pulled their shutters. Enter BofA with offers of no interest, unsecured credit card advances to the full limit of each card the customer held.

Now it’s October, the no-interest has gone to 12.99% with no more fixed interest. That’s right the desperate homeowners are now facing variable rate interest in paying back these loans in an economy that’s only gotten worse for consumers. And those interest rates are bound to respond to the run on capital that is right around the corner. Capital adequacy requirements, long overdue, will fuel it.

Red October Upon Us

Well, our Red October prediction is here.  As Planet Finance foretold in our earlier post, consumer credit is the ticking time bomb, which is sounding alarms right now.

If you tune in pundits and Sunday morning shows this week, you’ll hear consumer credit has taken over the position formerly occupied by talk of valuing, moving or dissolving toxic assets, which by the way are still alive and toxic but now ours, most recently noted by the NYT’s own Gretchen Morgensen.

 Instead of consumers having their own Hank Paulson running from pillar to post to alert the financial community of imminent collapse unless taxpayers mortgage the next two generations, consumers have banks rushing to raise interest rates, lower lending limits and change borrowing terms to variable rate interest. This is a recipe for disaster in a consumer-driven economy.

We ask our question again, given that we are a consumer-driven economy, why would we seek to cure its ills by bolstering the creditors?

Maureen Nevin

Your views???

Rolling Stone Goes After Goldman

Matt Taibi, writing in Rolling Stone, ties at least five economic bubbles to Goldman Sachs.
Despite the use of four letter words, Taibi builds a pretty convincing argument for the big bank’s extraordinary influence over our government and the markets.
Check it out online.
See also my article in Securities Industry News, on www.MaureenNevin.com, entitled the View from Inside the Meltdown. It’s also a hedge fund manager’s jaundice view of Goldman’s practices.  I think Taibi’s ability to find hedge fund guys who are willing to talk becomes clear when you read that piece.

Red October

Why was Bank of America lending unsecured monies to anyone with their credit card — at zero interest – during the credit height of the meltdown? It would appear the people at BoA who would’ve been concerned about unsecured debt were too busy scratching their heads over the Merrill Lynch acquisition.
Now, as October looms on the horizon, the month when many cardholders will start paying at least 12.99% on their balances, BoA has sent out a new wave of notices. This time it’s to tell all its cardholders that there will be no fixed balances in their futures — instead they’ll be tied to an index. That’s right variable rate credit cards, not the fixed interest rate they agreed to,  just as interest rates are starting to creep up. And the other banks are also moving toward similar policies.
Here’s the prediction: Many homeowners of Fall 2009 will stagger and fall under the 12.99%, while others will fumble around until the next rate increase, at which time they too will bite the dust.

And what of the investments in the asset backed securities based on  this credit card debt? What S&P yesterday put at $79.6 billion – just under their ratings, which is only about 53% of the total revolving consumer debt balance?  Pray tell, how far off did you say that recovery is now?

Taleb Hit it on the Head Today

Once again my friends have been oozing exhuberance to my dismay. Not that I like being the gloom momma, I just can’t see where the dynamic has changed to warrent optimism. Nassim Taleb agrees! His answer: For meaningful change debt must be converted to equity!

This is fair. Banks accepted inflated values for the properties they invested in, despite evidence to the contrary — namely last sale prices. The house next door had a last sale price of $187,000. The real estate guy asked the owners if they’d sell for triple what they paid. That’s the American way, right? Sure enough the real estate guy comes back with a buyer who pays $650,000! Now that new owner, three years down the road, is under water. She’s selling the place for $385,000, with a mortgage outstanding of $440,000! If the bank didn’t care about the last sale price, shouldn’t it have to take part of the loss?

SubPrime Market Worked on Congress for 10 years

Check out today’s mega report by the Center for Public Integrity -http://www.publicintegrity.org/news/entry/1352/ which looks at how this Meltdown Debacle happened…