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Clean-Up Time On Wall Street

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January 5, 2009

As we approach the eve of the Obama Administration’s first day, across America the new President’s supporters have visions of “change we can believe in” dancing in their heads.  For some, this change means the long overdue realization of health care reform.  For those active in the Democratic campaigns of 2006, “change” means an end to the Iraq war.  Many Americans are hoping that the new administration will crack down on the unregulated activities on Wall Street that helped bring about the current economic crisis.

On December 15, Stephen Labaton wrote an article for the New York Times, examining the recent failures of the Securities and Exchange Commission as well as the environment at the SEC that facilitates such breakdowns.  Some of the highlights from the piece included these points:

.   .   .    H. David Kotz, the commission’s new inspector general, has documented several major botched investigations.  He has told lawmakers of one case in which the commission’s enforcement chief improperly tipped off a private lawyer about an insider-trading inquiry.
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There are other difficulties plaguing the agency.  A recent report to Congress by Mr. Kotz is a catalog of major and minor problems, including an investigation into accusations that several S.E.C. employees have engaged in illegal insider trading and falsified financial disclosure forms.
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Some experts said that appointees of the Bush administration had hollowed out the commission, much the way they did various corners of the Justice Department.  The result, they say, is hobbled enforcement and inspection programs.

On December 18, Barack Obama announced his intention to name Mary Schapiro as the Chair of the Securities and Exchange Commission.  Many news outlets, including National Public Radio, presented an enthusiastic look toward the tenure of Ms. Schapiro in this office:

Speaking at the news conference on Thursday, Schapiro said there must be “consistent and robust enforcement” of regulations to protect investors, saying it will be her top priority as SEC chief.

On the other hand, in the December 18 Wall Street Journal, Randall Smith and Kara Scannell provided us with a more informative analysis of the SEC nominee’s track record:

She was credited with beefing up enforcement while at the National Association of Securities Dealers and guiding the creation of the Financial Industry Regulatory Authority, which she now leads.  But some in the industry questioned whether she would be strong enough to get the SEC back on track.
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Robert Banks, a director of the Public Investors Arbitration Bar Association, an industry group for plaintiff lawyers  . . .  said that under Ms. Schapiro, “Finra has not put much of a dent in fraud,” and the entire system needs an overhaul. ” The government needs to treat regulation seriously, and for the past eight years we have not had real securities regulation in this country,” Mr. Banks said.

Since Ms. Schapiro took over Finra in 2006, the number of enforcement cases has dropped, in part because actions stemming from the tech-bubble collapse ebbed and the markets rebounded from 2002 to 2007.  The agency has been on the fringe of the major Wall Street blowups, and opted to focus on more bread-and-butter issues such as fraud aimed at senior citizens.

Out of the gate, Ms. Schapiro faces potential controversy.  In 2001 she appointed Mark Madoff, son of disgraced financier Bernard Madoff, to the board of the National Adjudicatory Council, the national committee that reviews initial decisions rendered in Finra disciplinary and membership proceedings.  Both sons of Mr. Madoff have denied any involvement in the massive Ponzi scheme their father has been accused of running.

It appears as though we might see Ms. Schapiro face some grilling about the Madoff appointment, when she faces her confirmation hearing.  Beyond that, the points raised by Randall Smith and Kara Scannell underscore the question of whether Mary Schapiro will really be an agent of change on Wall Street or just another “insider” overseeing “business as usual”.  To assuage such concern, many commentators have emphasized that Ms. Schapiro has never worked for a brokerage firm or investment bank.  Her Wall Street experience has been limited to regulatory activity.  Despite this, one must keep in mind a point made by Michael Lewis and David Einhorn in the January 3 New York Times:

It’s not hard to see why the S.E.C. behaves as it does.  If you work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it.

Michael Lewis is the author of Liar’s Poker, a non-fiction book about his own Wall Street experience as a bond salesman.  With David Einhorn, he wrote a two-part op-ed piece for the January 3 New York Times.  The above-quoted passage was from the first part, entitled:  “The End of the Financial World as We Know It”.  The second part is entitled:  “How to Repair a Broken Financial World”.  The first section looked at the Bernie Madoff Ponzi scheme, using it to underscore this often-ignored reality about the Securities and Exchange Commission and its inability to prevent or even cope with the current financial crisis:

Indeed, one of the great social benefits of the Madoff scandal may be to finally reveal the S.E.C. for what it has become.

Created to protect investors from financial predators, the commission has somehow evolved into a mechanism for protecting financial predators with political clout from investors.  (The task it has performed most diligently during this crisis has been to question, intimidate and impose rules on short-sellers — the only market players who have a financial incentive to expose fraud and abuse.)

In the second section of their commentary, Lewis and Einhorn suggest six changes to the financial system “to prevent some version of what has happened from happening all over again”.  Let’s hope our new President, the Congress and others pay serious attention to what Lewis and Einhorn have said.  Cleaning up Wall Street is going to be a dirty job.  Will those responsible for accomplishing this task be up to doing it?

Dirty Rotten Scoundrels

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December 18, 2008

The Ponzi Scheme case involving Bernie Madoff is only the latest example of scumbaggery on Wall Street.  Madoff helped found the NASDAQ Exchange and established a reputation for himself as one of the captains of the financial world.  Now we know that he pilfered over 50 billion dollars from sophisticated investors, colleges, charitable institutions, banks and plain-old, rich people.  Worse yet, when he couldn’t get enough co-signers to back his ten-million dollar bail, he was placed under “house arrest” and confined to his $7,000,000 home.  When a car thief can’t make bail, he sits in jail until his case is tried.  Why is it that when someone is charged with stealing ten million times that much, he gets treated as though he was driving on an expired license?    By the way:  How does somebody hide fifty billion dollars?  Is he going to claim that he lost it or that he blew it all on lottery tickets?

The knaves who held themselves out as financial magicians have made pimps and drug dealers seem like Red Cross volunteers, by comparison.  Beyond that, the government institutions and officials charged with protecting the integrity of our financial system have been out to lunch for several years.  Worse yet, these hacks continue to facilitate the theft of trillions of dollars of taxpayer money and, for this reason, I believe they all belong in prison.  On second thought, they should be placed before a firing squad along with the swindlers whom they enabled.  After the Enron treachery was exposed to the light of day, one would have thought that the Securities and Exchange Commission might have started doing its job.  It didn’t.  People have to start forcing our elected officials to find out why.  I think I know the answer.  I believe it’s because many of the people entrusted to regulate the financial system are crooks themselves.

On December 16, Brent Budowsky posted an important article on The Hill website concerning the bailout bungle.  Mr. Budowsky is a gentleman who earned an LL.M. degree (that’s something you work on after graduating from law school) in International Financial Law from the London School of Economics.  He was a former aide to Senator Lloyd Bentsen and Representative Bill Alexander.  Mr. Budowsky pointed out that:

Government agencies have poured close to $8 trillion into banking bailouts.  The Treasury secretary has promoted massive government support of troubled, failed and corrupted institutions.

This program is a 100 percent top-down exercise involving the largest amount of money in history.

Virtually none of this money directly helps average Americans. Virtually none of it trickles down to the people who suffer the most and pay for the program.

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The Securities and Exchange Commission is discredited.  The Federal Reserve has failed in its duty as banking regulator. Congress has failed in its duty of oversight.  The most wise and citizen-friendly regulator, Sheila Bair of the Federal Deposit Insurance Corporation, is treated with contempt by the Treasury secretary.

*   *   *

Today the Federal Reserve Board refuses to disclose information regarding some $2 trillion provided to financial institutions.  Bloomberg business news has filed a historic freedom-of-information case seeking disclosure.  Congress and the president-elect should support it.

Bailout money is not a private account that belongs to Fed Chairman Ben Bernanke, Fed governors, the Treasury secretary or the banks.  It is the people’s money.  It should be used to benefit the people.  It should be monitored through the checks and balances of the democratic process.

Secrecy is the enemy of equity, integrity and common sense. Secrecy is the friend of negligence, misjudgment and corruption.  There are probably selected instances where the Fed should not disclose, but show me $2 trillion of secretly spent money and I will show you trouble.

Do you care to hazard a guess as to what the next Wall Street scandal might be?  I have a pet theory concerning the almost-daily spate of “late-day rallies” in the equities markets.  I’ve discussed it with some knowledgeable investors.  I suspect that some of the bailout money squandered by Treasury Secretary Paulson has found its way into the hands of some miscreants who are using this money to manipulate the stock markets.  I have a hunch that their plan is to run up stock prices at the end of the day before those numbers have a chance to settle back down to the level where the market would normally have them.  The inflated “closing price” for the day is then perceived as the market value of the stock.  This plan would be an effort to con investors into believing that the market has pulled out of its slump.  Eventually the victims would find themselves hosed once again at the next “market correction”.  I don’t believe that SEC Chairman Christopher Cox would likely uncover such a scam, given his track record.  Perhaps we can thank him when “vigilante justice” comes to Wall Street.