Today's Top Stories Also Noted: Spotlight On... The risks of traditional lending News From the Fierce Network:
Today's Top News1. SEC seeks old deposition of Cohen
Whether Steven Cohen and SAC Capital will ever be criminally charged with insider trading crimes is still an open question. But it seems likely that the SEC will make good on its Wells notice and charge the firm with civil fraud. One big issue is whether Cohen himself will be charged alongside his company. Bloomberg reports that investigators have subpoenaed a 2011 deposition of Cohen, "whose sworn statements on insider-trading compliance may hurt him as he tries to persuade regulators not to file a lawsuit with the potential to shut his $14 billion firm." Cohen's testimony in the deposition "establishes his personal control over the unit, CR Intrinsic, and records his unfamiliarity with his firm's compliance and ethics policies on insider trading." The controversial hedge fund magnate was quoted in the deposition as saying, "I've read the compliance manual, but I don't remember exactly what it says." Cohen may be opening himself up to failure-to-supervise charges related to alleged insider trading that has occurred within the CR Intrinsic unit, which is where Mathew Martoma was employed. Martoma, of course, has been criminally charged with insider trader. In the deposition, Cohen "enumerated several circumstances in which he would make trades while in possession of material, nonpublic information about a company -- core elements of any insider- trading case. He also characterized his firm's compliance policy as just 'guidelines' that employees could ignore by substituting their own judgment on whether a trade was illegal." For investors in SAC Capital, this is yet more disconcerting news. Some have been granted an extension on redeeming their funds, and these sorts of developments will make their decision trickier. For more: Related articles: Read more about: insider trading, SAC Capital
2. A wave of merger-related insider trading
If history is a useful guide, the industry might be in for a massive increase in insider trading--as if we didn't have enough such investigations underway already. The thinking goes like this: We may be on the brink of a new wave of mergers (the Dell deal seems to have sparked a mini-revival) and that wave will likely bring with it a lot of new temptations that some people just can't quell. The SEC has already noted some highly questionable options trades around the announcement by Berkshire Hathaway and private equity firm 3G Capital that they will buy Heinz for $23 billion. Via a Goldman Sachs account in Switzerland, someone bought up call options on Heinz that surged when the deal was made public. The account has been frozen, and the hunt for the actual humans behind the trade is on. That people traded ahead of a big deal announcement is hardly shocking. Mergers in fact have long been prime crime opportunities for people in the know--bankers, lawyers, accountants, IT guys and all their friends and families. Several studies of past merger booms have found unusual options and stock volume in the weeks before big merger announcements, and there is no reason to think that this will not happen again. The costs here are subtle. But it's fair to say that in past merger boom periods, bidding companies have been forced to pay more than they would have if it hadn't been for insider traders. The SEC ought to be gearing up. For more: Related articles: Read more about: mergers, insider trading 3. Goldman Sachs CEO not going anywhere
For years now, people have been speculating about when Goldman Sachs CEO Lloyd Blankfein would step down. Recently, I've suggested that the conditions were ripe for a transition. The bank was in decent shape, the stock price was up, the bank was no longer synonymous with financial evil, the main government prosecutions are in the past, the idea that Blankfein himself would be charged with a crime had been put to bed. All that meant that he could transition without an asterisk by his name. No one would say he had been pushed by circumstance. He could've left on his own terms. All the public, statesman-esque speaking he had been doing recently suggested that he was indeed angling for some sort of public service position, like his predecessors. But alas it wasn't to be. Blanfein told Bloomberg Television that, "The combination of this being who I am and what I do and having absolutely no other interests makes me think this is what I'll be doing for a while. He added, that while he would "love to be wanted" for such a role such as Treasury Secretary, "that seems like such a distant hypothetical." Having Blankfein stick around as CEO is certainly not a bad thing. But you do get the feeling that he would've jumped at the right opportunity. He may still be looking. For more: Related articles: Read more about: Goldman Sachs, CEO 4. Goldman Sachs CFO bullish on ROE
The dwindling ROE has been a constant source of consternation recently among Goldman Sachs shareholders. Before the financial crisis, the bank was able to generate returns in excess of 30 percent. That dwindled to 3.7 percent in 2011, a tough year for the entire industry. That prodded bank executives to back away from earlier pronouncements that an above-20 percent was possible. In 2012, the ROE rebounded to 10.7 percent. Most would say that the bank will not soon return to the days of an above 30 percent ROE. But Goldman Sachs CFO Harvey Schwartz is adding some clarity to the industry outlook. According to Bloomberg, he thinks that the industry's average ROE will rise to above 12 percent soon, as more banks are forced to exit critical business lines. The news service quoted him saying, "I think the industry will migrate to higher returns because it will have to. It might be a "question of excess capacity coming out over a long period of time." That said, the bank itself is not yet willing to venture a target ROE. In some scenarios, the top banks could indeed boost their ROEs at the expense of struggling banks. For example, if some banks retrench in FICC activity, in hopes of diversifying into, say, wealth management, the market could open up a bit for the likes of Goldman Sachs. Several years ago, the bank was able to thrive in a retrenchment period, enjoying fat spreads and high commissions in some markets. My guess is that Goldman Sachs emerges as a profitability leader over the next few years. For more:
Read more about: Goldman Sachs, Roe 5. Prosecutors seek more admissions of guilt
I noted recently that in the recent prosecution of Standard & Poor's for tainted ratings of mortgage-related securities, a prosecutorial shift was apparent. The government is now seeking admission of guilt, moving away from the time-worn policy of allowing companies to settle "without admitting or denying guilt." DealBook weighs in with a look at how this new approach is affecting the broad effort to charge companies in the great Libor scandal. In cases that target UBS and RBS, prosecutors are indeed asking the bank to admit guilt. But they are doing so in a way that would avoid a "death penalty" for the main bank. In these two cases, the Japanese units of both banks actually pleaded guilty to wire fraud. "By going after a subsidiary, prosecutors shield the parent company from losing its license, but still send a warning to the financial industry. The Justice Department plans to continue the campaign as it pursues guilty pleas from other bank subsidiaries suspected of reporting false interest rates," it noted. Citigroup is apparently in the prosecutorial cross hairs also, as its Japanese unit is "suspected of rate manipulation, and prosecutors recently accused one former trader there of colluding with other banks in a vast rate-rigging conspiracy." This approach sounds reasonable, and it might answer critics of the no-admission-of-guilt policy. But it will get very tricky when it comes to JPMorgan Chase, Bank of America and other U.S. banks. If the main deceit occurred in an important U.S.-based subsidiary, will the prosecutors still be willing to demand a guilty plea, even though the effects on the overall bank could be deleterious. If not, they might be susceptible to charges they are selectively enforcing the law, so far to the detriment of British banks. For more: Related articles: Read more about: prosecutors, Enforcement Action Also NotedSPOTLIGHT ON... The risks of traditional lending An interesting essay in the New Yorker reminds us that despite the deadlines, the real root of the financial crisis was traditional lending, not out-of-control trading. Indeed, the very root of the CDO crisis was an abundance of shoddy individual loans to finance a home purchase. The author makes a call to require banks to hold more equity vs. debt. That idea has always been universally panned in the industry as a good way to kill profits, and I doubt regulators will ever embrace the idea fully. Article Company News: Regulatory News:
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Wednesday, February 20, 2013
| 02.20.13 | SEC seeks old deposition of Cohen
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