Also Noted: Spotlight On... Fannie preps new risk-sharing bonds News From the Fierce Network:
Today's Top News1. Standard & Poor's says charges are retaliation
It was huge news when ratings company Standard & Poor's downgraded the debt of the U.S. government to AA-plus from AAA back in August of 2011. The gut-wrenching move sparked a lot of anger from government officials. Prosecutors, who had been investigating the firm for a host of issues related to sham ratings aimed at generating fees more than analyzing actual creditworthiness, filed charges against the firm in February of this year. Is this mere retaliation? Or is the government pursuing a legitimate case? S&P has charged that the lawsuit is a thinly disguised move to punish it for downgrade. The government's "impermissibly selective, punitive and meritless" lawsuit was brought "in retaliation for defendants' exercise of their free speech rights with respect to the creditworthiness of the United States of America," as noted by Reuters. The government answers that there was no correlation between the charges against S&P and the downgrade of Treasury debt. It would be hard to argue that the charges do not reflect legitimate issues. While some government officials might have been happy to see them filed, proving that they were filed because of the downgrade seems difficult. Given what we know about CDOs and MBSs, it's pretty obvious that rosy ratings were an issue in the run-up to the financial crisis. All those AAA ratings in hindsight were simply not warranted, though S&P may be correct that they nevertheless reflected sound analyses at the time. Another issue of course is why S&P was charged while Moody's was not? Was it because Moody's didn't downgrade U.S. Treasury debt? Or was it because the evidence against S&P was simply more compelling? For more: Read more about: Credit Rating, Standard & Poor's 2. SAC Capital eyes family office structure
Most people assumed that SAC Capital would have little choice but to transform itself into a private family office. With prosecutors attacking it on several fronts and limited partners beating for the exit, its choices were certainly few. No one should be surprised by the report from CNBC that the company is indeed taking steps down that path. "A SAC family office would likely continue the same long-short equities strategy it has embraced for two decades, say people familiar with the discussions, with small allocations in quantitative trading and 'macro,' a global trading style that uses a combination of bonds, stocks, and currencies, as well. It is unclear whether it would incorporate founder Steven Cohen's other investments, such as real estate or art, or use the company to manage the financial affairs of his own large family," according to the report. The big issue is whether the firm will be able to retain top talent. Many portfolio managers will no doubt seek greener pastures. The rest will be asked to maintain peak performance on behalf of Cohen's personal holdings. "One possible incentive: the 3 percent payout Cohen gave money managers for 2012 on top of their annual bonuses, a perquisite he is expected to give out again in 2013 to those who remain." To be sure, a lot is on the line. A strong performance as a family office would do a lot toward founder Steven Cohen's coming efforts to restore his reputation. Some might think that the firm's strong performance over the years was due in part to illegal activity. If the private office can maintain the same returns, it will speak volumes. This year, the fund is up 11 percent through August, still lagging the market. For more:
Read more about: SAC Capital, family office 3. Did the market just undergo a flash hiccup?
About 2 weeks after the Nasdaq suffered a historic 3-hour outage, the same system at the center of the storm, the Securities Information Processor, apparently was acting up again. Nasdaq says the SIP wasn't operating between 11:35 and 11:41 a.m. for stock symbols PC through SPZ. Nasdaq said trading was not affected, but exchange operator Direct Edge contradicted that. It said it temporarily halted trading in some Nasdaq-listed securities between 11:43 a.m. and 11:48 a.m., as noted by Reuters. The SIP hiccup was attributed by Nasdaq to a back-end server failure. A backup system successfully kicked in, thankfully. So there's the silver lining. All in all, the incident does nothing to assure market participants that outages and glitches are an aberration these days. Nasdaq OMX said last week that it intended to identify potential design changes to improve the SIP, "including architectural improvements, information security, disaster recovery plans and capacity parameters." That goal is as relevant as ever. Unfortunately, we've grown accustomed to these sorts of incidents. The most we can hope for now is that hiccups do not turn into flash crashes or major outages. This is more grist for critics off the market's complex web of technologies ahead of an important September 12 summit with SEC officials. The SIP itself will be a topic of great interest. But the larger issues deal with system integrity in a much deeper sense. Hopefully, some truly innovative solutions, perhaps beyond Reg SCI, will be broached. For more: Read more about: Nasdaq, System Integrity 4. Ex-energy trader wins arbitration award from Morgan Stanley
Amit Gupta, a hugely successful energy trader for Morgan Stanley, found himself embroiled in enforcement activity by the Manhattan District Attorney. He ended up refusing to meet with investigators, apparently on the advice of his attorney. For that action, Morgan Stanley decided to fire him, noting that they require all employees to cooperate in investigations. Gupta soon thereafter filed an arbitration claim. A three-person arbitration panel has sided with Gupta, ordering Morgan Stanley to pay $8.01 million in deferred compensation. More specifically, Gupta was awarded $4.7 million of stock units he was promised from 2006 to 2008 and a deferred-cash award of $1.84 million from 2008, plus interest, according to Bloomberg. Gupta was also seeking up to $14.2 million in lost earnings from 2010 to 2012. According to the decision: "Mr. Gupta received no fair, reasoned, fully-informed. individualized consideration of his circumstances. The decision to terminate him 'for cause' was so flawed that it does not constitute valid action by Morgan Stanley." It's unclear what Morgan Stanley will do from here. An appeal might be in order. A dissenting opinion noted the views of one investigator who suggested that Gupta seemed to have pretty clearly violated some rules. No charges were ever filed against Gupta. In the end, Morgan Stanley will hopefully remain aggressive when it comes to these sorts of issues. It needs to make clear that management stands for ethical conduct, which includes cooperating with authorities leading various probes. For more:
Read more about: arbitration 5. Banks embrace subprime auto loans
The market for auto loans stands as an interesting prism through which to view the multi-faceted challenges facing banks right now. On the one hand, they are being prodded by regulators and others to make more loans to help fuel the economic recovery. On the other hand, banks are, as they should be, loath to extend credit when the likelihood of repayment is suspect. All the while, the rise of alternative lenders has boosted the pressure, siphoning off business often from their top customers, putting them in more of a pinch. When it comes to auto loans, Reuters notes that banks are making more loans to subprime borrowers "as delinquencies fall and as automobile manufacturers' finance subsidiaries draw the more-reliable customers." U.S. banks made 36 percent of their loans to subprime borrowers in the second quarter, up from 34 percent a year earlier, according Experian. "The move down the credit spectrum came as the banks faced stronger competition. Their market share fell four points to 36 percent in the past year, while so-called captive finance companies of automakers gained more than seven points to 25 percent of the market. Credit unions, the third-biggest type of auto lender, lost two points of market share to 15 percent." We're seeing more aggressive alternative lenders crop up in many ways, at the retail and wholesale levels, putting banks in quite a conundrum. Embracing subprime customers for auto credits may seem like a return to the bad old days of the credit crisis. But we may be a virtuous inflection point in the credit cycle, such that these loans are aren't so bad. That said, average credit scores for auto borrowers have plunged. In the end, the move toward the subprime end of the spectrum may prove to be a winner. For more:
Read more about: subprime, Auto Loans Also NotedSPOTLIGHT ON... Fannie preps new risk-sharing bonds A new world of mortgage guarantees is opening up. For evidence, we can kook to the big housing GSEs, which are starting to market bonds that call for the GSEs to share the risk of default with the buyer. Freddie Mac has already sold bonds of this ilk. Fannie Mae is scheduled to follow suit soon. The FHFA has asked that they boost the fees charged to guarantee traditional mortgage bonds and that they share risk on mortgages. Article Company News:
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Thursday, September 5, 2013
| 09.05.13 | Did the market just undergo a flash hiccup?
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