It's about damn time....

The New South Wales councils, including Bathurst and Corowa, brought a class action against S&P, investment bank ABN AMRO and Local Government Financial Services (LGFS).

The councils claimed they were misled into losing almost $16 million in the financial crisis, saying S&P led them to buy complex investments called constant proportion debt obligation notes (CDPOs), which the agency had given a AAA rating.

Today's ruling found that rating was misleading and deceptive.

Federal Court Justice Jayne Jagot described the ABN AMRO products as "grotesquely complicated" and said that the LGFS breached its fiduciary duty to the councils by not properly investigating the products.

She said S&P had been "sandbagged" while ABN AMRO "simply bulldozed the rating through".

Now it may be fine and well for someone to opine and be entitled that opinion.

But S&P, Moody's and other NRSROs do more than just "opine."  They hold out their opinions as expert opinions, and more-so they lobby for and are the beneficiary of laws and regulations that in many cases require their ratings before some entity can purchase a given security.

Never mind that while there is certainly a valid First Amendment argument that one has the absolute right to free speech it is also well-within the boundaries of the law that one does not have a shield against knowingly false speech.

In other words there is a huge difference between being wrong and knowingly being wrong, either through willful blindness or deliberate falsehood.

This, incidentally, is the same issue I have with a number of the investment banks, who created products at the behest of some client who wanted to take a short position and then marketed them as good long investments without disclosing that the reason they existed was that someone wanted the other side -- in other words, that they were created by someone expecting them to fail.

This weekend I had an interesting conversation with a "registered investment advisor" (but not for my account; off-the-record) and our conversation turned to the markets.  He and I are on decidedly opposite sides when it comes to what we think is going to happen, and his closing argument was simply "you're wrong." 

Ok, we shall see.  My retort of course is "sold to you!" and that's what makes a market -- two people with opposing ideas of what value is.  One of us will be right and one of us will be wrong.

But neither of us has a fiduciary duty to the other; in the case where I was his paying client things change.  In that case there is a fiduciary duty.

S&P, Moody's, Fitch and others argue that they have no such duty.  I disagree; if your models are going to be required before someone can buy something, effectively going from a voluntary advisory position to that of a mandatory rating, then I argue that you have a fiduciary duty to those who rely on those ratings -- because without those consumers of your product, whether you're paid by them or not, you are out of business.

It just never ends, does it?

Options trade opened today and there's a "fair bit" of activity....  the stock is down another 9.5%, trading under $29.

I warned everyone not to get involved in this mess, and that proved to be right.  But it's not the poor prospects for revenue forward that we should all be outraged about, and the crazy hype-based "valuation" that people tossed around.

Rather, it's the Wall Street casino game where certain people get information others do not.

This was banned for listed stocks after the 1990s, when investors were fleeced relentlessly.  But for a new IPO they are not yet listed, so it appears to be legal (thus far) for certain favored people to get a phone call (but not a printed, faxed or possibly emailed!) advisory on the prospects of the firm.

Really?  It's perfectly ok for certain people to be given information everyone else doesn't have, and what's better it's ok when those "people" are then allowed to short as they are able to borrow stock that isn't yet available to the public at-large?

Oh yeah that's a good deal for the average investor.

NOT.

You want an unregulated, private market?  I have no quarrel with that.  It's called "Second Market" and it already exists.  But when you offer shares to the public and want the guarantee of public bid, offer, volume and clearing then you should have to follow the same rules as everyone else.

These dodge-ball games around things like Reg-FD are an outrage.  The people got robbed -- again -- and not just on this "favored" research either.

I have multiple reports from people who got royally screwed as a consequence of the order processing problems.  Now you can argue that this is part of the risk of the game, but I argue in turn that again, regulated markets have a fiduciary responsibility to perform and this failure was not a "force majure" event -- the entire process was under the Nasdaq's control!

They opened trading and left it open and executing orders they could not confirm in a reasonable amount of time.  People got margin called, they got REG-Td, they got burned -- badly -- in some cases winding up short on a stock that wasn't shortable even though they had no intent to be short, or they wound up long some multiple of their intended order size.

Wall Street has always been a shark tank but the price of running a public and orderly market ought to be that in exchange for being able skim those exchange fees you should be held responsible when you screw up.

If you cannot return confirms within a fraction of a second after they occur you should have a responsibility to halt trade as nobody knows what they own.  And if you don't do it, choosing to "save face" rather than blow up your payday IPO game, you should be forced to eat all the bad and unintentional executions that result.

And while we're at it, Reg-FD must be extended to any firm in which the research or other information has a reasonable probability of impacting its trading on a public exchange -- which includes a stock intending to go public that happens to be on a road show.

From the forum:

In Sweden, we've had an Order-to-Executed Order limit in place since last year. Basically for every 250 orders, at least 1 must be executed on, otherwise a fee of 0,09 SEK (around 0,015 USD) is applied per order above the 1 to 250 ratio.

Norway has now (Thursday morning) placed a 1 to 70 limit in place, with a fee of 0,05 NOK per order above the limit of 1 to 70.

If our regulators want individual investors to come back into the market they need to implement this but with a 1 in 10 limit.

That is, for every 10 orders you place at least one must execute or you pay a fee for each additional order.  Set the fee at 5 cents per order over 10 that does not execute.

1 in 10 is more than lax enough for any human trader, but makes unprofitable the practice of "spamming" an exchange with orders, the overload games that Nanex has repeatedly documented and other forms of behavior that have nothing to do with the price of an underlying security but instead are intended to and do manipulate the market.

This one simple rule change would put a stop to 99% of the games and yet would do no damage to actual trading of actual securities, whether by machine or person, for actual accounts where the intent is to express an opinion of price (instead of simply trying to steal a few pennies from someone else.)

Incidentally I have previously argued for imposing a "must remain valid" time for all orders as well sufficient to allow human reaction time -- say, 2 seconds.  Making both rule changes would be even better, although either would make a significant difference.

The market is supposed to be a price-discovery mechanism, not a pick-pocket's playground.

In a major bust the primary online poker systems were taken down today in conjunction with serious felony indictments.

PREET BHARARA, the United States Attorney for the Southern District of New York, and JANICE FEDARCYK, the Assistant-Director-in-Charge of the New York Field Office of the Federal Bureau of Investigation ("FBI"), announced the unsealing of an Indictment today charging eleven defendants, including the founders of the three largest Internet poker companies doing business in the United States - Poker Stars, Full Tilt Poker, and Absolute Poker (the "Poker Companies")- with bank fraud, money laundering, and illegal gambling offenses. The United States also filed a civil money laundering and in rem forfeiture complaint (the "Civil Complaint") against the Poker Companies,their assets, and the assets of several payment processors for the Poker Companies. In addition, restraining orders were issued against more than 75 bank accounts utilized by the Poker Companies and their payment processors, and five Internet domain names used by the Poker Companies to host their illegal poker games were seized.

Nasty.

I've never played for "real money" online; I've dabbled on the free tables before, but declined to participate in the "pay" side for two reasons:

• I have no confidence that the game isn't rigged.  If I can figure out how to collude without getting caught in seconds (hello cellular phone!) it can't be difficult for others to do so.  Any collusion or artificial assistance (e.g. odds computing systems that work in real-time by scraping the screen) that anyone else at the table has but you do not and you're going to get creamed.
  
  
• I have no desire to wake up one morning on the wrong end of a felony indictment, seeing as the law is a bit murky from a player's standpoint, and from a provider's standpoint in the United States it is definitely illegal to move the money around.

The press release is nasty, assuming the allegations are true.  It is alleged that in order to get around legal restrictions and blocks that payment processors (e.g. Visa and Master card, banks, etc) had placed against these sites due to laws banning online gambling, the sites instead worked with confederates who allegedly reported their transactions as things like "golf balls" and similar things that are legal.  There are also allegations that an actual bank was bought into by one of the firms with what looked an awful lot like a bribe (described in the indictment as a "bonus".)

The "in rem" money laundering and civil forfeiture complaint is bad news as it carries a materially lower standard of proof and is highly-likely to lead to the confiscation of everything of monetary value, most-particularly all the money itself.

The law cited, UIGIEA, does not make it illegal to play poker for money online.  What it does do is make it illegal to transfer money through the payment system for online gaming.  The law is written in such a way that it appears to apply only to the businesses that offered the gaming service.  That's the good news from a player's perspective, but unfortunately there remains an element of risk.

I would expect the US Attorneys to unwind the deceptions behind who was providing processing services under false pretense (whether they were actively involved or duped) and hit them with subpoenas, which means your identity is almost certain to be exposed if you're transferred money in or out of these online poker emporiums.  The best-case (and most-likely) scenario is that you lose whatever happened to in your account when the seizures and shutdowns happened.

The potential problem for players though lies in that "loss of funds"; it is possible that Department of Justice, if they can extract the funds transfer records from these firms and the various companies that they used to process transactions could attempt to seize any money you transferred in or out under civil forfeiture laws.  I can't calibrate the risk there but it is real, and the way these laws are written the standard of evidence required is very low.  Again, I doubt it's a factor for someone who has played "once in a while" but if you've been making a substantial income through online gaming anything you've made within the statute of limitations is potentially at-risk.

Last night I saw a bunch of FBI agents storming into major financial institutions and arresting people left and right.  It was a glorious thing indeed.

Unfortunately my alarm clock went off and I discovered that I was dreaming - and the real bust was of a handful of online poker sites.

Let's start with the last first....

That public trust is sacred, and it is the very foundation of the long-term success of your industry.

If bankers and regulators are to uphold that trust, we must demonstrate the ability to work together and engage in long-term thinking that will protect consumers, preserve financial stability, and lay the foundation for a stronger U.S. economy in the years ahead.

Sheila seems to think that there's any sort of trust to regain?  Shirley you jest - or is that Sheila you jest?

Back up the page a bit we find.....

Instead, the biggest long-term risk to the success of the banking industry would be its failure to support the reforms needed to ensure long-term stability in our financial markets and our economy.

The American people have suffered enormous economic losses as a result of the financial crisis.

The American people suffered enormous economic losses as a result of fraud which in turn resulted in the financial crisis.  Yet the people who engaged in that fraud, from top to bottom, have not paid for it.  They have not been indicted, prosecuted or jailed.  Not only have they not suffered criminally, they weren't forced to give back the money they stole either.

In April 2010, a Pew Research poll found that just 22 percent of respondents rated banks and other financial institutions as having "a positive effect on the way things are going in this country."

I suspect if the Pew Research group included a response "hang them all from lamp-posts" that would have gotten the other 78% of the responses.  Of course Pew wouldn't include something that would allow an honest expression of the depth of hatred that many have for the people in this industry. 

Then again, can you blame the public for that hatred?  It's one thing to lose your home and everything you worked for as a result of raw speculation that you knew was dangerous, got involved in anyway, and lost the bet on.  That happens all the time, and most people deal with it.  It's part of the risk:reward paradigm.

But it's an entirely different matter when you're told repeatedly that you can afford this house, you can afford to take on this credit, we're the nice guys in the expensive $5,000 pinstripe suits and we've run our computer models and our simulations and this product is both safe and suitable for you.

Of course all of these representations turned out to be a pack of lies.

When we issued proposed guidance on non-traditional mortgages, industry comments found the guidance too proscriptive, saying that it "overstate[d] the risk of these mortgage products," and that it would stifle innovation and restrict access to credit. Later, when we proposed to extend these guidelines to hybrid adjustable-rate mortgages, which at that time made up about 85 percent of all subprime loans, we received a letter co-signed by nine industry trade associations expressing "strong concerns" and saying that "imposing new underwriting requirements risks denying many borrowers the opportunity for homeownership or needed credit options."

For our part, I think it is clear in hindsight that while our guidance was a step in the right direction, in the end it was too little, too late.

Fraud is fraud Sheila.  Lending people you know they can't pay back and then playing "hot potato" with the paper, lying to the buyer of the paper so he's induced to "invest" in something you have every reason to know is going to explode in his face, isn't "too little, too late."  It's a scam.

At this point we're not speculating any more.  We have sworn testimony that this happened.  That major financial institutions knew they were selling crap to investors - as much as 80% of their production in 2007.  That's in the record in the form of sworn testimony at this point in time.

Oh yes, the non-bank issuers were worse.  But if the regulated banks had 80% of their production represented by fraudulent and bogus paper, does that not mean that the non-bank lenders were probably peddling paper that 100% garbage?  This, of course, leads one to ask - does it really matter whether the so-called box of chocolates you're peddling is in fact 80% or 100% dog turds? 

I think not.

Accidents happen.  Speculation is part of all markets.  But when you have sworn testimony in the record that knowingly bad paper was being peddled and it was the vast majority of all the loans being made at the time, that's not speculation nor is it an accident.

Nether the FDIC or other regulators in Washington have given a damn about this, you've done nothing to stop it, Congress has done nothing to stop it, and nobody has been punished for doing it.  Yet we now know that the only logical explanation in 2007 which I and others put forward - that these loans were in fact both fraudulently issued and sold, was factually true because at least some of the people who were doing it have admitted to the facts under oath.

The balance sheets of households, depository institutions, state and local governments and the federal government all suffered serious damage as a result of the recession. All of these sectors are taking steps to repair that damage, but in some cases it will be a long, painful process.

Now that's a lie.  Very little contraction in systemic debt has taken place, and what has taken place has all been replaced by the federal government.  Shifting liabilities from one hand to another does not change the amount of the liabilities.  It is simply an attempt to hide them.  That's a scam too.

But then again, that's all we have these days in America when it comes to Washington and our so-called "financial markets" and "financial firms", isn't it Sheila? 

Whether you like it or not you're a (major) part of the problem - both past and present.