(c) 2010 F. Bruce Abel
Dare I say it -- the most important congressional hearing starts Wednesday. Read what Andrew Ross Sorkin would ask:
By ANDREW ROSS SORKIN
Published: January 11, 2010
Questions anyone?
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On Wednesday, the first hearing of the Financial Crisis Inquiry Commission — what many are calling this century’s equivalent of a Pecora-style investigation that scrutinized the market crash of 1929 — will take place in Washington.
Wall Street’s top brass are planning to be there (and yes, they are flying down the night before so they don’t miss it): Lloyd C. Blankfein of Goldman Sachs, Jamie Dimon of JPMorgan Chase, John J. Mack of Morgan Stanley and Brian T. Moynihan of Bank of America.
The hearing, of course, will partly be political theater. There will be finger-pointing. But if the committee uses its inquiry for its stated purpose — “hearing testimony on the causes and current state of the crisis” — it may help direct the national conversation and steer the current reform efforts.
In the spirit of trying to help start some lively discussions, here are some questions they might consider asking:
¶Mr. Blankfein, your firm, and others, created and sold bundles of mortgages known as collateralized debt obligations that it simultaneously sold short, or bet against. These C.D.O.’s turned out to be bad investments for the people who bought them, but your short bets paid off for Goldman Sachs.
In the process of selling them to institutional investors, however, your firm lobbied ratings agencies to assign them high ratings as solid bets — even as your firm planned on shorting them.
Could you explain how Goldman bet against these C.D.O.’s while simultaneously trying to persuade ratings agencies and investors that they were good investments? Were they designed from the outset to be shorted by Goldman and possibly select clients? And were those clients involved in helping design these transactions? What explicit disclosures did you make to Standard & Poor’s and Moody’s about your plans to short these instruments? And should we continue to allow transactions in which you’re betting against what you’re also selling?
¶Mr. Dimon, during the final week before Lehman Brothers collapsed, your firm asked Lehman to post billions of dollars in collateral and threatened to stop clearing Lehman’s trades if it didn’t do so. That demand had the effect of depleting Lehman’s capital base, just when it desperately needed that capital to return funds to investors who were asking for their money back.
JPMorgan clearly was trying to protect itself. But could you explain what impact you believe that “collateral call” had on Lehman’s failure and the ensuing market crisis?
¶This one is for the entire group. All of your firms are involved in some form of proprietary trading, or using your own capital to make financial bets, not unlike hedge funds and other private investors. As the recent crisis has shown, these bets can go catastrophically wrong and endanger the global financial system.
Given that the government sent a clear signal in the crisis that it would not let the biggest firms fail, why should taxpayers guarantee this sort of trading? Why should the government backstop what amounts to giant hedge funds inside the walls of your firms? How is such trading helpful to the broader financial system?
¶A question for all the executives about bonuses: We keep hearing that you plan to pay out billions in bonuses this year. Given that they come out of profits that, to a large degree, seem to be the result of government programs to prop up and stimulate the banking sector, do you think they are deserved, even if they are in stock? And, while we’re on the topic, given the market crisis of 2008, were you all overpaid in 2007?
¶Again, for the group: Over the last year, your firms have actively used the Federal Reserve’s discount window to exchange various investments (including C.D.O.’s) for cash. You probably have a better idea than most about what those assets now sitting on the Fed’s balance sheet are worth.
Given the growing calls for regular audits of the Fed (an idea being resisted by the likes of the chairman, Ben Bernanke), do you think the demands for such audits are warranted?
¶This question is for Mr. Mack. In November, in a surprisingly candid moment, you publicly declared, “Regulators have to be much more involved.” You then added, “We cannot control ourselves.” Can you elaborate on those comments? Is Wall Street inherently incapable of policing itself — a view contrary to what most of your peers have argued?
¶Mr. Blankfein. Your firm, like other banks on this panel, was paid in full by the American International Group on various financial contracts, thanks to the government’s bailout. You can understand how this has whipped up no small amount of fury and questions over why A.I.G. and the government did not try to renegotiate those contracts.
Because your firm was the largest beneficiary of the government’s decision, did you or any of your employees lobby the Fed, Treasury or any other government agency for this “100 cents on a dollar” payout? If so, enlighten us about those conversations.
¶This is for Mr. Moynihan. Please explain — and no jargon, please — why your firm believed it didn’t have to disclose mounting losses at Merrill Lynch ahead of a shareholder vote in December 2008. After all, investigations into the matter suggest company executives knew of the $4.5 billion loss Merrill suffered in October before that vote.
And why, just a week or so after you became general counsel, did Bank of America decide to tell the government about those same losses that it chose not to tell shareholders about?
¶To Mr. Dimon and Mr. Moynihan: Your industry has vigorously opposed creating a consumer protection agency. But it’s clear that your millions of retail customers weren’t adequately protected, leading to hardship and heartbreak across the nation. Because you oppose creating such a regulator, what should be done to ensure these problems don’t happen again?
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RecommendNext Article in Business (30 of 33) » A version of this article appeared in print on January 12, 2010, on page B1 of the New York edition.
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Showing posts with label andreww ross serkin. Show all posts
Showing posts with label andreww ross serkin. Show all posts
Tuesday, January 12, 2010
Sunday, September 21, 2008
Andrew Ross Sorkin
The SEC head Cox does not have a clue. Short-selling is one needed part of the complex financial instruments that are abroad in the land/world.
Markets Soar, but New Rules Upset Traders
new_york_times:http://www.nytimes.com/2008/09/20/business/worldbusiness/20markets.html
By VIKAS BAJAJ, ANDREW ROSS SORKIN and MICHAEL J. de la MERCED
Published: September 18, 2008
This article was reported by Vikas Bajaj, Andrew Ross Sorkin and Michael J. de la Merced and written by Mr. Bajaj.
After a week of escalating panic in the markets, stocks soared for the second consecutive day on Friday, and many investors rejoiced. But below the surface, a new sense of turmoil set in. When Washington changed the rules of Wall Street, winners were turned into losers and losers were turned into winners, and both camps were left fearful about what would come next.
In a day of chaotic trading, the currents in the financial world changed course on Friday morning after the Bush administration moved to prop up faltering financial institutions.
Stocks that had been beaten down soared. Treasuries and gold, where investors had sought safety in recent days, plunged. Junk bonds shot up.
“Clients and advisers are almost giddy,” said Sallie L. Krawcheck, the head of Citigroup’s Global Wealth Management division. “It’s a sense of massive relief. Everyone feels like they looked over the edge and saw the abyss, and have been pulled back.”
The Standard & Poor’s 500-stock index soared 4 percent to 1,255.08, while financial shares rose 11 percent, in the busiest day of trading in the New York Stock Exchange’s history. The American International Group, which the government essentially took over, jumped 43 percent. Big banks like Bank of America and the Wachovia Corporation rose more than 20 percent.
But across Wall Street, many of the basic mechanisms of the marketplace broke down after the Securities and Exchange Commission announced on Friday morning that it would ban short selling in nearly 800 financial stocks, making it harder for people to bet against those securities, and that it also would force investors to disclose those trades. When investors sell short, they borrow shares and sell them, hoping to buy them back at lower prices and profit from the difference. Short sellers had come under fire for contributing to the sharp decline in financial shares this year.
Computers that automatically buy and sell for big investors hit snags because they were not programmed for such a restriction. Securities firms and money managers that routinely sell short to hedge against possible losses wondered how they would cope. In certain stocks and funds traded on New York Stock Exchange, some prices and trades were “erroneous,” a spokesman said.
The surge in financial shares was driven at least in part by traders who were forced to buy those stocks to cover earlier short sales, raising doubts about whether the rally will last.
Hedge fund managers who made vast profits betting against the nation’s financial titans called the ban unfair, and said the move would only prolong the financial crisis. Some traders said they were no longer betting on the intrinsic health of companies, but rather on what the government might do next. Others simply withdrew from the market.
“Some of my clients are literally closing their books and going on their vacation for two weeks — they can’t operate in this environment,” said Meredith A. Whitney, a financial services analyst. “You pack up and come back and play the game when you know what the rules are.”
One hedge fund manager, who declined to be named, likened the changes to “turning a football game into badminton.”
Many players warned that the government’s sweeping actions might have unintended consequences. The ban on short selling raised questions about how certain parts of the capital markets would function. Companies may have a harder time raising money by selling instruments like convertible bonds, which can be exchanged for shares, because many investors short stocks to hedge against the risks of owning these instruments.
Byron Wien, chief investment strategist at Pequot Capital Management, the big hedge fund, said that forcing big investors to disclose short positions could create a run on stocks. It might not be immediately apparent whether investors with short positions were using it to hedge another position or bet against stocks.
In the market for options — instruments that give holders the right to buy or sell shares at certain prices — traders reported frantic trading in Chicago and New York. Many big options traders, or market makers, must frequently sell shares short to hedge other trades.
“It was the most difficult day we have ever seen in the market,” said Peter Bottini, an executive vice president at optionsXpress, a brokerage. “We have had a very volatile day.”
William J. Brodsky, the chief executive of the nation’s largest options exchange, Chicago Board Options Exchange, lashed out at the S.E.C. “The need for the policy intervention notwithstanding, it is difficult to comprehend the merits of a draconian measure that will result in the sudden and severe removal of liquidity from the marketplace at the same time that the government is taking unprecedented steps to preserve it,” he said in a statement.
Later in the day, the S.E.C. said its staff had recommended that the commission exempt options market makers from the short-sale trading restrictions.
“People have definitely been saying that this is no longer an investor’s market, nor even really a trader’s market — it’s all entirely speculation on what the government is going to be doing next,” said a broker at a Wall Street firm, who was not authorized to talk to the press. “Anyone who thinks they have a handle on where things are going is deluding themselves.”
The immediate targets of the S.E.C.’s actions were short sellers, who have been blamed for the plunges in the stock prices of large investment banks like Morgan Stanley and Goldman Sachs. To many observers, shorts were to blame for the collapse of Bear Stearns and the bankruptcy of Lehman Brothers; the government takeover of Fannie Mae and Freddie Mac, the mortgage finance giants; and the $85 billion bailout of A.I.G.
The world of deal-making was turned upside-down by the stock market rally, as mergers like Merrill Lynch’s $50 billion sale to Bank of America, struck as Lehman Brothers slid toward bankruptcy last weekend, could unwind. Arbitrageurs, investors who bet on the outcome of deals by buying shares in the target company while shorting those in the seller, were unable to play one side of that trade.
Some hedge fund managers complained bitterly that they had been singled out, even as they were among the few to properly manage risk. Those whom the government had propped up were the investment banks, whose hundreds of billions of dollars in losses arose from reckless risks undertaken to raise profits to hedge-fund-like levels.
“Bailing out the banks should not be done,” said Carl C. Icahn, the activist investor. He suggested that the government should have extended those firms a loan, instead of buying their toxic mortgage-backed securities.
In the end, the market closed on Friday at nearly the same price it did last week before all the mayhem. An e-mail message circulating around Wall Street on Friday carried the subject line: “If you took the week off ... you didn’t miss anything.”
Eric Dash and Louise Story contributed reporting.
Markets Soar, but New Rules Upset Traders
new_york_times:http://www.nytimes.com/2008/09/20/business/worldbusiness/20markets.html
By VIKAS BAJAJ, ANDREW ROSS SORKIN and MICHAEL J. de la MERCED
Published: September 18, 2008
This article was reported by Vikas Bajaj, Andrew Ross Sorkin and Michael J. de la Merced and written by Mr. Bajaj.
After a week of escalating panic in the markets, stocks soared for the second consecutive day on Friday, and many investors rejoiced. But below the surface, a new sense of turmoil set in. When Washington changed the rules of Wall Street, winners were turned into losers and losers were turned into winners, and both camps were left fearful about what would come next.
In a day of chaotic trading, the currents in the financial world changed course on Friday morning after the Bush administration moved to prop up faltering financial institutions.
Stocks that had been beaten down soared. Treasuries and gold, where investors had sought safety in recent days, plunged. Junk bonds shot up.
“Clients and advisers are almost giddy,” said Sallie L. Krawcheck, the head of Citigroup’s Global Wealth Management division. “It’s a sense of massive relief. Everyone feels like they looked over the edge and saw the abyss, and have been pulled back.”
The Standard & Poor’s 500-stock index soared 4 percent to 1,255.08, while financial shares rose 11 percent, in the busiest day of trading in the New York Stock Exchange’s history. The American International Group, which the government essentially took over, jumped 43 percent. Big banks like Bank of America and the Wachovia Corporation rose more than 20 percent.
But across Wall Street, many of the basic mechanisms of the marketplace broke down after the Securities and Exchange Commission announced on Friday morning that it would ban short selling in nearly 800 financial stocks, making it harder for people to bet against those securities, and that it also would force investors to disclose those trades. When investors sell short, they borrow shares and sell them, hoping to buy them back at lower prices and profit from the difference. Short sellers had come under fire for contributing to the sharp decline in financial shares this year.
Computers that automatically buy and sell for big investors hit snags because they were not programmed for such a restriction. Securities firms and money managers that routinely sell short to hedge against possible losses wondered how they would cope. In certain stocks and funds traded on New York Stock Exchange, some prices and trades were “erroneous,” a spokesman said.
The surge in financial shares was driven at least in part by traders who were forced to buy those stocks to cover earlier short sales, raising doubts about whether the rally will last.
Hedge fund managers who made vast profits betting against the nation’s financial titans called the ban unfair, and said the move would only prolong the financial crisis. Some traders said they were no longer betting on the intrinsic health of companies, but rather on what the government might do next. Others simply withdrew from the market.
“Some of my clients are literally closing their books and going on their vacation for two weeks — they can’t operate in this environment,” said Meredith A. Whitney, a financial services analyst. “You pack up and come back and play the game when you know what the rules are.”
One hedge fund manager, who declined to be named, likened the changes to “turning a football game into badminton.”
Many players warned that the government’s sweeping actions might have unintended consequences. The ban on short selling raised questions about how certain parts of the capital markets would function. Companies may have a harder time raising money by selling instruments like convertible bonds, which can be exchanged for shares, because many investors short stocks to hedge against the risks of owning these instruments.
Byron Wien, chief investment strategist at Pequot Capital Management, the big hedge fund, said that forcing big investors to disclose short positions could create a run on stocks. It might not be immediately apparent whether investors with short positions were using it to hedge another position or bet against stocks.
In the market for options — instruments that give holders the right to buy or sell shares at certain prices — traders reported frantic trading in Chicago and New York. Many big options traders, or market makers, must frequently sell shares short to hedge other trades.
“It was the most difficult day we have ever seen in the market,” said Peter Bottini, an executive vice president at optionsXpress, a brokerage. “We have had a very volatile day.”
William J. Brodsky, the chief executive of the nation’s largest options exchange, Chicago Board Options Exchange, lashed out at the S.E.C. “The need for the policy intervention notwithstanding, it is difficult to comprehend the merits of a draconian measure that will result in the sudden and severe removal of liquidity from the marketplace at the same time that the government is taking unprecedented steps to preserve it,” he said in a statement.
Later in the day, the S.E.C. said its staff had recommended that the commission exempt options market makers from the short-sale trading restrictions.
“People have definitely been saying that this is no longer an investor’s market, nor even really a trader’s market — it’s all entirely speculation on what the government is going to be doing next,” said a broker at a Wall Street firm, who was not authorized to talk to the press. “Anyone who thinks they have a handle on where things are going is deluding themselves.”
The immediate targets of the S.E.C.’s actions were short sellers, who have been blamed for the plunges in the stock prices of large investment banks like Morgan Stanley and Goldman Sachs. To many observers, shorts were to blame for the collapse of Bear Stearns and the bankruptcy of Lehman Brothers; the government takeover of Fannie Mae and Freddie Mac, the mortgage finance giants; and the $85 billion bailout of A.I.G.
The world of deal-making was turned upside-down by the stock market rally, as mergers like Merrill Lynch’s $50 billion sale to Bank of America, struck as Lehman Brothers slid toward bankruptcy last weekend, could unwind. Arbitrageurs, investors who bet on the outcome of deals by buying shares in the target company while shorting those in the seller, were unable to play one side of that trade.
Some hedge fund managers complained bitterly that they had been singled out, even as they were among the few to properly manage risk. Those whom the government had propped up were the investment banks, whose hundreds of billions of dollars in losses arose from reckless risks undertaken to raise profits to hedge-fund-like levels.
“Bailing out the banks should not be done,” said Carl C. Icahn, the activist investor. He suggested that the government should have extended those firms a loan, instead of buying their toxic mortgage-backed securities.
In the end, the market closed on Friday at nearly the same price it did last week before all the mayhem. An e-mail message circulating around Wall Street on Friday carried the subject line: “If you took the week off ... you didn’t miss anything.”
Eric Dash and Louise Story contributed reporting.
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