Thursday, April 29, 2010

OK, maybe they landed a glove or two....

According to the Washington Post, "The Securities and Exchange Commission has referred its investigation of Goldman Sachs to the Justice Department for possible criminal prosecution, less than two weeks after filing a civil securities fraud case against the firm, according to a source familiar with the matter.

The Wall Street Journal and Bloomberg News reported Thursday night that the U.S. Attorney's Office in Manhattan had followed up on the request and opened a criminal probe. The office declined to comment.

It is very rare for the government to indict a firm, and the mere threat of criminal prosecution can destroy a company. A criminal investigation destroyed the infamous Wall Street firm Drexel Burnham Lambert in the 1980s even though the firm settled with authorities."

Tuesday, April 27, 2010

Never laid a glove on them

I attended part of Senator Carl Levin's Permanent Subcommittee on Investigations hearing concerning Goldman Sachs. Bottom line: they never laid a glove on them. As one report noted, "By day’s end, the investment bank’s market value had risen by $549 million." My comments follow.

1. When questioned about most matters, Goldman's CEO simply misdirected the questioner to an irrelevant portion of the inquiry. Specifically asked a direct question about the firm's short position (a position that benefits from a fall in prices, in this case, housing prices) in the mortgage market, the CEO referred to Goldman's 140 year history (this was a misdirection), and characterized the firm's position as a hedge (this was false). A key factor relates to relative position size. A $1 million dollar long position offset by a $1 million dollar short position is a hedge. A $1 million dollar long position offset by a $10 million dollar short position is a directional bet on the market, not a hedge.

2. In addition, Goldman's CEO purposely confused the market making role Goldman plays with their role as an underwriter. As a market maker, a size matched ($1 million long for $1 million short) hedge on a position is appropriate. This insures liquidity and an ability of the firm to respond to customer requests. As an underwriter, a bank is using it's reputation to sell product to clients. Underwriting carries with it a higher level of fiduciary duty. This is where misstatements about the construction of a security are critical. (Think of it this way. If you manufacture and sell cars, you have an implicit obligation to sell safe cars. I will not buy a car from you if I know that you, or a partner firm involved in the design and manufacture of the vehicle, have taken out a life insurance policy on me, the car buyer, and designed the car to maximize the chances that you, or a partner firm, will be able to collect on the insurance policy by reducing the reliability of the car's braking system. This is what the SEC says Goldman did.)

3. A question was asked about Goldman's use of the discount window at the Fed. The answer given by Goldman was not accurate. An accurate answer would have cited the total dollar amount of benefits the firm received from all Emergency Federal Reserve Liquidity Programs. These include the Term Auction Facility (TAF), the Primary Dealer Credit Facility (PDCF), the Term Securities Lending Facility (TSLF), the Term Securities Lending Facility Options Program (TOP), the Commercial Paper Funding Facility (CPFF), the Asset-Backed Commercial Paper (ABCP) Money Market Mutual Fund Liquidity Facility (AMLF), the Money Market Investor Funding Facility (MMIFF), as well as the currency swap arrangements with foreign central banks.

Friday, April 16, 2010

SEC accuses Goldman Sachs of civil fraud

According to the Washington Post, "The Securities and Exchange Commission filed charges Friday against Goldman Sachs, one of the most successful but vilified banks on Wall Street, for misleading and defrauding investors in selling a financial product based on subprime mortgages.

In filing the civil suit against Goldman Sachs, the agency is targeting one of the banks that largely escaped the wreckage of the financial crisis and, with the help of various forms of government aid, emerged stronger."

We believe this may be the first in a series of actions targeting Goldman. An examination of Goldman's transactions with AIG will probably reveal similar questionable practices. As we noted on July 9, 2009, the US lost 53% supporting Goldman.

As we noted on March 5, 2009, Goldman was one of several firms accused of systematically cheating customers.

And, finally, as noted on July 19, 2007,

"From an ethical standpoint, (Goldman) has repeatedly engaged in behavior that would cause a prudent person to question its objectivity and fairness. We note that a smaller firm engaging in similar conduct would have been severely sanctioned by the market. Goldman has escaped meaningful sanction, however. We have found these behaviors often the prelude to the development of a set of fraudulent business practices."

Our focus on evaluating of both financial and ethical practices at major firms, once again, seems prescient.

Saturday, March 20, 2010

Opal's Emerging Managers Summit and Awards Luncheon

Emerging Managers Summit and Awards Luncheon
May 12-14, 2010
Swissôtel Chicago, Chicago, IL

According to Opal, the conference organizers, "If you are looking to expand and diversify your asset allocation by investing in emerging managers as well as women and minority owned investment managers, the emerging managers conference will provide the unique opportunity to access a diversified group of up-and-coming performance-oriented managers and manager of managers. The conference will explore the benefits and opportunities offered by investing in emerging managers as well as new strategies for implementing an emerging managers program. If you are an emerging manager, you will learn the procedures used by institutions to launch and maintain successful emerging manager programs. This event will showcase a variety of emerging mangers as well as minority-owned manager funds and other high potential smaller investment firms, and it will offer participants invaluable networking opportunities."

Friday, March 19, 2010

Hearing on the link between Fed Policy and Bank Supervision (Frank Hung, Intern)

We attended the hearing held by House Financial Services Committee on Wednesday March 17, 2010. Among the speakers:

The Honorable Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve

The Honorable Paul Volcker, Chairman of the President’s Economic Recovery Advisory Board, Former Chairman of the Federal Reserve

Their testimony focused on interest rates and government guarantees, such as those granted Fannie Mae and Freddie Mac. One Congressman asked if holding rates too low for too long causes inflation? Bernanke indicated he is watching economic trends closely will move rates up or down in order to avoid future economic problems. He stated that arbitrage opportunities still happened and that, based on current reports and research, demand is still lower than the full employment level. He noted that low interest rates can stimulate consumer expenditures and alleviate the unemployment problem.

He also stated that the Fed cooperates with other regulatory agencies in supervising the banking system since some of the banking organizations are large and complex. Bernanke indicated that the Fed will do its best to address systemic safety issues for the whole financial system by rigidly supervising high leverage or low credit companies.

The hearing also covered problems with Fannie Mae and Freddie Mac. Bernanke said, while the Fed understands the problem and has already started to address it, results will not be seen anytime soon. Time will tell what they did and how is it works.

In conclusion, there was not much useful or new information. We note there was no discussion concerning the supervision and regulation of a company like Goldman Sachs.

Friday, March 12, 2010

Federal agency orders Ideal Federal Bank to find a buyer

From the Baltimore Sun, March 11, 2010 by Jamie Smith Hopkins

"Ideal Federal Savings Bank has until March 31 to find a buyer, a deadline set by the Office of Thrift Supervision after the federal agency determined the small Baltimore institution was undercapitalized.

The bank — which opened in 1920 to combat rampant discrimination in lending — is one of the oldest continuously operated black-owned businesses in the country, according to Creative Investment Research, an analyst of minority and women-owned banks."


Sunday, February 28, 2010

Saturday, February 27, 2010

Professor compares subprime borrowers to e-coli

We attended today's Financial Crisis Inquiry Commission (FCIC) hearing earlier today. The Commission brought "experts who have researched the financial crisis for a forum in Washington, DC on February 26-27, 2010 at American University Washington College of Law."

More smoke than light was shed on the cause of the crisis. I was struck, however, by one comparison made. In the last session on Shadow Banking, Gary Gorton, Professor of Finance, School of Management, Yale University, compared subprime borrowers to e-coli, suggesting they had "infected" the home loan market.

According to Wikipedia, "Between 2004-2006 the share of subprime mortgages relative to total originations ranged from 18%-21%, versus less than 10% in 2001-2003 and during 2007. The value of USA subprime mortgages was estimated at $1.3 trillion as of March 2007, [17] with over 7.5 million first-lien subprime mortgages outstanding." That's a lot of e-coli, too much for this analogy to be apt.

I think we know what the good professor is really saying. A bigoted and biased statement, to say the least, with the added flaw of being untrue.

Sounds like something you might have heard in Germany in 1937.

Friday, January 29, 2010

On Shorebank

Ailing ShoreBank Seeks the Aid of an Ailing State

American Banker | Wednesday, January 27, 2010

By Robert Barba

With dwindling capital and mounting losses, ShoreBank Corp. in Chicago is seeking a bailout from the state of Illinois.

Executives of the $2.5 billion-asset community development bank met with the Illinois Finance Authority and regulators earlier this month to discuss raising as much as $50 million through a bond deal, according to local media reports. ShoreBank executives are playing up its history of community service in trying to secure a lifeline from the state.

Banking experts say such help is conceivable, as ShoreBank's inception stems from the civil rights movement in the 1960s and it has supported struggling Chicago neighborhoods. Yet state assistance could have unintended consequences - especially given Illinois' own troubled fiscal picture.

"It deserves a look, because from a historical standpoint, it is part of the legacy of Martin Luther King Jr.'s Chicago movement and it is the prototype of the impact that a large community development bank can have," said William Michael Cunningham, a social investing adviser and the founder of the minority bank fund MBF LP in Washington. "But if this is approved, every struggling bank in the country is going to go to their state for a handout."

ShoreBank, experts agree, is delivering what the government wants from a community development bank. But the question is whether the government can afford to subsidize that mission.

Experts said community development banks have faced even more difficulty raising capital in recent years than conventional banks, because they are perceived to be riskier. Given this landscape, government assistance for ShoreBank would be viewed as a positive sign by the nation's 60 or so community development banks, said Jeannine Jacokes, chief executive and policy adviser for the Community Development Bankers Association.

"The notion that the government, be it state or federal, would step up to provide additional support to our banks is a good thing. It is important that the low-income communities they serve be a part of the recovery," she said.

ShoreBank's efforts include its Rescue Loan program. Launched in 2007, it has made $40 million in loans to help Chicago families refinance adjustable-rate mortgages into more affordable loans.

Illinois officials did not return phone calls seeking comment. But according to Crain's Chicago Business, the state aid would be tailored to ShoreBank. The report said any state investment would be tied to ShoreBank's ability to raise private capital. The governor also would have to approve the measure.

Brian Berg, a spokesman for ShoreBank, would not comment on talks with the state. He would say only that the company is developing a capital plan but that it would be inappropriate to discuss details until it is completed.

Since July, ShoreBank has been operating under a cease-and-desist order from the Federal Deposit Insurance Corp. and the Illinois Department of Financial and Professional Regulation, which gave it 60 days to develop a capital plan. Regulators have granted the bank some leeway, yet the Federal Reserve Board this month slapped an enforcement action on the holding company requiring more capital, better management oversight, and a ban on dividend payments.

In July, Ronald Grzywinski , ShoreBank's chairman, said in an interview that it was turning to longtime supporters to raise as much as $10 million of capital. It also was seeking to reduce assets.

Continued real estate losses have pushed ShoreBank's capital ratios in the other direction, however. At the end of the third quarter, losses on real estate loans left the bank adequately capitalized, with a total risk-based capital ratio of 9.6%. Mike Heller, the president of the rating firm Veribanc Inc. in Woonsocket, R.I., estimated that ShoreBank would need to raise $77 million to cover its problem loans, which made up 15.11% of total loans at the end of the third quarter. But it would need as much as $200 million to put itself back on solid footing, he said.

"Their losses are trending in the wrong direction," he said. "This institution is not doing very well."

ShoreBank has been denied assistance through the Treasury Department's Troubled Asset Relief Program. "We put in an application and were asked to withdraw it," Grzywinski said in the July interview.

Another issue complicating whether ShoreBank receives aid is the state of Illinois' own precarious financial situation. Watchdog groups have pegged Illinois as headed toward insolvency.

The state could face liability issues by investing directly in a bank, Cunningham said. If ShoreBank were to fail, he said, not only would the state's investment be wiped out, but creditors could turn to the state to settle claims.

"There would have to be some sort of safeguard in place," Cunningham said. "I could see creditors going after the state for repayment, because they were part owners and are therefore responsible."

Wednesday, January 13, 2010

Bankers to Commission: Screw You

The First Public Hearing of the Financial Crisis Inquiry Commission was held on January 13, 2010 at the Longworth House Office Building in Washington, DC. "The Commission..has been given a mission to examine the causes of the financial crisis and to report findings to the Congress, the President, and the American people."

According to the New York Times, "The heads of Wall Street’s largest banks faced skeptical questions on Wednesday about executive pay and the failures of regulation from the bipartisan commission established to examine the causes of the biggest downturn since the Depression. Tensions flared as commission members retraced the events leading to the near-collapse of the financial system in 2008 and pressed bankers on whether they or their employees had acted unethically."

This is inaccurate. There were no skeptical questions. There was no tension. No one pressed the bankers on anything. They lied at will, without fear of being contradicted. It was as if the bankers were being questioned by their employees.

I know. I was there.

Nothing to see here, people. Move on.

Friday, December 25, 2009

Friday, December 18, 2009

SEC Approves Enhanced Disclosure About Risk, Compensation and Corporate Governance

On December 16, 2009, the Securities and Exchange Commission "approved rules to enhance the information provided to shareholders so they are better able to evaluate the leadership of public companies.

Additional Materials

Final Rule: Proxy Disclosure Enhancements

Beginning in the upcoming annual reporting and proxy season, the new rules will improve corporate disclosure regarding risk, compensation and corporate governance matters when voting decisions are made.

In particular, the new rules require disclosures in proxy and information statements about:

The relationship of a company's compensation policies and practices to risk management.

The background and qualifications of directors and nominees.

Legal actions involving a company's executive officers, directors and nominees.

The consideration of diversity in the process by which candidates for director are considered for nomination.

Board leadership structure and the board's role in risk oversight.

Stock and option awards to company executives and directors.

Potential conflicts of interests of compensation consultants.

The new rules, which will be effective Feb. 28, 2010, also require quicker reporting of shareholder voting results."

Wednesday, December 16, 2009

Minority Banks Struggle To Offer Loans

"President Obama met with the nation's top bankers yesterday at the White House. The President urged the CEO's to bolster lending to consumers and small businesses to help jumpstart the economy. Largely absent from the meeting were community-based minority banks, which have struggled to stay afloat in recent years. Bill Cunningham, CEO of Creative Investment Research, discusses the historic role of minority lending and..its role in the current economic landscape."

Online at:

Monday, December 7, 2009

21% of Black Households do not have banking accounts

According to the FDIC National Survey of Unbanked and Underbanked Households, released on December 2, 2009, 21.7% of Black households, 19.3% of Hispanic households and 15.6% of Native American households are underbanked.."at least 25.6 percent of U.S. households, close to 30 million households with about 60 million adults, are unbanked or underbanked," a very large potential market.

Competition is supposed to fill a market need, in this case defined as an underserved customer, so not only are these statistics surprising, but they raise questions about the justification for and very existence of an underserved market. They also raise questions concerning the efficiency of the FDIC's Advisory Committee on Economic Inclusion. "Freakonomics" style economic analysis will quickly be offered to explain this gap, but will miss the true reason behind the statistics. While we applaud the release of the data, it clearly shows the Committee is ineffective, to say the least.

Thursday, November 12, 2009

Regulators shut down two black-owned institutions

According to Black Enterprise Magazine,

"Liberty Bank (No. 5 on the BE 100s bank list with $373 million in assets) has assumed all of the $13.5 million retail deposits of Home Federal Savings Bank and has purchased approximately $14.9 million of its assets.

Home Federal, which was founded in May 1947, was 'critically undercapitalized and in an unsafe and unsound condition to transact business,' according to the OTS. Its two branches and eight employees reopened under the Liberty Bank and Trust Company banner on Monday.

Liberty Bank was founded in 1972 and has expanded into seven metropolitan areas and six states while offering banking services and mortgage lending. 'The expansion of our banking network to Detroit is a significant benchmark in our development. We want to broaden our reach and provide our services to a larger audience,' said Alden J. McDonald Jr., Liberty Bank and Trust Company’s president and CEO, in a news release. 'This acquisition is another step to be more aggressive on a national stage.'

Separately, the Missouri Division of Finance took possession of Gateway Bank of St. Louis, another black-owned institution, and appointed the Federal Deposit Insurance Corporation receiver. The FDIC then sold Gateway to Central Bank of Kansas City, a minority-owned financial institution that was chartered in 1950. Central Bank will assume the failed bank’s deposits and its total assets of $27.7 million.

'My sense is that there are going to be a lot of other black-owned banks that are going to go belly up,' says William Cunningham, president of Creative Investment Research Inc., which tracks minority banks. He says even the loss of just two institutions takes a big chunk out of the number of black-owned banks, which has dwindled to 33.

The FDIC has instructed loan customers of the banks to continue to make payments as usual. The regulator estimates that the cost to the Deposit Insurance Fund (DIF) will be $5.4 million for Liberty Bank and $9.2 million for Gateway Bank."

Saturday, November 7, 2009

Minority Banks in trouble

On Friday, November 6, 2009, state and federal regulators closed several minority banks, reducing the total number of minority owned banks in the US to 236 from 239.

According to, "The failed institutions included (Asian-owned) United Commercial Bank of San Francisco, the main subsidiary of UCBH Holdings. The bank had $11.2 billion in total assets and was the seventh largest failure during the 2008-2009 crisis. The FDIC was appointed receiver and sold the failed bank's deposits and $10.2 billion of its assets to East West Bank of Pasadena, Calif., which also has operations in China and is a subsidiary of East West Bancorp.

The Office of Thrift Supervision shut down (Black-owned) Home Federal Savings Bank of Detroit and appointed the FDIC receiver. The FDIC arranged for Liberty Bank and Trust of New Orleans to assume the failed thrift's deposits and its $14.9 million in total assets.

The Missouri Division of Finance took over (Black-owned) Gateway Bank of St. Louis and appointed the FDIC receiver. The FDIC arranged for Central Bank of Kansas City to assume the failed bank's deposits and its total assets of $27.7 million."

Thursday, November 5, 2009

Wall Street banks get swine flu vaccine....

According to The Hill, "Now we learn that while many kids, hospitals and pregnant women cannot get enough of the swine flu vaccine, the major banks and Wall Street firms were given a private allocation. At best, this is a ridiculous distribution strategy; at worst, these firms gave some vaccines not to high-risk people but to high-profit traders and senior managers."

And you were wondering where your $700 billion went. Pitchforks, anyone?

Monday, November 2, 2009

Major SEC shareholder resolution policy change

According to the Responsible Investor and SEC websites, in a major policy reversal, "the Securities and Exchange Commission (SEC) (will) allow shareholder resolutions (concerning) companies’ environmental and social risks.. Similar resolutions had previously been blocked under policies dating back to the Bush administration. The move was unveiled in new guidance by the SEC’s Division of Corporation Finance under new director Meredith Cross. As a result, companies will no longer be able to automatically exclude resolutions seeking information on the risks of environmental, human rights and other social issues." Shareholder resolutions are now sure to include executive compensation, community development, diversity, gender, SRI, ESG and CSR issues.