SEC Looking at Securitization Process in Mortgage Foreclosure Probe

About time, and therefore that means the feds are getting close to striking a deal with the banksters, legitimatizing everything they've done.

Reuters reports that the SEC has sent out a new round of subpoenas to Wall Street banks in its probe of mortgage/foreclosure fraud, and this time the regulators are looking at the very root of the fraud - securitization:

U.S. regulators have opened a new line of inquiry in their mortgage foreclosure probe and are asking big Wall Street banks about the beginning stages of mortgage securitization, two sources familiar with the probe said.

The Securities and Exchange Commission launched the new phase of its investigation by sending out a fresh round of subpoenas last week to big banks like Bank of America Corp, Citigroup Inc, JPMorgan Chase & Co, Goldman Sachs Group Inc and Wells Fargo & Co, the sources said.

The SEC's subpoenas focus on the earliest stage of the mortgage securitization process, said the sources, who requested anonymity because the probe is not public.

The sources said the SEC is asking for information about the role of so-called "master servicers" -- specialized firms that oversee the selection and maintenance of the large pool of home loans that go into every mortgage-backed bond.

...One of the sources said the SEC is seeking information about the role banks had in mortgage securitization. The regulator is also looking at the role trustees for the trusts that issued the mortgage-backed securities had in monitoring the performance of the underlying loans.

"Master servicers" - read Bank of America, J.P.Morgan Chase, Wells Fargo, Citibank. Servicers are the ones who collects mortgage payments from the borrowers.

"Trustees of the trusts [REMIC]" - read Wells Fargo, US Bankcorp, Bank of New York Mellon, Deutschebank. Trustees of the REMICs are the ones who were supposed to verify all the necessary documents were properly transferred to the trusts.

Foreclosures in mostly judicial states have turned out to be the discovery process, as the homeowners and lawyers defending them have found out that their mortgages were never transferred properly to the REMICs, and the foreclosing parties (either the servicer or the trustee) do not have the legal standing in foreclosure.

Attorneys who have been trying to help homeowners in foreclosure will tell you that they've known for a long time that mortgages were never transferred to the REMIC, but that was business as usual for the industry and no one raised a stink about it.

And who bought the securities issued out of these trusts, which may have been issued without any backing? Banks, hedge funds, pension funds, mutual funds around the world. One of the largest holders of these securities - mortgage-backed securities - is the Federal Reserve under Ben "Bernank". The Fed has over $1 trillion of these MBS.

These banks have been telling us "Oh it's just minor document processing problems", precisely because it is not.

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SEC Probe on Insider Trading Is Getting Interesting

At first I thought it was nothing more than a "wag the dog" operation by the SEC to divert public attention from a much bigger mess (mortgage/foreclosure fraud), but it may get traction as more prominent hedge funds get subpoenaed.

First, it was these smallish three on Monday:

Diamondback Capital Management ($5.8 billion assets in management)
Level Global Investors
Loch Capital Management ($2 billion assets in management)

Then today, much bigger funds got ensnared:

Janus Capital Group Inc. ($161 billion assets in management)
Wellington Management ($598 billion assets in management)
SAC Capital Advisers
Citadel Asset Management

Why is the SEC going after hedge funds? Fines of few million dollars? Peanuts. Or is the SEC using these funds as bait to catch much bigger fish on Wall Street?

Now, Zero Hedge's Tyler Durden, citing FOX's Gasparino, says Goldman Sachs may get roped into the insider trading probe, via Diamondback. Now we are talkin'....

However, as soon as the investigation gets close enough to Goldman Sachs, it will be inexplicably shut down, if the past is any indication, and we are supposed to forget anything about insider trading. By that time, the foreclosure fraud, securitization fraud, and mortgage fraud will be all forgotten. Oh, so it IS a "wag the dog" operation after all...

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Even Barron's Laughs at SEC's Explanation of Flash Crash

Jim McTague of Barron's magazine wrote an article about the absurdity of the SEC blaming a single "mutual fund complex", aka Waddell & Reed, for the flash crash on May 6.

I thought I got the picture of how the flash crash happened and why, from reading knowledgeable blogsites like Zero Hedge, but there are some new pieces of information in Jim McTague's article I didn't know.

Here's one:

"Twenty thousand trades, totaling 5.5 million shares, were executed at a price 60% or more away from pre-Flash-Crash price levels, and thus later were deemed invalid. At least half those were retail orders."

And here's another, about how the retail investors' orders are handled:

"A brokerage firm will try to match one customer's order with that of another customer in-house. If the firm can't make the trade, it sends the order on to an executing broker. The big ones are Knight Capital, Citadel and UBS. The executing broker will generally take the opposite side of the customer order because retail customers tend to buy high and sell low, so it's easy to make money off them.

"In the rare instances when an executing broker demurs, he sends the trade to a dark pool, usually one owned by his firm. (Dark pools are electronic-trading venues where institutional investors trade stocks away from the public stock exchanges.) If the dark pool can't execute the trade, it is sent to one of the stock exchanges. This largely automated process occurs in sub-seconds.

"On May 6 when the market fell out of bed, the report says blandly, some of these players reduced executions of sell orders but continued to execute buy orders. In other words, they'd sell stock to a retail customer but wouldn't buy stock from a retail customer. They wanted to get rid of their own inventories, not accumulate more shares. So they sent the customer sell orders onto the swamped stock exchanges."

Let me recap the process:

1. Your brokerage firm tries to match your order with that of another customer in-house. If the firm can't match it, it sends your order to one of the executing brokers (Citadel, Knight, etc).

2. The executing broker usually takes the other side of the trade and profit handsomely. But if the executing broker refuses to take the other side, the order goes to a dark pool, usually owned by the executing broker's firm.

3. If there is no trade to be made in the dark pool, the order gets sent to the exchanges.

And so the exchanges were swamped with orders on May 6 when market makers, human or HFT bots, stopped making market.

Lastly:

"Retail stop-loss and market orders were converted to limit orders by internalizers prior to routing to the exchanges. A limit order requires the trade to be executed at a specific price, whereas a market order is the best price available. If the limit order wasn't filled because the stock's price had fallen, it was kicked back to the internalizer who, in turn, set a new, lower limit price and resubmitted it. Orders were kicked back multiple times because prices were collapsing so rapidly. They followed the prices down, "eventually reaching unrealistically low bids," as the report puts it."

And the SEC blames Waddell & Reed for all that.

No wonder the retails have been exiting ever since May 6.

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SEC Does Blame a Kansas Firm of Causing the Flash Crash

to the collective belly-laugh in the financial blogsphere and stock message boards.

Move on, nothing to see here, and those HTF algo bots are innocent.

(Who do they think they are kidding? Oh I see, themselves.)

Here's the SEC's report (the SEC staff managed to concoct a 100-page report in between porn viewing), and here's the initial take by Zero Hedge.

(The SEC would dare not point fingers at New York, Wall Street firms, would they?)

The stock of that Kansas firm in question, Waddell & Reed, is trading at $27.45 right now, up 9 cents for the day.

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SEC About to Blame a Small Trading Firm in Kansas for May 6 Flash Crash

Yeah right. No mention of High Frequency Trading, no mention of quote delay in NYSE.

I read the article on Bloomberg, and was about to write a post.

Zero Hedge beat me to it:

Bloomberg has just released something which if true, will wipe out every last ounce of credibility left in the market. As readers will recall, the initial scapegoat that CNBC and everyone else, who has no clue what really happens in the market decided to pin the flash crash on, was small Kansas-based trading firm Waddell & Reed, which traded a few extra contracts of E-Mini futures in the hours preceding the flash crash. Well, ladies and gentlemen, if this advance glance into what the SEC is about to disclose in its flash crash report is indeed valid, then the entire flash crash is about to be blamed on Waddell and Reed once again, with no mention of High Frequency Trading, or any of the other real culprits for the drop which wiped out $1 trillion in market cap, and the furthermore the report will have no policy recommendations. This is so insulting to the general intelligence of the average American investor who has by now seen the destructive influence of HFT in action so many times, that it will wipe out the last remaining shards of credibility left in US stocks. Will Mary Schapiro next blame every single mini flash crash which we have seen on almost daily basis over the past month on Waddell and Reed as well? Or is that reserved for E-Trade retail accounts? We will not pass judgment until we see the final report, but if true, this is immediate grounds for termination of the SEC head, and will require that everyone pull their money from the market asap, as it will definitely confirm that even our regulators have no clue just how broken the market truly is. It will also confirm that every single SEC staffer has been bribed, bought and corrupted beyond repair by the HFT lobby.

In case you haven't caught on yet to what really most likely caused the flash crash that clearly triggered the 21 consecutive weeks of outflow from equity funds, here it is.

Will HTF algo bots walk scot-free? Where will they go next? Someone at CNBC thinks it will go to CDS market, which is currently OTC but will be forced to move to exchange trading and clearing under the new financial regulation bill, and it may not be a pretty sight:

Let's imagine, however, what a flash crash might look like in the CDS market.

Let's say high-frequency traders have become liquidity suppliers to the market, buying and selling bond protection. The broker-dealers have stopped providing this liquidity, in part because their profits have been squeezed out of the market by the new transparency. One day, an event somewhere in the world triggers the algorithms of a few highly correlated HFT shops to start buying more protection on a wide variety of stocks.

This triggers other HFT programs to stop selling, which triggers more buying. Prices on CDS soar across the board. The clearing houses start demanding more collateral from everyone to reflect the higher prices, triggering a rush for cash by everyone participating in the market.

Meanwhile, the risk management operations of institutional investors detect the soaring CDS prices, which are read to signal that the bonds are about to become distressed. The corporate bond market sells off and even more buyers for CDS enter the market. The short-term credit markets freeze up as money market funds stop providing credit to what look like increasingly risky corporate borrowers.

And then the clearing house notices that some market participants aren't making good on the collateral calls, so it starts closing out their positions. Outsiders get wind of this and begin to doubt the solvency of the clearing house, triggering a run on the clearing house itself. With no one able to process trades through the perhaps insolvent clearing house, and all other alternatives have been declared illegal by Dodd-Frank, the credit markets seize up completely.

The next thing we know, we're all hearing about emergency meetings down on Maiden Lane, where bankers and regulators are putting together a plan to fend off the next Great Depression. The plan is elegant and its proponents are articulate and highly adroit at defending it against critics. It involves the transfer of risk from the private market participants to the taxpayers. It is, in short, another bailout.

Can we handle a flash crash in the bond market? Are we prepared for a freeze in derivative clearing? Has anyone even asked these questions?

But what the heck, as long as the gullible taxpayers exist....

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Slap on the Wrist for Goldman Sachs, As Expected

Strange buoyancy of Goldman Sachs' shares today had a very good reason. And here it is:

Goldman to Pay Record $550M SEC Settlement (7/15/2010 CBS News)
"Wall Street Firm Agrees to Reform Business Practice to Settle Charges Goldman Sacs Misled Investors"

Misled investors??? How about "swindled the US taxpayers"? How about "help crash the housing market and the economy"?

Of $550 million, $300 million will go to the SEC the regulator who doesn't regulate (busy watching porn). $250 million will go to the investors who lost money investing in the securities that Goldman peddled - i.e. fellow international bankers.

(Here's the SEC announcement on the deal.)

Goldman's investors are celebrating the "slap on the wrist" in the after-hours market by sending the stock up another $8. (During the regular session, GS shot up $6.)


Enron's top executives went to jail and the company went bankrupt for "accounting fraud" - setting up special purpose entities to hide losses. But that's what big Wall Street banks have been doing for all these years, and not one executive has gone to jail, not even on a trial.

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SEC, Stock Exchanges Agree on Circuit Breaker Even Though They Don't Know What Caused the Plunge

Is the SEC clueless or pretending to be clueless so that it doesn't see the big elephant in the room (High Frequency Trading)?

Does that make sense to you? They don't know (or say they don't know) what caused it and probably won't know for weeks, but let's fiddle with the market circuit breaker right now and see what that will do in the next big freefall..??

SEC: Exchanges agree in principle to new rules (5/10/2010 AP via Yahoo Finance)

"NEW YORK (AP) -- The major securities exchanges put aside some of their differences Monday and agreed to coordinate trading rules to prevent stock plunges like last week's historic dive.

"The Securities and Exchange Commission said the six exchanges agreed in principle during a meeting with regulators to a uniform system of "circuit breakers." Those are restrictions that would curb trading when a stock index or individual stock or other security rises or falls to a specified level in the course of a trading day.

"Four days after the plunge that sent the Dow Jones industrials down to a loss of nearly 1,000 points in less than 30 minutes, regulators were still saying publicly that they did not know the exact reason for the drop. But there is a growing belief that the varying trading rules on different exchanges contributed to the intensity of the selling and the size of the market's slide.

"People familiar with the situation said regulators believe the disruption was caused by the way different exchanges manage their trades and rapid price swings. A definitive answer could take weeks because regulators are going through information from across the market by hand, said the people, who spoke on condition of anonymity because they were not authorized to discuss the investigation." [The article continues.]

The AP article tries to tell us that if only all exchanges have the same circuit breaker the freefall wouldn't have happened.

Well, we wouldn't know that, would we, until "next time"?

Besides, it seems it was the NYSE's circuit breaker mechanism that made the plunge much worse, by sweeping the sell orders into the other electronic exchanges.

In the meantime, the article does mention High Frequency Trading toward the end, in a totally neutral light, nowhere near even hinting it might have been the cause.

So, to recap, they don't know what happened, but let's put more regulations in to "protect investors". From what?

It's likely from being able to sell and get out of position when a disaster hits. Under the new regulations, all exchanges would slow down or shut down in the time of a crisis, preventing the investors from fleeing from the market. What a way to further fleece the investors in order to "protect" them.

Slowing down or shutting down "at the same time" may be problematic, too. With High Frequency Trading, we are talking milliseconds here.

HFT firms will simply write new and improved algorithms to take advantage of the slowdown mechanism. Without addressing predatory HFT and flash trading, putting in the uniform circuit breaker will probably do next to nothing in preventing a freefall we've experienced.

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SEC May Not Have A Case Against GS?

CNBC reports that Paolo Pellegrini, John Paulson's associate, testified to the government that he informed ACA Management (the one who assembled the Abacus CDO in question) that his firm would be shorting (betting against) it.

Testimony Could Undercut SEC Charge Against Goldman
(4/21/2010 CNBC)

"The government has testimony from a Paulson & Co. official that could contradict its own claims against Goldman Sachs, CNBC has learned.

"Paolo Pellegrini told the government that he informed ACA Management that Paulson intended to bet against, or short, a portfolio of mortgages ACA was assembling.

"If true, the testimony would go directly against government claims that ACA did not know Paulson was hoping the collateralized debt obligations would fail, and subvert charges that Goldman breached its duty by not informing ACA of Paulson's position.

"CNBC has examined documents in which a government official asked Pellegrini whether he informed ACA CDO manager Laura Schwartz about Paulson's position in the portfolio, named Abacus 2007-AC1.

""Did you tell her that you were interested in taking a short position in Abacus?" a government official asked Pellegrini, referring to the name of the CDO portfolio.

""Yes, that was the purpose of the meeting," Pellegrini responded." [The article continues.]

CNBC, a financial news network, is unabashedly pro-Wall Street, particularly Goldman Sachs. But if Pelligrini did tell ACA of his firm's intent, and the government didn't even mention that in the complaint, the SEC's case does look weak.

CNBC's Steve Liesman in the accompanying video to the article says Pellegrini told the government that he shared with ACA the outline of how his firm picked the underlying mortgage securities - with low FICO scores and high loan-to-value ratios.

If ACA (who assembled the CDO), the rating agencies (who slapped AAA-rating), and the investors (British and German, by the way) thought the CDO with that kind of profile was a good investment, they have zero sympathy from me.

I suppose the SEC could still say that Goldman Sachs didn't tell the investors that someone was taking the short side, even if Paulson's firm did tell ACA who assembled the CDO.

What I find much more troubling and what's hardly reported so far is the way CDS (credit default swaps) on debt securities are priced and indexed. But that will be another post.

So what is the point of the SEC's lawsuit against Goldman Sachs?

It has surely made this guy happy, among so many, that the justice is finally being done. Praised be the government.

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GOP Is Suspicious of SEC's Timing Against Goldman Sachs

Darrell Issa, the top Republican in the House Oversight Committee, wants to know how and why the SEC's civil charges against Goldman Sachs happened the way it happened.

GOP seeks SEC records on Goldman (Mike Allen, 4/20/2010 Politico)

"Rep. Darrell Issa, the top Republican on the House Oversight committee, is demanding a slew of documents from the Securities and Exchange Commission, asserting that the timing of civil charges against Goldman Sachs raises “serious questions about the commission’s independence and impartiality.”

"Issa’s letter, addressed to SEC Chairwoman Mary Schapiro and signed by eight other House Republicans, asks whether the commission had any contact about the case, prior to its public release, with White House aides, Democratic Party committee officials, or members of Congress or their staff.

"“[W]e are concerned that politics have unduly influenced the decision and timing of the commission’s controversial enforcement action against Goldman,” Issa writes.

"Issa implied that the timing was a bit too convenient, saying President Barack Obama’s push on Wall Street reform “neatly coincided with the commission’s announcement of the suit.”" [The article continues.]

How "coincidental" was it? The letter says the following:

--The Commission approved the Goldman suit in a vote that spit along party lines – a rare occurrence for approvals of enforcement litigation.

--Before the Commission had released its announcement, the New York Times published on its website a story describing the suit.

--Less than half an hour after the Times story’s publication, Organizing for America, the successor organization to Obama for America and now a project of the Democratic National Committee (“DNC”), sent millions of supporters an e-mail message from President Obama urging support for “Wall Street Reform.”

--Within hours, the Democratic National Committee had purchased AdWords advertising from Google, Inc. The DNC’s Google campaign fundraising advertisement, headed “Fight Wall Street Greed,” appeared whenever a user ran a Google search for the phrase “Goldman Sachs SEC.” It read, “Help Pres. Obama Reform Wall Street and Create Jobs. Families First!” and included a link to www.BarackObama.com, the website of Organizing for America.

--Democrats in Congress and the Administration have heralded the Commission’s suit against Goldman as a welcome boost to their case for the legislation.

--Members of the media have already begun to question the timing of the Commission’s suit and the actions of the Democratic National Committee.

Oh nothing but just coincidence, says the White House press secretary, who is reportedly very keen on becoming the lead political strategist for Obama.

The 2nd point above was what tanked the shares of Goldman Sachs and the whole stock market on an option expiration day (which tends to be volatile even without any news).

How the hell did these two New York Times reporters (this and this) get the SEC announcement before it was released?

The 3rd point is also interesting, as I remember seeing a message on a stock message board urging people to support President Obama in his financial reform bill to punish Wall Street. And the poster didn't even know what's in the bill.

Not that I am a fan of the Vampire Squid, aka Goldman Sachs, but a contrarian in me is suspicious when things are choreographed in-your-face manner like this in order to force you to think in a certain way and no other (which has been the case since the days of George W. Bush, and hasn't changed one iota - actually it has gotten worse). I have to say I'm more than annoyed as a trader because they pulled this stunt on an op-ex day.

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SEC Vote on Goldman Sachs Was 3-2

along partylines.

Two Democrats voted for suing Goldman, two Republicans against, and the chairman sided with Dems. On that news, Goldman Sachs' shares turned up, and ended the day in a positive territory taking the other financials and the general market with them.

For more, here's from Bloomberg.

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Financial "Reform" Bill Is Just Another Tax Bill

for the general public to help out big investors (including Goldman Sachs).

SEC announcing civil charges against Goldman Sachs on Op-Ex (option expiration) day which tanked the stocks across the board, as President Obama pushes for his financial reform bill.

The move was so in-your-face and transparent it is not very hard for pundits to come up with a headline like this:

Wall Street suspects Goldman charges 'not coincidental' to financial reform effort (4/16/2010 New York Post), or;

Goldman Sachs case could help Obama shift voter anger (4/18/2010 LA Times)

as Obama threatens another catastrophe unless his financial reform bill passes:

Obama: Fresh crisis without new financial rules (4/17/2010 AP via My Way News)

If you think you heard something like that before, you did. This president said it would be "catastrophe" if his $800-plus billion so-called stimulus bill didn't pass in February 2009. Well, the catastrophe continues on job creation front, which this bill was supposed to be about. It has added to already catastrophic public debt. (See the debt clock ticking on this blog, upper lefthand corner.)

"..."Opposing reform will leave taxpayers on the hook if a crisis like this ever happens again," the president said", according to the above AP article.

Ummm, Mr. President, have you read what Chris Dodd wrote in that bill? The so-called reform will keep taxpayers on the hook for permanent bailout, by creating the $50 billion fund to dismantle "too big to fail" firms in an orderly manner so that the creditors get their money back. Just like Goldman did on credit default swaps it purchased from AIG. And who will those creditors be? They are likely to be big banks, hedge funds, pension funds, private equity groups - i.e. big boys.

Means for orderly dissolution already exists, and it's called bankruptcy. But no, that won't do, because in bankruptcy the creditors will lose some money! Can't have that!

So, my personal take remains that this move by SEC against the biggest corporate donor to the Obama campaign (GS) is to promote the administration's push for their "financial reform" by creating a perfect boogieman (who will likely to benefit from the "reform") to deflect the public's attention, when in fact this financial reform bill is yet another scheme to defraud US taxpayers who will be forced to fund the perpetual bailout in one form or another. Part of it may be increased and/or new tax (or "fees" if they prefer), part of it will be indirect, such as added fees passed on by the financial institutions who will be required to pay for the bailout fund.

If you think the financial institutions as defined by the bill are banks only, you will be in for a surprise. The definition of financial institutions is so broad it could include manufacturing companies who extend credit to customers (auto companies, big IT infra companies come to mind; basically the same companies that were considered "financial" and were protected from short selling, back when the market was rapidly deteriorating in September 2008). It will be another added cost to those businesses. Do you think it will encourage more hiring?

Just like the stimulus bill that hasn't stimulated, various job bills (that secure jobs for public workers), the health insurance "reform" bill, this financial "reform" bill is basically a tax bill. Beneficiaries? Who do you guess will benefit from increased tax?

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Did Goldman Sachs Short Itself and Short the Market?

Rumors were circling today. If it did, that's chutzpah at its best (or worst, depending on your perspective). If GS the Vampire Squid is going down, everybody else is going down!

And they did, big time. Major US indices may have bounced back and ended with 1.6% loss at most (S&P500), but individual stocks in the indices went down much, much more, regardless of whether they are financial stocks or not.

Did Goldman Short Itself, Reuters Reports Goldman Was Told In Advance It Faced SEC Action (4/16/2010 Zero Hedge)

"Time for the SEC to take a look at what bets Goldman's prop desk, and material affiliates as well as hedge funds that are close to Goldman's flow traders, were taking on Goldman's stock over the past few days. If indeed Goldman shorted itself, bought SPY puts, bought octuple leveraged negative financial ETFs, or something else of the sort, on material non-public information, it would be time to shut the firm down." [Emphasis is original.]

And:

Talk From The Pits: Goldman Sold 1,000 Large S&Ps Earlier (4/16/2010 Zero Hedge)

"From the open outcry pits:

Goldman sold 1,000 big SP today over 1,200.00. Was it just a hedge because they
KNEW the SEC would do nail them to the cross? Is that insider trading? Who knows
how many tens of thousands they sold in the ES?

"We can hope the SEC still hasn't blocked Zero Hedge and is reading these very pertinent questions. "

For more on what the SEC's action on an Op-Ex cay did to the market, GS share price, and April option prices (someone made an immoral amount of money), take a look at my trading blog.

(And oh BTW, Mercury Retrograde starts on April 17 at Taurus, the bull.)

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SEC's New Rule for Short Selling Is a Non-Rule

The U.S. Securities and Exchange Commission (SEC) chairman Mary Shapiro announced a new rule to "restrict" short selling today, and it has been approved by 3-2 vote.

According to the announcement, this new rule will do the following:

"... a circuit breaker would be triggered any time a stock has dropped 10 percent in one day. At that point, short selling would only be permitted in a security if the price is above the current national best bid."

The circuit breaker, therefore, won't stop short selling even when the stock has dropped 10 percent. Short sellers will still be able to short as long as the price is above the current national best bid (sort of uptick rule, and SEC actually calls it "alternative uptick rule").

Creating the national best bid should be very easy for the outfits that can do "flash-trading" and "high-frequency trading", both of which SEC is supposed to have been investigating oh for such a long time. Instead, the agency is busy harassing Toyota.

With flash-trading and HF trading, it should be very, very easy to keep the drop within the 10% threshold while these quant traders short away the stock.

And this non-rule will be effective for the day the stock plunges 10 percent, and the day after.

Why does SEC even bother? Is it just to show that they are doing "something" to justify their salaries and benefits?

I have a feeling that this will join the list of "unintended consequence" very shortly. What unintended consequence I haven't yet figured out. One possibility is a no-bid market. Who wants to invest and trade in a market which is openly manipulated by meaningless regulations and by the likes of Goldman Sachs?

Another possibility is that investors/traders who are long the security may get trapped, unable to unload their shares. I am sure the brokerages and banks will have mechanisms to distinguish long sellers from short sellers, but somehow I can't seem to trust such mechanisms.

In a crash like we had in September-October 2008, you may want to dump your holdings as fast as you can, whatever the price, even if you may get a sizeable haircut. It was better to lose 10% by selling out than to lose 50, 60, even 70% several days, weeks, months later. Some stocks lost more than 90% before the market bottomed in March 2009.

This potential entrapment of long sellers is perfectly in line with another recent SEC ruling that will allow money market funds to refuse redemption in a crisis.

Capital and information want to flow in and out freely. Any effort to stop the free flow will eventually backfire.

After the damage is done, the government will say "Who could have known? But we meant well..." A lot of people (other than people with their heads in the sand, including government bureaucrats) will have known. Intention will be irrelevant.

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Chicagoland-Style Toyota Witch Hunt Intensifies

Don't they have better things to do?

Grand jury subpoena has been issued, and now SEC has joined the fray.

Toyota faces federal, congressional probe (2/22/2010 AP via Yahoo Finance)

"WASHINGTON (AP) -- Federal prosecutors have launched a criminal investigation into Toyota Motor Corp.'s safety problems and the Securities and Exchange Commission was probing what the automaker told investors, the company disclosed Monday. Newly released internal documents showed that Toyota officials visited with U.S. regulators years ago who "laughed and rolled their eyes in disbelief" over safety claims.

"The twin developments created new public relations challenges for Toyota plus the prospects -- however likely or unlikely -- of hefty federal fines or even indictments against executives in the U.S. and Japan. They also complicate Toyota's ability to discuss details driving its recall of 8.5 million vehicles because anything executives say could be used against the company inside a courtroom.

"Top Toyota executives were expected to testify at hearings Tuesday and Wednesday on Capitol Hill. One lawmaker said he believed Toyota misled owners about the repairs and relied upon a hastily-arranged study to reassure the public.

"In a new filing with the SEC, Toyota said it received the grand jury request from the Southern District of New York on Feb. 8 and got the SEC requests Friday.

"It wasn't immediately clear what U.S. laws Toyota might have broken. A subpoena would specify why prosecutors sought company documents, but Toyota would not comment beyond its disclosure with the SEC. A spokeswoman with the U.S. Attorney's Office for the Southern District of New York declined to comment, saying it does not confirm or deny its investigations as a matter of policy."

"...Legal experts said the fresh subpoenas could affect how Toyota executives respond to the questions from lawmakers.

"Eric Dezenhall, a crisis management consultant in Washington, said the subpoena might cause Toyota to limit its testimony because apologies are admissible in court. He predicted the company would walk a line between carefully phrased testimony and enough disclosure to describe the cars' mechanical problems and steps Toyota had taken to make the vehicles safer." [The article continues.]

Ms. Shapiro's agency is yet to do anything about naked short selling that probably precipitated the market crash in September-October 2008 which in turn crashed the global economy, or about so-called "flash-trading" (aka front-running) by big investment houses like Goldman Sachs. But she finds time to investigate Toyota.

This is getting beyond absurd.

No word about other companies with the same sticking pedal problems. No word about the company (CTS) who makes the accelerator assembly for Toyota and other major auto manufacturers including GM, Ford, Chrysler, and Honda that is known to cause the problem.

And how about this allegation by Wayne Madsen that CTS's accelerator may be negatively affected by military frequencies? (CTS supplies to the US military.)

But no. Obama-land is intent on doing all it can to squash Toyota by staging a show trial. With the subpoena, Toyota executives have little choice but take the fifth in the congressional hearing, and they will be painted by the obliging media as "guilty". Its union pals must be ecstatic.

When will Japan start dumping US Treasuries, I wonder?

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SEC's New Rules for Money Market Funds

should make Treasury and the Federal Reserve happy.

While the financial press is more focused these on the banking industry regulations and the re-confirmation of the Fed chairman, the Security and Exchange Commission has just adopted a new set of rules to regulate $3.3 trillion (and rapidly declining) money market funds industry, which will affect the public much more than the re-confirmation of Ben Bernanke.

There are 3 areas that SEC focuses on to regulate the industry:

1. Further Restricting Risks by Money Market Funds
2. Enhancing Disclosure of Portfolio Securities
3. Improving Money Market Fund Operations

Of these, the first is the most detailed. It includes:

Minimum liquidity requirement (currently there is no such requirement):

Daily Requirement: For all taxable money market funds, at least 10 percent of assets must be in cash, U.S. Treasury securities, or securities that convert into cash (e.g., mature) within one day.

Weekly Requirement: For all money market funds, at least 30 percent of assets must be in cash, U.S. Treasury securities, certain other government securities with remaining maturities of 60 days or less, or securities that convert into cash within one week

Shorter maturity requirement:

Restricting the maximum "weighted average life" maturity of a fund's portfolio to 120 days. Currently, there is no such limit. The effect of the restriction is to limit the ability of the fund to invest in long-term floating rate securities.

It seems like SEC has found a ready (unwilling, maybe) buyer of Treasury debts and agency bonds and MBS backed by Fannie, Freddie, Ginnie and FHA (as long as these bonds mature in 60 days). Now the Federal Reserve has a big enough counterparty to do the reverse repo agreement! Bernanke can finally implement one of his "exit strategies". (If he is re-confirmed as chairman, that is.)

Under the third, there is this clause:

Suspension of Redemptions: The new rules permit a money market fund's board of directors to suspend redemptions if the fund is about to break the buck and decides to liquidate the fund (currently the board must request an order from the SEC to suspend redemptions). In the event of a threatened run on the fund, this allows for an orderly liquidation of the portfolio. The fund is now required to notify the Commission prior to relying on this rule.

SEC says that the "new rules are intended to increase the resilience of money market funds to economic stresses and reduce the risks of runs on the funds by tightening the maturity and credit quality standards and imposing new liquidity requirements". What's ironic about it is that the Reserve Primary Fund broke the buck in September 2008 because of the government regulators' capricious decision to let Lehman Brothers go bankrupt. The run on the Reserve Primary Fund triggered a far bigger run on money market funds that could have collapsed the entire world economy.

SEC also says the new rules are being adopted to "better protect investors". Now, do you feel secure, knowing you may not able to get your money back in a crisis?

The rules will be effective 60 days after their publication in the Federal Register.

60 days, folks.

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SEC Names 29-Year-Old Goldman VP as Its COO

I thought it was a joke at first.

Goldman Exec Named First COO of SEC Enforcement
(10/16/2009 AP via NY Times)

"WASHINGTON (AP) -- A Goldman Sachs executive has been named the first chief operating officer of the Securities and Exchange Commission's enforcement division.

"The market watchdog agency said Friday that Adam Storch, vice president in Goldman Sachs' Business Intelligence Group, is assuming the new position of managing executive of the SEC division.

"The move came as the SEC has been revamping its enforcement efforts following the agency's failure to uncover Bernard Madoff's massive fraud scheme for nearly two decades despite numerous red flags.

"Storch, who will be responsible for project management and operations, will report to SEC Enforcement Director Robert Khuzami." (You can read the rest of the article by following the link above.)

AP's article doesn't say how old Mr. Storch is. But Bloomberg's article does, which says he is 29-year old. But Business Insider dug deeper than AP or Bloomberg, and they came up with a very youthful photograph of Mr. Storch at this link:

FOUND: Photo of Adam Storch, 29-Year-Old Goldman Guy Who Is Now COO Of The SEC (John Carney, 10/16/09 Business Insider)

If your confidence in SEC is inspired by looking at the photo, please let me know. I will sell you Golden Gate Bridge.

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SEC To Ban Flash Trading?

SEC moving toward banning flash orders (8/4/09 AP via Yahoo Finance)

"NEW YORK (AP) -- The Securities and Exchange Commission is moving toward a ban on a trading practice that gives some brokerages a split-second advantage in buying or selling stocks.

"SEC Chairwoman Mary Schapiro has said in a statement Tuesday that the agency is working to create a rule to ban the trades known as flash orders.

"Flash orders give certain members of exchanges including Nasdaq, Direct Edge and BATS the ability to buy and sell order information for milliseconds before that information is made public. High-speed computer software can take advantage of that brief period to allow those members to get better prices and profits."

Direct Edge is the network supported by Goldman Sachs, Citadel, and Knight Trading, and it pioneered in this type of trading.

Let's see... Qui bono?

Answer: New York Stock Exchange, who doesn't have flash trading and whose trading volume has been suffering because of that.

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Government Considers Stripping SEC of Powers

Bloomberg.com reports that "U.S. Considers Stripping SEC of Powers in Regulatory Overhaul".

"The Obama administration may call for stripping the Securities and Exchange Commission of some of its powers under a regulatory reorganization that could be unveiled as soon as next week, people familiar with the matter said.

"The proposal, still being drafted, is likely to give the Federal Reserve more authority to supervise financial firms deemed too big to fail."

So far, I don't like this at all. Whatever the shortcomings, whatever the past and present mistakes, SEC is UNDER THE US GOVERNMENT'S JURISDICTION. Whereas the Federal Reserve, it is an INDEPENDENT entity owned by its member banks. The US government does not have formal authority over it. Remember, we can't even audit its books!

Oh wait, at least I was not alone in thinking it would be a mistake:

"“It would be a terrible mistake,” said Stanley Sporkin, a former federal judge and enforcement chief at the SEC. “Whatever the SEC has done or didn’t do, it is still the premier investor protection agency around.” "

It was the then-Treasury Secretary Paulson who wanted to expand the Fed's role in regulating the financial industry in March 2008. Now we are moving very fast in that direction:

"Geithner was set to discuss the proposals at a dinner last night with Summers, former Fed Chairman Paul Volcker, ex-SEC Chairman Arthur Levitt and Elizabeth Warren, the Harvard University law professor who heads the congressional watchdog group for the $700 billion Troubled Asset Relief Program."

There are people who argue against it on conflict of interest:

"Opponents of giving the Fed more authority, such as former SEC chief Levitt, have said the central bank’s focus on keeping the financial system solvent may trump efforts to punish companies for violating securities laws."

As the article points out, it doesn't help SEC when two of their attorneys are being investigated for possible (looks like probable) insider trading.

Don't waste a good crisis, the White House Chief of Staff says. Indeed.

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FBI probes possible insider trading by SEC lawyers

From AP article [emphasis mine]:

"Federal prosecutors and the FBI have been investigating possible illegal insider trading by two Securities and Exchange Commission enforcement attorneys who were in a position to receive sensitive information about agency probes of public companies.

"The SEC's inspector general, David Kotz, found that the frequent stock trades over a two-year period by the pair raised suspicions of insider trading. Earlier this year, he referred the matter to the Fraud and Public Corruption Section of the U.S. attorney's office in Washington.

"The SEC enforcement attorneys, one male and one female, each earn more than $160,000 annually and had stock portfolios estimated to be worth more than that, according to Kotz's report. They often e-mailed each other about stocks and their trades, it said. The attorneys and the companies whose stock they were said to have traded weren't named.

"... they both traded in the stock of a large financial company after being told by a colleague about investigations of the company, a violation of SEC rules, according to the report.

"Two months before an SEC investigation of a large health care company was opened, according to Kotz's report, the female attorney sold all her shares in the company. She traded stocks 247 times between in 2006 and 2007, the report said."

247 times. That would have earned her the gold-level pricing on my brokerage account...

"Both attorneys "inexplicably" testified to investigators that they failed to see how sending e-mails to the male attorney's brother and sister-in-law from his SEC account could create the appearance that he was improperly sharing nonpublic information with someone outside the SEC, the report says."

Create the appearance? That's an understatement. But SEC has this to say:

""We take seriously even the suggestion that any SEC employee would engage in insider trading," according to a statement from the agency. "We note that the (inspector general's) report neither accuses any SEC employee of insider trading nor concludes that any such conduct took place.""

As long as you don't openly say it, it's OK. No one has done anything wrong.

Remember the recent headline on another insider-trading/conflict of interest case? Proverbial tip of the iceberg that no one cares, because "we are moving forward not backward"?

New York Fed Chairman's Ties to Goldman Raise Questions
and 3 days later;
New York Fed Chairman Resigns

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U.S. SEC told not to revive uptick short-sale rule

According to Reuters news.

"Financial professionals, academic experts and the U.S. broker-dealer watchdog agree the Securities and Exchange Commission should not reinstate its old uptick rule to regulate short selling but disagreed on what other measures would be effective.

"The SEC is considering five proposals, including reinstating an updated version of the Depression-era uptick rule, which would only allow short sales when the last price was higher than the previous price.

"None of the SEC proposals received overwhelming support at the public meeting on Tuesday. The only thing on which experts achieved some sort of consensus was their opposition to proposed legislation that would force the SEC to reinstate its old uptick rule. ..."

Looks like nothing is going to happen anytime soon, but traders seem to be covering the shorts on certain heavily shorted stocks (here's one example, and another), just in case.

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