Tuesday, May 12, 2015

Monday, May 11 Recap: Tri-party Repos, SCE Survey, SEC on Market Structure & Talk Show Hosts Charged With Fraud

Liberty Economics publishes connects tri-party repo to increased market risk

SCE credit access survey released

SEC charged Stephen Goodrich with fraud

Fed announced that it was barring five ex-private bankers and senior managers of Credit Suisse

SEC Commissioner talks Market Structure

SEC sent out yet another alert warning investors about Government impersonators

SEC charged former radio talk show hosts with fraud

  • Liberty Economics, the research leg of the New York Federal Reserve, published the first article in a two part series about financial innovation titled, Financial Innovation: The Origins of the Tri-Party Repo Market.  "While tri-party repo ultimately evolved in ways that created and amplified systemic risk (as we will describe in our next post)," the authors state, "its origin was as a solution to inefficiencies and risks associated with the repo settlement arrangements prevailing at the time." The post goes on to suggest that the tri-party repo, a financial innovation created to reduce risk more so than increase profits, actually contributes to systemic risk in the market. In the follow up post the authors will show how tri-party repos led to a large increase in volume which allowed for the financing of riskier securities. Very interesting article, I'm looking forward to the follow up.
  • The SCE Credit Access Survey was released. The Survey provides information on consumer credit demand access. Once a quarter SCE panelists are asked about credit applications and their expectations for credit in the future. Information is collected for auto loans, credit cards, credit card limit increases, mortgages, and mortgage refinancing. The April 2015 Survey of Consumer Expectations indicates "that one-year ahead inflation expectations fell while three-year ahead inflation expectations increased." Expectations around earnings and household income growth were unchanged while household spending growth expectations declined.  
  • The SEC charged Stephen Goodrich, 57 years old resident of Rocky Hill, Connecticut, with fraud. Goodrich worked as an un-registred investment adviser from 2006 to 2012 and pled guilty to one count of mail fraud and one count of false tax returns and on February 26, 2015. He was then sentenced to 60 months imprisonment followed by three years of supervised release and ordered to pay $1.8 million in restitution for operating an investment scheme that defrauded 10+ investors out of more than $1.8 million. Goodrich also used $600K of the funds raised for his own personal expenses. 
  • It is rare that the Federal Reserve Board bars individuals, extremely rare, but it happened yesterday. The Fed announced that it was barring five ex-private bankers and senior managers of Credit Suisse, AG, Zurich, Switzerland from working in the banking industry. This is in connection with a civil money penalty against Credit Suisse for failure to comply with certain federal banking laws.  Markus Walder, Marco Parenti Adami, Susanne Ruegg Meier, Michele Bergantino, and Roger Schaerer were all named on the order and were previously indicted for conspiring to "defraud the U.S government by assisting U.S. citizens' evasion of federal income taxes through the creation and maintenance of bank accounts that were not declared to U.S. tax authorities." Walder was the head of Credit Suisse's North American Offshore Banking business, responsible for the bank's "undeclared U.S. cross-border banking business".  He also supervised teams of private bankers in Switzerland and New York. Here's a final statement from the Board explaining the reason for the action:
In issuing today's enforcement actions, the Board found that the continued participation by Walder, Adami, Meier, Bergantino, and Schaerer in the affairs of a depository institution would impair public confidence in the institution.  The prohibition is effective indefinitely, unless the criminal charges against Walder, Adami, Meier, Bergantino, and Schaerer are dismissed.
  • SEC Commissioner Luis A. Aguilar published a public statement entitled "U.S. Equity Market Structure: Making Our Markets Work Better for Investor". The statement discusses the many criticisms of inefficiency concerning the US market structure. These criticisms are coming from industry insiders. The public statement comes just one week after the SEC announced it would be using a pilot of 1400 small caps to increase tick-size from $.01 to $.05. The goal of the change is to reduce market manipulation created via high frequency trading.  In conclusion, Luis remarks that there are more areas that need examination if the markets are to be fair and balanced including:
...the possibility of excessive intermediation in our markets, the reasons institutional investors’ trading costs have failed to see any meaningful improvement in the last 13 years,[184] possible avenues to incentivize market makers to provide liquidity during periods of market volatility, the propriety of the fees that exchanges charge for data and ancillary services and, of course, an in-depth study of the practices employed by high-frequency traders and the quality of the liquidity they provide.
  • The SEC sent out yet another announcement warning investors about Government Impersonators.
SEC staff is issuing this updated Investor Alert because we are aware of continuing fraudulent solicitations that purport to be affiliated with or sponsored by the Securities and Exchange Commission.
  • The SEC charged a retirement planning firm with falsely telling customers "that interests in life settlements they offered and sold were "guaranteed," "safe as CDs," and "federally insured."" The principals of Novers Financial, Christopher A. Novinger and Brady J. Speers, who live in Mansfield, Texas, and hosted a financial radio show called Retirement Experts Radio Show weekly on WBAP-AM (820), were charged yesterday. The charges allege that from 2012 to 2014 the firm sold ~$4.3 million in life settlement interests to 26 investors. The SEC also charged ICAN Investment Group LLC and Speers Financial Group LLC for acting as unregistered broker-dealers.