1. “Best Short Ever” Costs Citi $285M
Citibank has become the third major institution to settle a civil fraud case based on its marketing of CDO securities. The SEC’s case against Citi alleges it marketed the securities to customers while its own staff called the pool of assets the “best short ever” and an experienced portfolio manager said “the portfolio is horrible.” According to the SEC’s case against Citigroup, the CDO failed in November 2007, less than nine months after it closed, but Citi made $160M in fees and profits from the sale of the $1 billion issuance.
2. Do You Know What Your ETF Is Doing With Your Securities?
ETFs buy shares of a portfolio (usually an index of some kind) and then issue shares of the fund representing the entire portfolio. However they lend out the shares to other investors and securities companies. The borrowers provide collateral of 102-105% of the value of the borrowed asset. The ETF adviser then invests the extra 2-5% as they see fit. But what happens to that revenue? Does it matter? Well, since U.S. ETFs lend out about $39 billion in assets – it does matter. Some advisers keep half the interest from the lending, others keep 15% or just enough to cover the cost of the lending program and return the rest to the fund. Disclosures are, understandably, confusing and it is expected regulators will be stepping in with rules to standardize the practice. But at present it is hard for investors to miss what they don’t know about.
3. Remember, Remember the Fifth of November
History buffs amongst you (and fans of the movie ‘V for Vendetta’) will remember that the Fifth of November is Guy Fawkes Day, named for the famous revolutionary that attempted to blow up the British Parliament in 1605. November Fifth has now been appropriated by a group calling itself bankTRANSFERday. With a Facebook page counting 21,000 “likes,” the group is advocating closing your big bank account, on the fifth of November of course, and opening a credit union account. Their argument is that credit unions are not-for-profit and more aligned to the interests of the account holders. While this is certainly a very valid point of view – I worry that they have chosen to use the Guy Fawkes mask that has become a symbol of the malevolent hacker group Anonymous. I hope that less well-intentioned groups do not try to usurp bankTRANSFERday and use it for more serious mischief.
4. Al-Qaida Owes $9.3 Billion. Where Should We Send The Bill?
A New York magistrate judge this week held that the terrorist group owes $9.3 billion as a result of their Sept. 11 attacks. The damages were assessed and tripled as allowed under NY law. Not surprisingly Al-Qaida never responded to the suit and was found guilty in default. So why bother? Some of the insurers and other parties involved need to demonstrate that actions to recover were indeed undertaken. File this judgment under “form over function” and, well, “unpaid bills.”
5. Wall Street Waits For ‘The Other Shoe’
Treasury Secretary Timothy Geithner speaking on CNBC last week in respect to regulatory actions against Wall St. said “You’ve seen very, very dramatic enforcement actions already by the enforcement authorities across the U.S. government, and I’m sure you’re going to see more to come. You should stay tuned for that.” This came as Raj Rajaratnam was sentenced to 11 years in prison in the strictest sentence ever imposed for insider trading and Citibank was fined $285 million for civil fraud. There is a certain fatigue that comes when financial institutions live with the knowledge that the Treasury Secretary wants them to “stay tuned” for more regulatory actions.