1. OMG: MF Global!
In one of the more shocking turn of events in recent financial history (and that’s saying something), MF Global filed Chapter 11 this week. The failure is the eighth largest bankruptcy in U.S. history. Last week, the firm was still rated investment grade. What happened? The firm was proprietary trading, as many broker/dealers do. However, sources contend that, the firm made substantial wagers on European sovereign bonds. When the European crisis continued to worsen, the NY Times reports, the highly leveraged positions quickly burned through the firm’s capital. The FBI has been called in to investigate allegations that MF Global may have made use of client funds in making outgoing payments and CEO Jon Corzine has resigned from the firm. What is certain is that the collapse represents a rather tragic end for a major broker with roots in the commodity industry going back to 1783.
2. The Fed Is Just Like My Sister-in-Law
My wife’s sister hates to buy wholesale, preferring to pay full retail. I was reminded of that while reading a recent study by the General Accounting Office about the bailout of AIG, which found the New York Fed turned down potential discounts offered by AIG counterparties in settling their Credit Default Swap positions. The Fed insisted on paying 100 cents on the dollar to settle AIG CDS debts. Why would they do that? The Fed has not offered a full explanation as yet, but there were 16 counterparties involved. The fact that one or two of those counterparties were willing to negotiate a settlement may have just been an obstacle. Accepting discounts with any might have meant opening up discussions with all in order in ensure that every counterparty was treated equally. Whatever the Fed’s reasoning, the outcome was simple: Pay everyone, every dollar. My sister-in-law would be proud.
3. Capmark Sues One Of Its Former Owners Claiming They Used Their Influence To Get Paid Prior To Bankruptcy.
Payments made by a company just prior to filing bankruptcy can be problematic if they are not determined to be in the best interest of the company. In some cases those last payments before bankruptcy can be “clawed back.” Capmark is claiming that one of its owners encouraged the Capmark Bank to refinance $1.5 billion in debt in the months before their bankruptcy filing and the proceeds of the refinance allowed them to repay $147 million to the owner. The new owners, consisting of many of the bank’s other creditors are now litigating to have those funds returned to the firm. The owner being sued is Goldman Sachs, but the lesson is universal, payments made in the months before bankruptcy will almost always be examined and their fairness evaluated.
4. Asset Managers Need Better Handcuffs – Or At Least Better Contracts With Their Fund Managers
Worse than the ugliest divorce, when a star fund manager leaves an investment firm they can frequently gut their old firm. Many investors will want to follow the star. Trust Company of the West is in a fierce battle with its former chief investment officer and his new asset management firm. The claim is that his new firm was only able to grow to $18 billion in assets in two years because it used TCW trade secrets. Damages experts are currently testifying, and the results of the suit are unsettled as yet. The moral of this story is clear. When possible, align the firm’s interest with its key employees through whatever means available – contracts, vesting shares or, perhaps even, actual golden handcuffs.
5. “Franchise” Mortgage Company Sued by Feds
Allied Home Mortgage of Dallas operated 600 branches at the height of the housing bubble. The firm specialized in mortgages backed by the Department of Housing and Urban Development, or HUD. The suit filed by the US Attorney said the default rate on Allied originated loans climbed to “a staggering 55 percent” in 2006 and 2007. HUD paid $170 million to settle Allied’s failed loans. The lawsuit claims that Allied operated their branches like franchises with minimal control, “allowing its shadow branches to operate independently of any scrutiny whatsoever”. The new Consumer Financial Protection Bureau will have authority over mortgage companies like Allied in the future. Franchises may work well for hamburgers, but perhaps less so when compliance is involved.
And… Déjà vu
The newspaper article announced that people were displeased with the announcement that banks were going to impose a $1 monthly fee for maintaining checking accounts for anyone not maintaining a $200 balance. The op-ed argued that bankers need to consider the average man and not simply seek short-term selfish gains. The interesting part of the article was the date of the American Banker article…1909.
Déjà vu all over again.
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