1. One Fine Day…Rajaratnam Levied With Highest Individual SEC Penalty Ever!
In addition to the 11 years that the Galleon Group founder will be serving in federal prison, Rajaratnam has 14 days to pay nearly $93 million in penalties to the Commission. This is in addition to the $10 million in fines already imposed and the order to forfeit $53.8 million in illegal profits. Does he have the means to pay the record fine? In 2009 Forbes ranked him as the 236th-richest American with an estimated worth of $1.8 billion, so the odds are good that this fine may actually be collectable.
2. Fannie & Freddie’s Revenge
The Federal Housing Finance Agency, the regulator of the Federal Home Loan Banks and trustee of both Fannie Mae and Freddie Mac, has filed suit in the last few weeks against 18 major banks claiming that they misrepresented the number of homes owner-occupied and the valuations of the collateral they used for their borrowings. The banks, in return, will attempt to show that the approximately $40 billion in losses experienced by “Fan & Fred” were not caused by the misrepresentations but rather by the collapse in the housing market itself. A finding that the banks misrepresentation caused the agencies’ losses could not only be a major financial loss for the defendants but a major setback in defending against other similar suits filed by other investors. Some legal experts cite the most difficult hurdle will be in proving that the bank’s actions actually “caused” the loss. Who knew two companies called Fannie & Freddie could play so rough?
3. SEC’s “Pinky-Swear”
In addition to fines, SEC punishment will often require financial institutions to vow not to violate fraud statutes in the future. Let’s pause for a minute to consider the ramifications. We are asking an organization, often composed of hundreds of thousands of constantly changing individuals, to make a promise. What are they promising? Not to break a federal law. Does breaking the promise make it worse than merely breaking the law itself? No. A recent article by the NY Times highlights the alleged breaches by the mega-banks but glosses over the fact that the SEC requirement itself is an anachronism that has no place in modern regulatory enforcement. It’s time the SEC faces reality. Regulators must make the punishment fit the crime, forget the vows. Vows are for weddings, and Wall Street is no blushing bride.
4. Dirty Window Dressings ~ Japanese Style
During the ’90’s Japanese companies would use tricky accounting moves to make their annual financial statements look better. It was hardly a secret. The practice was called “window dressing.” Regulators cracked down on the practice in 2000 and most of the Japanese companies fell into line. However, as we learned last month, Olympus Corporation allegedly took the practice to a whole new level. The recently fired CEO has asserted that for the last two decades Olympus has used some rather clever means to defer publicly reporting losses. In one instance he claimed that a merger advisory fee of $687 million paid in 2008 to a small adviser named Axes America was actually part of a scheme to hide losses. The fee actually represented nearly a third of the purchase price of the acquisition. Authorities from Japan and the US are investigating.
5. If It Looks Like A Hedge Fund And Walks Like A Hedge Fund…It Must Be A Mutual Fund
Tired of losing customers to hedge funds because investors believed that hedge funds were faster or willing to take greater risks, a handful of mutual funds have come up with a solution: replicator funds. A few large players including Goldman Sachs and Credit Suisse have launched the new vehicles. Since hedge funds don’t disclose their holdings, replicator funds have to perform regression analysis and estimate the actual composition of the fund after the fund has posted their returns. While the replicators may not be perfect in emulating the hedge funds, they also don’t charge the higher fees that hedge funds normally charge. If imitation is the sincerest form of flattery, hedge funds should be flattered… and nervous about the competition.
Hollywood… & Vine & Wall Street
The public is being inundated with movies and images depicting the world of finance. First was the barrage of books describing the credit crisis and now comes the big screen depictions of Wall Street and its environs. In the ’80s we had Oliver Stone’s original Wall Street and recently his follow-up based on a post-crisis Gordon Gecko. Now studios have released non-fictions like Too Big To Fail and the recent fictional Margin Call. Even the recent comedy Tower Heist is based on a Bernie Madoff-type character. Now Hollywood royalty, Robert De Niro, is set to play Madoff himself in an upcoming HBO movie. Is all this limelight making finance more accessible to the general public or just fomenting anger and stoking Occupy sentiments? Is Wall Street ready for its close-up?