Financial Reform
In the news today…..
Greece Bailout – There are reports in the market that the financing of Greece plan would be split through the EU member countries each contributing via a proportion of their population. The countries like Portugal (9.4% of GDP) , Spain and Italy who are all above the 3% debt to GDP limit (Greece is at 12.9%) proposed by the EU would likely not be able to participate. This would put the burden on strong countries like Germany who may have difficulty swallowing that pill of bailing out the weak sisters. The EU members were scheduled to meet to hammer out the details of the rescue package today but with the no fly restrictions, the meetings have been postponed. There are talks that it will take place in the next day or two even if it has to take place via satellite. It will be interesting to see what type of rabbit they can pull out of the hat but the risk is that talk of a contagion continues to increase. Bottom Line = It ain’t over unti the fat lady sings.
More pain for Goldman Sachs – After the SEC charged Goldman Sachs with fraud on Friday, saying the firm created and sold a mortgage investment designed for failure, the U.K. said it would launch its own probe into Goldman’s “morally bankrupt” actions. Germany may follow suit, and has requested information from the SEC. Meanwhile, the EU has launched an investigation into Goldman’s role in providing swaps to the Greek government. As for the SEC suit, Goldman learned in July 2009 that it might face a suit but said it was blindsided by Friday’s announcement; the SEC usually notifies firms in advance to allow for last-minute settlements, and the SEC’s failure to do so signals the agency is trying to take a particularly aggressive stance, suggesting the move may be more about politics than financial villainy. On the other hand, though only one Goldman employee, Fabrice Tourre, was named in the suit, sources said senior bank executives, including CEO Lloyd Blankfein, played a pivotal role in overseeing the mortgage unit. John Paulson, the hedge fund investor who made billions betting against the housing market and who was short on some of the underlying securities at issue here, was not named in the SEC’s complaint, but may face lawsuits from investors who lost more than $1B on the deal. John Paulson bought this $1B from Goldman Sachs, but bought $5B in total from all investment banks – so you can see the investigation going further. Bear Sterns, ironically, turned Paulson down to make this type of deal because it was immoral.
SEC looks into other soured mortgage deals – Following its civil fraud charge against Goldman Sachs, the SEC is investigating whether other Wall Street firms misled investors over mortgage investments. It’s not yet known which firms the SEC is looking into, but there were similarly troubled mortgage deals created at Deutsche Bank, UBS and Merrill Lynch, among others. The SEC is using this opportunity to raise its sights and send a warning to Wall Street, but by doing so it faces the risk of further damaging its reputation if it loses the Goldman case or similar cases against other Wall Street firms.
Countrywide case picks up steam -A federal probe into the collapse of Countrywide Financial appears to be gaining momentum, as sources said investigators have been calling witnesses before a grand jury. Though few details are available since grand jury proceedings are generally kept secret, and the calling of witnesses doesn’t guarantee charges will be filed, the progress is notable; the former mortgage giant, which was bought by Bank of America (BAC) in 2008, has been the subject of a slow-moving investigation for around two years. An SEC civil trial against the company and three former top Countrywide executives is scheduled for October. Let’s hope the guilty pay.
Tonight’s Dinner Conversation….
Financial Reform – this is the current Obama agenda. So, what needs to be done?
Derivatives need to be put onto an exchange. It is a $600 TRILLION market – it’s huge. Credit Default Swaps, in part, were responsible for bringing down the economic system 18 months ago. But, this didn’t make it happen, it just clouded the issue, and made decisions harder for the people trying to pick up the pieces in real time back then. So, why is this controversial?
The financial companies are against this for one reason, and one reason only. They will lose revenue. They make a bundle on this of off-market trading, and if it is put on an exchange, the costs will come down, and these investment banks will lose, lose, lose. So, they are lobbying big time.
Anything else in a political financial reform bill is just a waste of time. This is the big deal, and should be passed. Anything else will be a political favor for someone, and should be avoided.
Remember: “Leverage Can Kill.”
Here are the last numbers for today:
Dow Jones 30 Industrial – 11092 (up 73)
10 Year Treasury Bond – 3.81% (up 0.04%)
Euro – $1.3506
Gold – $1136 (down $36)
Oil – $83.12 (down $2.39)
Gasoline – $2.28 (down $0.05)
