Outrage isn’t asleep it’s just gone underground
By Matthew Goldstein and Jennifer Ablan
Where is the outrage? A year ago, the Occupy Wall Street movement was just getting started, with mass demonstrations across the nation against corporate malfeasance and greed.
But now it’s been crickets and we don’t mean the game. There’s been no marching on Wall Street nor on the steps of Capitol Hill since the latest revelations of bad behavior in the financial sector. The populist uproar has been rather sedate in the face of the deepening scandal that big banks rigged Libor–a benchmark lending rate; JPMorgan Chase’s mounting losses from disastrous credit bets and a possible cover-up attempt; and the disappearance of customer funds from Iowa futures broker PFGBest, discovered after its founder tried to commit suicide and left a note outlining a 20-year fraud.
But the lack of populist rage doesn’t mean there’s a lack of concern about these and other scandals. We think that’s a misreading of the temperature of the American people. And if Wall Street thinks the average person doesn’t care about the nearly $6 billion trading loss at JPMorgan Chase, or the alleged Libor manipulation scandal , then the street is badly misjudging things.
As documented in “Banks behave badly redux: Is it killing confidence?” earlier this week, the spate of Wall Street horror stories is having a real impact on the markets. Interest by individual investors in stocks is way down and isn’t showing signs of coming back any time soon. Retail investors are showing their disgust by walking away—something we first noted a year ago in our story on The Madness of Wall Street.
In some ways it’s a quiet protest investors are showing and in some ways maybe more damaging than protests in the street. Maybe there is no outrage because investors and the public have come to believe they don’t expect much better behavior from Wall Street. In other words, the new norm is to expect the worst of the street.
The hedge fund world’s version Elvis plays cupid
You know Bill Ackman as a hedge fund rabble rouser, but did you know on the side he likes to play cupid. Here’s Svea Herbst-Bayliss with a post on the Pershing Square Capital manager’s softer side:
By Svea Herbst-Bayliss
Bill Ackman is known as many things: investor, corporate nudge and quick-talking television pundit. But matchmaker?
Helping his single friends and acquaintances find a life partner is, however, close to the multi-millionaire’s heart and he’s doing his part to help. And every so often, Ackman and his wife whirl through their Rolodexes and invite their unattached friends to come on over to their place and spend a few hours meeting other singles.
In this day and age of internet dating, the Ackmans like to give that stressful process a personal touch. And last night was one of those nights when the man who runs $10 billion Pershing Square Capital Management and his wife Karen, who trained as a landscape architect, threw open the doors and hoped for the best.
While no officials statistics have been kept, people who have attended the events say plenty of people have found their mates here. At this week’s event? Roughly 200 people attended, according to someone who was there. For Ackman the matchmaking evening was clearly so important that it trumped another event that he holds dear: a charity poker tournament that raises money for education.
The poker tournament, which is partly sponsored by Pershing Square, went ahead without Mr Bill, who two years ago we dubbed the Elvis of the hedge fund world because of his star power. That’s because when it comes to helping young people find true love, playing poker can wait for Ackman.
Eminent Domain reader
Jenn Ablan and I have done a lot reporting on Mortgage Resolution Partners’ plan to get county governments and cities to use eminent domain to seize and restructure underwater mortgages. As we’ve reported, it’s an intriguing solution to the seemingly intractable problem of too much mortgage debt holding back the U.S. economy. But it’s also a controversial one that threatens to rewrite basic contractual rights and the whole notion of how we view mortgages in this country.
And then there’s the issue of just who are are the financiers behind Mortgage Resolution Partners and whether they’ve gone about selling their plan in the right way.
The debate over using eminent domain has sparked a lively debate on editorial pages, on blogs and in other media, and that debate is likely to continue now that Suffolk County, NY says it is looking at eminent domain just like San Bernardino County, Calif. So here’s a bit of sampler of some of the differing views and coverage on this important topic:
Joe Nocera: Housing’s Last Chance?
Robert Shiller: Reviving housing requires collective action
Rep. Brad Miller: No wonder eminent domain mortgage seizures scare Wall Street
UF Weekend Reads
It’s Libor all the time, just not for me.
Earlier I blogged about how the Libor scandal just isn’t getting me as worked up as it is for other journalists (see Joe Nocera’s column today in the NYT). It’s not that I don’t think allegations of market manipulation aren’t important. And this is nothing to take away from the groundbreaking reporting by my Reuters colleague Carrick Mollenkamp did on the matter back in 2008 while he was at the WSJ.
It’s just that in the scheme of things, the allegation that bankers may have conspired to keep Libor artificially low to make their institutions seem more solvent during the height of the financial crisis doesn’t chill me to the bone. Did anyone really believe those institutions were solvent during the crisis? Does anyone really believe banks with hundreds of billions of second-liens on their books and other poorly reserved loans are really solvent today?
We simply say the banks (except for maybe some in the euro zone) are solvent and whistle past the graveyard.
And here’s the thing: we all know how this Libor thing will play out. A bunch of other banks will pay big fines, some other top executives will resign, politicians will hold hearings at which they will rant and rage, a few no-name bankers will go to jail and there will be talk about creating another loan benchmark that probably won’t be any less prone to potential abuse than Libor.
Oh, and the folks on Twitter will rage and pontificate too. But in the process I worry about all that we in the media miss while we get all worked up and go from one big scandal to and another. In the process we ignore the everyday financial crimes that rip-off ordinary people–whether it be lenders assessing unnecessary fees or hucksters pitching higher yielding funds and investment schemes.
Just a week ago, the SEC shut down an apparent Ponzi-like scheme that allegedly bilked $42 million from 400 investors. The pitch was a series of funds investing in mortgage investments that promised 7.5% or more annual returns. On July 2, the SEC froze the assets of a “Georgia-based investment adviser who has apparently gone into hiding after orchestrating a $40 million investment fraud.”
Hedge funds vs. darts
By Matthew Goldstein
The Wall Street Journal used to run a feature in which some of its staffers would periodically pick stocks by throwing darts against a target. The idea was to see how many times stock picking by pure chance could outperform the picks of a bunch of experts.
The WSJ ended the popular feature several years ago but maybe it’s time from someone to bring it back and this time use darts to try to outperform some of top hedge funds managers. That’s because with the average hedge fund up about 1.2% during the first-half of the year, it would seem an investor on his or her own could do just as well picking stocks blindfolded.
Indeed, with the S&P500 up about 8 percent for the first half, the 3.7% gain for David Einhorn’s Greenlight Capital and the 3.9% gain for Dan Loeb’s Third Point don’t look so robust on second glance.
Sure, Einhorn and Loeb are beating a lot of their peers. And they are certainly doing better than John Paulson, who is well on his way to another losing year in his biggest fund. But for all the ink we in the media spill on hedge fund managers, you’d think more would be knocking it out of the park. (Sorry, David your 3rd place finish in the World Series of Poker was great but doesn’t count).
Now to be fair, hedge fund managers don’t just buy stocks like mutual funds. They also short them and buy plenty of other securities. In theory, hedge fund managers aren’t supposed to “kill it” with outsized performance in a given year, but “kill it” by making money for their investors in both good and bad market environments.
So if a manager is up about 4 percent for the year—after those hefty fees–one could argue the managers are doing what they are supposed to.
Libore? The real scandal is still CDOs
By Matthew Goldstein
There is an opaque financial market where pricing is determined by a cadre of Wall Street banks and private emails show that behind the scenes many in the market don’t even believe in what they are doing.
The Libor price fixing scandal? Sure. But what I’m talking about here is the market for the CDOs, which at the end of the day you can still argue did more harm to the world financial system than the allegations now emerging from the Libor scandal.
Don’t get me wrong: I am not defending the apparent misconduct by bankers to manipulate Libor, a benchmark interest rate for lots of commercial and leveraged loans. But it’s still not clear just what the big harm was in the Libor scandal.
One of the allegations is that banks worked together to manipulate Libor to keep the rate low during the financial crisis. Now maybe that helped the banking system, but it no doubt helped borrowers.
And remember, almost no one pays Libor. That’s why in loan docs it always says Libor plus–Libor is the floor rate in any loan.
The thing is, if bankers are really going to be thrown into jail for manipulating Libor, how is it that no one goes to jail for bringing to market a financial product that arguably caused more harm to average people than anything else in recent memory?
The Green Mountain saga: a cup of joe to go
By Matthew Goldstein
In some ways, the story of Green Mountain Coffee Roasters is one of those quirky only in Vermont business stories, with a founder who made a small fortune in the 1970s selling rolling papers to potheads and a board member who helped invent the sports bra. Yet at the same time, Green Mountain is very much a Wall Street saga, with all the requisite highs and lows for its stock and questions about where the fast-growing company is going.
And right now, with shares of Green Mountain trading around $20–down sharply from the all-time high of $115 reached last September–it’s the Wall Street story that matters most.
Critics of the company question whether Green Mountain can maintain a stranglehold on the market for single-cup coffee products with other competitors joining the fray and some patents expiring. And, of course, there’s questions about that ongoing SEC investigation into the company’s accounting practices and how it recognizes revenues.
On Monday, Emily Flitter wrote a story that began taking a close look at the SEC probe and in particular focused on the little-known distribution company, M. Block and Sons, that’s responsible for processing about 40 percent of Green Mountain’s single-cup coffee product.
One thing Emily found was that on at least two other occasions, the SEC investigated accounting practices at two M. Block customers and in both cases M. Block executives were deposed by SEC lawyers. In neither case did the SEC charge M. Block or its employees with any wrongdoing, but regulators did file civil fraud charges against executives of M. Block’s customers.
One of those charged by the SEC was Al “Chainsaw” Dunlap of Sunbeam Corp. The SEC’s lawsuit against Dunlap, which he ultimately settled, became one of those textbook cases for B-school students on the dangers of channel stuffing to juice revenues.
S&P calls baloney on Wall Street’s “cyclical” profit view
By Lauren Tara LaCapra
Ask a Wall Street CEO whether his bank will be able to make as much money as it used to make, once customers start trading and doing deals again. He will inevitably respond with some form of “Yes!”
Ask just about anyone else with a shred of common sense and the answer is more along the lines of “hahaha…you’re kidding, right?”
This conversation is known on Wall Street as the “Structural vs. Cyclical” debate. On the structural side, you’ve got those who are convinced that new regulations, higher capital requirements and clients’ mistrust of big, conflicted i-banks will keep a lid on profits for firms like Goldman Sachs, JPMorgan and Morgan Stanley. On the cyclical side, you’ve got people like Goldman CEO Lloyd Blankfein and JPMorgan CEO Jamie Dimon, who keep insisting that everything will be just fine once various “headwinds” subside.
But the longer this so-called “cycle” of weak Wall Street profits trudges on, the broader the Structural Change Coalition gets.
On Monday, S&P came out with this blaring headline: “The Weakness In Capital Markets Revenues Is More Of A Structural Than Cyclical Phenomenon.”
The news was actually that S&P had become more optimistic in its outlook for 2012 capital markets revenue: analysts now forecast a decline of up to 10 percent instead of up to 20 percent. But because the structural vs. cyclical debate has been raging on for some time, S&P felt the need to come out with a point of view, S&P analyst Stuart Plesser said in an interview.
UF Weekend Reads
The heat is on all across the U.S. as we gear up for the 4th of July. And in Europe, the heat over the euro zone financial crisis seems to have abated for a day at least, judging by Friday’s big stock market reaction.
So is the euro zone financial crisis over? No, and a lot more work needs to be done. It’s also likely that Friday’s rally will give way to more selling pressure by next week. It’s the Madness of Wall Street and it’s simply how things go.
But here’s the thing: this week’s ability of European leaders to move toward getting something done–even if it is just a bigger band-aid–is one more indication that at the end of the day this crisis will be solved in someway. Oh sure, some nations will get hurt–and more importantly a lot of ordinary people that had nothing to do with the financial crisis will get hurt the most. However, maybe it’s time for everyone–especially those in the media, at hedge funds, bloggers and on Twitter–to back away from some of the worst doom-and-gloom hysteria. Yes, things are bad and could get worse, but is the world really coming undone over the euro zone crisis?
Earlier this week, my UF co-leader Jenn Ablan had an exclusive interview with Michael Steinhardt, one of the people who helped make hedge funds famous, and he basically said there was too much hysteria over Europe. And I think he’s onto something.
So on a real hot weekend, maybe it’s time for everyone to chillax–about the euro zone, health care, etc. Sound advice for all of us–even me.
And without further ado, here are Sam Forgione’s weekend reads:
Thank you for some very sensible advice. Calm minds prevail – there’s no need for hysteria.
The eminent domain brush fire
By Matthew Goldstein
It didn’t take long for the powerful voices on Wall Street to rise up in protest over an intriguing and controversial idea to condemn distressed mortgages through local government’s power of eminent domain.
Two weeks after Jenn Ablan and I first reported that officials in San Bernardino County, Calif. were giving serious consideration to the novel idea being pushed by financier-backed Mortgage Resolution Partners, 18 financial trade groups are voicing strong objections. The groups, led by the Securities Industry and Financial Markets Association, are concerned that if local governments can seize underwater mortgages it might discourage bank lending. Why? The argument is that if it can happen now, who knows when local governments might move to condemn mortgages again–crisis or not.
The unified opposition may make it difficult for Mortgage Resolution Partners, which says it is talking to public officials in Nevada, Florida and on Capitol Hill, to get much traction for its plan outside of San Bernardino. And if San Bernardino County goes forward with using private money to buy-up underwater mortgages held by banks and in mortgage-backed securities, a U.S. Supreme Court lawsuit challenging the legality of the measure seems more than likely.
And litigation, of course, takes time and it means it could be two years before any legal challenge to using eminent domain for mortgages get resolved. In other words, the goal of using eminent domain to keep struggling homeowners in their residences by reworking their mortgages in the eminent domain process could be years off.
The trouble is we don’t have two, or three years to wait for a resolution of the worst by-product of the financial crisis, which is that average Americans still sit saddled with too much debt — most of it housing debt. Last October, Jenn and I wrote how some economists were beginning to say “a great haircut” was needed to address all the debt hanging over the heads of ordinary Americans in order to jump-start the economy. And the calls for debt relief have only grown–it’s one reason Yale economist and housing guru Robert Shiller came out in favor of the eminent domain concept in a recent op-ed in The New York Times.
Is eminent domain the answer? It’s too soon to say and it’s not clear if it is constitutional, even though some legal scholars say it is. But if this idea sparks debate that’s not a bad thing.
-
About Unstructured Finance
The Reuters blog where Wall Street and Main Street meet; edited by Matthew Goldstein and Jennifer Ablan.
