NakedShorts

Great days in securities fraud

Mark-to-market. Mark-to-mystery. Now, Mark-to-Madoff.

The Obama administration is close to deciding on a plan to purchase bad — or non-performing and illiquid — assets from banks, according to industy (sic) sources. The plan could be announced early next week.

The so-called “bad bank” plan, would address the key problem of how to price the assets by using a model-pricing mechanism. The model would take account of the government's ability to hold onto assets, even to maturity, and pay for the (sic) them with cheap funding. 

Result: the government might end up paying more
than current market prices for the securities. 

Another triumph for The Price Discovery Suppression Society. And, no matter what, the crookes will be paid. Again. 

Plan for Banks’ Toxic Debt May Be Unveiled Next Week

by Steve Liesman

CNBC Jan. 27 2009

FDIC May Run ‘Bad Bank’ in U.S. Plan to Remove Toxic Assets 

by Robert Schmidt and Alison Vekshin

Bloomberg Jan. 27 2009

A new era error in regulation

Queen Mary Schapiro (right) was sworn in yesterday as chairman of the US Securities and Exchange Commission by commissioner Elisse B. Walter (left). In an unrelated development, operators of the federal employees’ health plan confirmed that it would in future cover counseling and medications prescribed for the treatment of Stockholm Syndrome.

“Having seen what happened during Henry Paulson’s reign at Treasury, most especially the billions in TARP funds shoveled in the general direction of Goldman Sachs’ and its counterparties, and the ever-expanding bailout of AIG (to which Goldman had no...cough...material exposure) we have come to understand that, untreated, this disease can have severely negative ramifications for the commonweal.

“While we do not comment on individual cases, we note that the American Psychiatric Association has identified ‘revolving door disorder’ as a complicating factor in this very serious illness.”

Madoff inquiry: Animal indignities edition

Duck-shoving, ass-covering highlight hearing

The Fooles on The Hill — this time d/b/a Chris Dodd’s Senate Banking Committee — took another swipe at the Madoff Maelstrom today, with a hearing prosaically entitled ‘Regulatory and Oversight Concerns and the Need for Reform.’ The gratuitous insults to animal dignity came, predictably, from two senior US Securities and Exchange Commission executives still showing the tire marks from the bus they were thrown under — mostly deservedly, but still — by the unlamented former chairman.

Duck shoving?

Before I go any further I want to thank the Committee for understanding that because of our collective desire to preserve the integrity of the investigative and prosecution processes there are matters that I cannot discuss today......

...I cannot comment on the pending civil and criminal litigation or the underlying investigations in order to avoid jeopardizing the ongoing legal and investigative processes. In addition, I cannot comment on any historical SEC enforcement investigations of Mr. Madoff, his firm or associated persons because the information is non-public and the SEC's Office of the Inspector General is actively investigating any such prior matters. 

Linda Chatman Thompsen
Director, Division of Enforcement
US Securities and Exchange Commission
Jan. 27 2009

Thanks for that Linda. You can trot back to your office and get to work on your resume.

Ass-covering?

This is an ongoing matter, under investigation by both the SEC's Enforcement Division, and with respect to past regulatory activities, by the SEC's Office of Inspector General. I am not authorized to provide specific information about past regulatory oversight of this firm...

Lines on the Accession of Queen Mary

The US Senate last week voted unanimously to confirm Mary L. Schapiro as chairman of the US Securities and Exchange Commission; she will probably be sworn in this week and move into the office formerly occupied by Christopher Cox once the exorcists are done (and the cleaners have removed that well-thumbed, but heavily tear-stained, copy of ‘Atlas Shrugged’). 

In welcome, NakedShorts would proffer this review of Schapiro’s regulatory career, in doggerel loosely based on the The Vicar of Bray.  

In good King Ronnie’s golden days

As his grasp on reality faded;

He ordained me to the SEC 

And thereby my career made.

Unto the flock I always preach’d

We advocate investors’ interests

And damned are those who dare resist

The grasping regulatory thicket.

And this is law, I will maintain

Unto my dying day, Sir.

That whatsoever King may reign

I’ll be a regulator’s savior!

When Bubba & Bob possest the crown

And bubbles began in fashion;

I went off to CFTC

To further my education.

Wendy Gramm’s rule I found would fit 

Full well my constitution,

Though Brooksley Born it must be said

Was one with intuition!

And to this day, you’ll understand

I’d only gotten girl’s jobs.

So when NASD called me up

And thrust at me $2 million...

News you can’t use

Timmy G. advocates Turbo Tax Dollar

It would probably save a lot of trouble to just include this line in the Secretary of the Treasury’s oath.

A strong dollar is in America’s national interest

Assuming, of course, that America’s national interest includes making exports less competitive, driving consumers (if any) to Bed Bath & Beyond (and similar) for the latest useless carp (Possible typo — Ed) imports, and making Cap d’Antibes apartments more affordable for the little people.

Geithner Says a ‘Strong Dollar’ is in US National Interest

by Brendan Murray

Bloomberg Jan. 22 2009

 

 

Great days in customers’ yachts

M&T v. Deutsche Bank Edition

It’s finally dawning on market players and investors
that Wall Street’s interest and those of
investors have never been aligned...Investors
are beginning to say to themselves: ‘Hey, there
is someone who will benefit if this doesn’t go well.’

While the preferred outcome here would be humiliating defeat for both sides, the answer to two questions would be interesting:

1. How many people at M&T actually read the “390-page offering document with detailed descriptions of the kinds of bonds that would go into” the dodgy CDO; and
   
2. How many of those actually understood that which they read? 

After Sure-Bet Investment Fails, a Bank Contends It Was Duped

by Vikas Bajaj

The New York Times Jan. 20 2008

NOTE: Editorial brain-fart involving the name of the alleged victim bank corrected.

  

* Blushing furiously *

Thanks to Douglas A. McIntyre and Ashley C. Allen at 24/7 Wall Street for ranking these pixels among Wall Street’s Best 25 Financial Blogs. 

24/7 Wall St.'s Best 25 Financial Blogs

by Douglas A. McIntyre and Ashley C. Allen
24/7 Wall Street via Time Jan. 22 2009  

They’re such kidders* at Merrill

Pretty much standard ass-covering:

“Although we vigorously disputed the allegations in these cases, we concluded it was best to avoid the uncertainty, distraction and costs of the litigation, and to try to achieve certainty through these settlements,” Mark Herr, a spokesman for Merrill Lynch...

Except “these settlements” reached $550 million, which seems a little on the high side for “vigorously disputed allegations.” Fortunately, NakedShorts found the first draft of Herr Herr’s statement.

“The allegations of issuing false and misleading statements about CDOs and other assets backed by subprime mortgages were right on the money. If this had gone to trial, a bunch of current and former big shots around here would have had to either admit certain Madoffian tendencies, or perjure themselves. Not only that, regulators and federal prosecutors (if any) might have picked up some clues as to who else they should be asking which questions.

“Fortunately, Panickin’ Hank, in his final loss of bladder control, agreed to pick up the ‘Under New Management’ signs so we buried these bodies while the going was good.”

Merrill to Pay $550 Million to Settle Subprime Mortgage Suits

by Karen Gullo

Bloomberg Jan. 17 2009

Bank of America Receives $138 Billion of Rescue Funds 

by Scott Lanman and Craig Torres

Bloomberg Jan. 16 2009

* Entirely intentional pun. 

I’m from S&P and I’m here to help

NEW YORK, Jan. 14 /PRNewswire/ — Standard & Poor’s, the leading provider of financial market intelligence, has announced the launch of Valuation Scenario Services for Structured Asset Portfolios, a new service to help investors evaluate the intrinsic value of structured assets and complex securities. 

Having made such a huge success of ratting structured assets and complex securities, this is sure to work out just fine.  

S&P Launches Valuation Scenario Services

PR Newswire Jan. 14 2008

Tug o’ the forelock: Fintag

Heckuva job, Dubya

Stolen from Nick Anderson, Houston Chronicle, via Slate

Swindlers’ List (Weekend edition)

Beyond the usual suspects — many carrying business cards with the legend “chairman and chief executive officer,” accompanied by the logo of the Global Megabank NA affiliate of your choice — the Swinding Bastards bubble is still inflating.

From the balmy, barmy soon-to-be-former spring-training home of the Cincinnati Reds:

Investors in a Sarasota-based hedge fund could be out $350 million, and the man behind it has vanished. Managers of the fund are telling clients that their money is gone, and they do not know if any will be recovered.

Fund principal Arthur G. Nadel, a prominent player in Sarasota social and philanthropic [misanthopic, surely? — Ed] circles, disappeared this week. His wife, Peg, filed a missing person report with law enforcement after finding a suicide note...

Meanwhile, in cooler climes:

Idaho securities regulators are investigating allegations that a money manager in the state operated a long-running Ponzi scheme that cost investors as much as $100 million. Marilyn Chastain, securities bureau chief for the state's Department of Finance, said a formal investigation of Daren Palmer of Idaho Falls has been opened following a meeting with about 30 investors there...

...The complaints involve Mr Palmer, 40 years old, and Trigon Group Inc, a company with an office in Idaho Falls that investors say was owned by him. Neither Mr. Palmer nor the firms are registered as investment advisers with state securities regulators.

Reached for comment at his New York apartment*, Bernie Madoff said “Pikers.”

$350 million...gone

by John Hielscher, Michael Pollick & Kevin McQuaid

Sarasota Herald-Tribune Jan. 17 2009

Florida Fund Manager Disappears as Clients Report Missing Money

by Saijel Kishan

Bloomberg Jan. 17 2009

Idaho Man Accused of Ponzi Scheme

by William M. Bulkeley and Steve Stecklow

The Wall Street Journal Jan. 17 2009

* Not really. 

Who said Mary’s FINRA is fast asleep?

Breaking, just in time to take the heat off FINRA chief executive office Mary Schapiro when she shows up in front of the Senate banking committee today, for confirmation as chairman of the US Securities and Exchange Commission. 

FINRA settled a matter that involved a registered representative who misappropriated $50 from a customer. The customer had earned a $50 credit by referring two new customers to the representative’s employer bank. The representative obtained the $50 from the bank but never deposited the funds into the customer’s account. Instead, the representative kept the money for himself. 

FINRA concluded that this conduct violated NASD Rule 2110 (ethical standards) and, as a result, barred the representative in all capacities.

Which should make all those embarrassing questions about, among other things

1. FINRA’s alleged supervision of Bernard L. Madoff Investment Securities LLC;
2. Her finagling of the NASD-NYSE Regulation merger (during which she caught a 50 per cent pay raise, to more than $3 million); 
3. Some mysteriously good things that happened to people (Gary Lynch, lookin atcha!) with whom she had worked during her term as an SEC commissioner;
4. Her longstanding refusal to change the inherently biased mandatory arbitration system; and 
5. And just how somebody who has been a senior member of the regulatory complex for 20 years could so quickly throw off a severe case of Stockholm Syndrome

quietly go away.

Tug o’ the forelock: Paul Springer

Obama's Pick to Head SEC Has Record of Being a Regulator With a Light Touch

by Randall Smith, Tom McGinty And Kara Scannell

The Wall Street Journal Jan. 15 2009

Schapiro to face Senate grilling over SEC nomination

by Joanna Chung, Deborah Brewster and Greg Farrell

The Financial Times Jan. 14 2009

SEC Choice Is Sued Over a Merger of Regulators

by Stephen Labaton

The New York Times Jan. 12 2008

Will This Change Mean Anything?

by Gary Weiss

Gary-Weiss.com Jul. 25 2008

Earlier on NakedShorts

If Mary Schapiro’s the answer...

...it was probably a stupid question

Dec. 18 2008

Cioffi losses recovered in secret deal

Apparently, the trick to getting back money from the Bear Stearns hedge funds that went to the incinerator in mid-2007 was to be a resident of the Commonwealth of Massachusetts, and having secretary of state William F Galvin brew up a secret — whoopth — deal.

During the fall of 2007, Bear Stearns, the parent company, sought to reach what seemed like arbitrary settlements...Those who invested in May or June 2007 and accepted in the offer got all their money back; those who invested between January 2007 and April 2007 and accepted the offer got two-thirds of their money back; and those who invested before January 2007 and accepted the offer received one-third of their money back...

...Galvin’s November 2008 settlement with JPMorgan Chase put $9.3 million back in the pockets of the fortunate Massachusetts investors, giving them 100 cents on the dollar and, in many cases, topping up their original settlements with Bear Stearns...

Investors who may not have fared so well should probably call David Weintraub, the lawyer at JPMorgan Chase who is handling the investor deals. But if the phrase “Go pound sand” comes up, don’t say you weren’t warned. 

Nice job, Bill. Apart from the secrecy bit. But that seems all cleared up now. 

The Bear Stearns Lucky Bastards

by William D. Cohan

The Daily Beast Jan. 14 2008  

Administrative Complaint

In the matter of Bear Stearns Asset Management

Nov. 14 2007

An old well keeps a’ pumpin’

Debra Ryan, having already annoyed the Feds by helping her boyfriend Scammy Bayou on his way last summer, greatly shortened her odds of getting away with a rap over the knuckles and a few months probation. 

The girlfriend of the convicted hedge fund swindler Samuel Israel III, already accused of helping him skip out on a prison sentence, tried to send him $300 in jail, officials said Wednesday. The cash was “secreted in the pages of a magazine” mailed to Mr Israel last month at the Westchester County Jail, a county police spokesman, Kieran O’Leary, said...

Ryan was arrested Friday, and will be formally charged with her latest offense, a misdemeanor carrying a maximum sentence of 12 months, in local court later this month. Her arrest was disclosed in federal court in White Plains, NY, yesterday when she formally entered a not guilty plea to the original charge.

The judge warned Ms. Ryan to have “no contact of any kind” with Mr. Israel in the future and added that to the conditions of her $75,000 bail.

Scammy is currently toying with the shrinks at the Devens Federal Medical Center in Ayer, Mass — the prison to which he was originally sentenced as an act of kindness by Judge Colleen McMahon, acknowledging his claimed physical frailties and pharmaceutical dependencies — while theoretically being evaluated for his fitness to plead on the absconding charges. 

Girlfriend Faces a New Charge in Bayou Fund Case

AP via The New York Times Jan.14 2009

Earlier on NakedShorts

Fairfield threatens Feds’ Madoff grasp

The Feds’ rush to incarcerate Bernard Madoff has nothing to do with the jewelry-laden gyftte boxes he shipped out to assorted friends and family around Christmas. Nope; they’re terrified Mr Plod, of Fairfield, Conn., will get him under lock and key first.

Fairfield officials have begun their own criminal investigation of Bernard Madoff as the town deals with losing $42 million in municipal pension money it invested with the disgraced New York financier.

Deputy Fairfield Police Chief Gary MacNamara says his department will investigate a fraud complaint filed by the town...he expects police to apply for an arrest warrant for Madoff when their investigation is complete.

Fairfield originally invested in Madoff in 1995, through Tremont’s Rye Broad Market fund; it eventually contributed around $20 million (depending on whether you believe the local press report that puts the sum at $17 million, or the one that puts it at $22 million. Details). Tremont founder Sandra Manzke took the account with her when she formed Maxam Capital Management in 2005. 

So that would probably be who town attorney Richard Saxl has in mind when he said “officials will pursue other legal actions to try to recoup as much money as possible.” Always assuming Fairfield’s chief fiscal officer Paul Hiller (below) can find the relevant documents in his filing system.

Conn. town launches own Madoff investigation

AP via New Haven Register Jan. 13 2009

Seeking Jail, Argues Madoff Can’t Be Trusted

by Zachery Kouwe

DealBook (NYT) Jan. 13 2008

Related Fast Fading Hoofbeats News

Fairfield dumps pension consultants

by Genevieve Reilly

Connecticut Post Jan. 9 2009

Lying liars call in expert advisors

The malevolent chimps of the American Securitization Forum, fresh from master-minding the global financial pandemic, have called in AAA-ratted exponents of the black arts of spin-meistering, post-hoc fabulism and plain ol’ makin’-stuff-up to headline their annual conference.

Announcing: Karl Rove and James Carville 

This session will offer a dynamic discussion presenting competing views on the impact of the new administration and the Democratic congress on securitization, and the financial markets generally, given the current market and economic turmoil.

The appearance of Rove (especially) and Carville will be helpful in restoring at least some of the conference’s sleaze ratio, which might otherwise have been severely diluted by the absence of John Devaney and his United Capital Group from its sponsors’ ranks. 

Devaney, 38, paid for comedians Jay Leno and David Spade to perform in previous years. This time, he's sponsoring dinner and a show by the Blue Man Group, a theatrical troupe that sprays paint on the audience and vomits fake food. 

The conference’s ‘Lead Sponsor’ list still happily extends to such pinnacles of securitization probity as FitchRatings, Moody’s Investor Services and Standard and Poor’s. Probably expensing their presence on the promotion budget’s RICO line. 

Non-fake vomit after the jump.

Financially-shrunken shrink. . . psyched!

From the ill wind file, a UConn professor emeritus of educational psychology enlists The Wall Street Journal to help flog his recently-published ‘Annals of Gullibility.’ Ahead of it being relaunched as ‘I’m an Academic, Please Save your $44.95.’

As mentioned, I was a participant — and victim — of the Madoff scam, and have a pretty good understanding of the factors that caused me to behave foolishly. So I shall use myself as a case study to illustrate how even a well-educated (I’m a college professor) and relatively intelligent person, and an expert on gullibility and financial scams to boot, could fall prey to a hustler such as Mr. Madoff.

Warning: The equation resolves as

History + (Common sense dressed as PsychoBunkum) = Yawn.

Consider yourself warned.

Why We Keep Falling for Financial Scams

by Stephen Greenspan (probably no relation)

The Wall Street Journal Jan. 3 2009

Dubai cooling (in more ways than one)

Speaking of rapidly unspooling Ponzi schemes, let’s head, hotfoot, to Dubai, the crane-enveloped entrepôt and money-launderer to a world with rather less money than it thought.

Versace, the renowned fashion house, is to create the world’s first refrigerated beach...next to the new Palazzo Versace hotel...

The beach will have a network of pipes beneath the sand containing a coolant that will absorb heat from the surface...

Obviously, the resort of choice for anybody who forgot to pack their flip-flops. 

Chill out, you beautiful people

by Jonathan Leake

The [London] Sunday Times Dec. 14 2008

Tug o’ the forelock: Raj. 

Madoff restitution, Mugabe-style

Zimbabwe introduces $50 billion note

CNN Jan. 10 2008

It’s Schadenfreude Saturday!

Capping the payoff

Having earned been paid $115 million since 1999 for taking lunch and, on a busy day, pontificating, former Treasury secretary Bob Rubin capped his payoff for helping debauche Glass-Steagall, without which intervention Citi might still be a functional financial institution rather than a ward of state. 

Not forgetting, of course:

Inside and outside the bank, Mr. Rubin is blamed by some for pushing Citigroup to rev up risk-taking as the housing and derivatives bubbles expanded — a move that has saddled Citigroup with tens of billions of dollars in write-downs and necessitated a sweeping government bailout of the financial giant...Citigroup’s share price is down 70% since he came on board. 

In the next turn of the revolving door, NakedShorts has the over/under on Hank Paulson joining the board of JP Morgan Chase (or similar) at Sep. 2009. And is taking the under. (Related links after the jump).

Bailing on another Ponzi

The eponymous J. Ezra Merkin resigned as chairman of GMAC LLC, slipping over the gunwales of the Cerberus-GM joint venture under cover of a “board restructuring” triggered by a TARP-funded bailout that, but for the fact that TARP has no rules other than whatever Hank & Neel say they are, seemed to have broken every rule in the book.

Mr Merkin stands at an intersection of two of the largest current business stories — the federal bailout of the auto companies and the Madoff financial scandal. 

In addition to being chairman of GMAC, Mr Merkin is a hedge fund operator who invested more than $1.8 billion of his clients’ money with Mr Madoff. Mr. Merkin’s three private investment funds — Ascot, Ariel and Gabriel — are among the largest of the so-called feeder funds that placed investors’ money with Mr Madoff without their knowledge, according to the investors. Mr Merkin collected millions of dollars in management fees annually for his work.

Among all the allegedly professional money managers hit by the Madoff fraud, Merkin has been the most egregiously self-pitying, whimpering, in his Dec. 11 letter to his Ascot Partners LP hedge fund investors that “As one of the largest investors in our fund, I have also suffered major losses from this catastrophe.” At least with GMAC off his plate, he’ll have plenty of time for the deposition hell that awaits.(Related links after the jump).

Gross miscalculation

Barrons’ is out with the first part of its annual WrongTable (© Alchemy of Trading) this weekend, and the first question indicates pretty much how everybody did. 

Barron’s: Let’s forget about 2008 — and that includes most of your stock picks. With the market down 36% from its highs, the government bailing out everything in sight and a new president coming to town, what is the outlook for 2009?  

And my personal favorite, if not the worst, of the records on display? (Click for a more legible image).

Of course, at the beginning of 2008 Gross had neither established his stranglehold on Fred Reserve policy, nor had Pimco been named among the four entirely unconflicted investment managers — with Goldman Sachs Asset Mgt, BlackRock Inc and Wellington Mgt Co — that will help Fred’s New York branch buy in $500 billion worth of mortgage-backed securities by mid-2009. So Bill’s 2009 picks, which should show up next week, might be worth following. Unless, of course, he needs to unload a little something on the great unwashed. (Related links after the jump).