Spitzer’s Settlement Two Years On
Posted by Eddy Elfenbein on August 30th, 2005 at 12:04 pm

Eliot Spitzer made quite a name for himself taking on Wall Street. Two years ago, he forced the biggest firms on Wall Street into a global settlement due to conflicts of interest between research and investment banking. The firms had to pay over $1.4 billion. The money was supposed to go to investor education, independent research and investors who were harmed. Instead, it’s turned into a money grab among competing federal and government agencies.

Most of the $413 million that went to the states, based on population, went to help balance state budgets (or close big gaps). California had the largest share–$43 million. It put $40 million into its general fund and reserved $3 million for investor education. So far, it has spent $150,000 on a campaign to teach military personnel and their families how to avoid financial scam artists.

More on Bayou
Posted by Eddy Elfenbein on August 30th, 2005 at 10:14 am

The New York Times has more on the fall the Bayou hedge fund.

“It’s not logical to me,” said Leon Meyers, an investor in Bayou who is still baffled by the indications of possible fraud at the firm. “If this was a Ponzi scheme, why would the firm go through a voluntary liquidation, when all this would come to light?”

The Wall Street Journal has more on Bayou’s clients. Also, The Stamford Advocate has a good article on the investigation.

The Collateralized Debt Obligations Market
Posted by Eddy Elfenbein on August 30th, 2005 at 9:53 am

The market for collateralized debt obligations, or CDOs, is the fastest-growing business on Wall Street.

Banks create CDOs by bundling together assets ranging from mortgages to loans to high-yield bonds, with income from those assets used to repay investors. The securities are divided into pieces, or tranches, that can offer yields as high as 14 percent, said Nestor Dominguez, 48, co-head of Citigroup’s North American CDO group in New York. Average investment-grade bonds yield 5.1 percent and junk bonds yield 7.5 percent, according to Merrill.
“The high yields have created great demand for CDOs from hedge fund managers and arbitrageurs,” said Thomas Eggenschwiler, 47, co-head of fixed-income research at Aladdin Capital Management LLC in Stamford, Connecticut, which oversees about $3.5 billion and buys the securities.
CDO fees usually equal about 1.5 percent to 1.75 percent of the size of a deal, bankers who arrange such sales say. That’s more than triple the average 0.4 percent that banks charge to sell investment-grade bonds and about the same as fees on junk bonds, traditionally the most lucrative, Bloomberg data show.

Many CDOs are “synthetic,” meaning they’re backed by credit default swaps. Although Greenspan has spoken favorably of credit default swaps, the growth of this market has led to meeting to a meeting of top Wall Street firms next month at the New York Fed to discuss credit derivatives.

Reuters: China Defends Yuan Policy
Posted by Eddy Elfenbein on August 30th, 2005 at 9:37 am

China defended its currency regime on Tuesday ahead of a visit to the United States by President Hu Jintao, but hinted at possible future changes by saying it would “develop and perfect” the exchange rate.
Some U.S. politicians and industry groups complain that the yuan’s small revaluation last month will do little to address the yawning U.S. trade deficit, and hope President Bush will press Hu on the matter when they meet next week.
In a briefing about Hu’s trip, He Yafei, director-general of the Foreign Ministry’s department of North American and Oceanian affairs, said the reforms to the yuan, also known as the renminbi, fit China’s reality.
“We will further develop and perfect the renminbi exchange system with a firm heart,” He said.
He said that currency issues were a matter of national sovereignty and that Beijing had always taken a responsible attitude toward the exchange rate.
“We have taken into consideration the practical situation of China’s economic development and how to maintain the financial and economic stability of the region and the world,” He said.
Critics accuse Beijing of keeping the yuan undervalued so as to make its exports cheaper on the world market.
On July 21, the central bank revalued the yuan by 2.1 percent and dropped the dollar peg in favor of managing the exchange rate with reference to a basket of currencies.
Hu visits the United States from September 5 for talks also expected to feature concerns over Taiwan and the trade deficit.

Greenspan Warns
Posted by Eddy Elfenbein on August 30th, 2005 at 8:58 am

Financial Times

Greenspan Warns Successor

The Telegraph

Greenspan Warns of the Dangers from Capital Gains

NewsHour

Greenspan Warns of Growing Risks to U.S. Economy

Smart Money

Greenspan Warns of Rise in Risk Tolerance

Myrtle Beach Sun News

Greenspan Warns Homeowners

BBC News

Greenspan Warns on Protectionism

The Washington Post

Greenspan Warns End of US Housing Boom Inevitable

Globe and Mail

Greenspan Warns on Deficits

Financial Times

Greenspan Warns on Dangers in US Housing Market

The Spoof

Alan Greenspan and Jessica Simpson Burned in Effigy After Warning of House Price Crash

Police Arrest NYSE Member for Death Threat Against Fellow Member
Posted by Eddy Elfenbein on August 29th, 2005 at 2:40 pm

Wall Street can be a tough place. According to police, Edward A. Reiss made a death threat against William Higgins. Higgins has been opposed to the New York Stock Exchange’s plan to buy Archipelago.
Here’s more on Reiss:

“In the past 10 years, electronic technology has transformed the Exchange at lightening speed,” says Ed.
Although Ed marvels at the computerization of the floor, there have been no advances in saving shoe leather. He’s in constant motion, running from the Main Room to the Garage and back, shouting and gesticulating in a lingo unique to the Exchange.

Bayou Hedge Fund
Posted by Eddy Elfenbein on August 29th, 2005 at 10:17 am

Two weeks ago, Eric Dillon went to the offices of Bayou Management. He’s a money manager and he wanted to find out what was happening at the hedge fund. The fund had abruptly shut down, and despite promising to return everyone’s money, no money had been dispersed. Also, no phone calls were being returned. Dillon knocked on the Bayou’s front door, but no one came. He came in through an unlocked back door, and on the CFO’s desk, he found a letter that began, “This is my suicide note and confession.”
The Wall Street Journal has the whole story. Also, Gretchen Morgenson wrote about Bayou on Sunday.

Foreigners are Pouring Cash into Emerging Markets
Posted by Eddy Elfenbein on August 29th, 2005 at 9:48 am

The Economist has an interesting article on the sudden interest in emerging markets.

Between the beginning of June and the week ending August 17th, emerging-market equity funds took in a net $6.94 billion. That brings the year’s total to $8.74 billion, nearly three times 2004’s level and more than the previous high of $8.6 billion for all of 2003. Bond funds tell the same story, with total net inflows this year of $4.74 billion, a record.

Many emerging markets are doing very well, plus the risk is much lower than it was eight years ago.

Google Watch
Posted by Eddy Elfenbein on August 29th, 2005 at 9:19 am

UBS lowers its earnings estimate due to the secondary stock offering.

For 2006 and 2007, UBS lowered the earnings-per-share estimates on Google to $7.57 and $9.30, respectively, down from $7.60 and $9.43, citing the impact of an offering of about 14 million shares expected in the third quarter.

Bankruptcy Abuse Prevention and Consumer Protection Act
Posted by Eddy Elfenbein on August 29th, 2005 at 9:05 am

There’s another hurricane headed towards Wall Street. On October 17, the new bankruptcy law goes into effect. The old law is considerably more liberal, so many companies are expected to file before the deadline. Both Northwest Airlines and Delphi have said that they’re contemplating filing under the old law. The new law is aimed at reducing abuses of bankruptcy proceedings and it makes declaring bankruptcy more difficult. But like all laws, there will be unexpected side effects.

Certain provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act will give airlines and other troubled companies less breathing room than in the past to settle their debts and continue in business, rather than liquidate. Among other things, they will have a harder time deferring payment of utility bills to conserve cash. In addition, new restrictions on executive compensation will make it tougher to retain or hire the top-notch managers required to pull off a corporate turnaround.
Some of the provisions may seem esoteric, but they are sweeping in their implications. For instance, the law imposes an 18-month limit on the incumbent management’s exclusive right to propose a reorganization plan. This ability to control the ball is the debtor’s most powerful means of persuading contending groups of creditors to compromise. Under the new arrangement, one faction might obstruct negotiations until it gets a shot at proposing its own, self-serving plan.

One of the fears is that distressed companies will dump their real estate holdings to raise money. That could put undue stress on the overheated real estate market.

The new law’s consumer-related provisions stirred considerable controversy. The no-less-important corporate rule changes received negligible attention, outside the circle of bankruptcy specialists. Now investors must live with the consequences. That will mean dealing with dramatically increased uncertainty, at least until the bankruptcy courts handle a fair number of cases under the new rules.