Dogecoin: DBeS2gHm79fHsxkYWTatbCYonxxc8fQn4M
Bitcoin: bc1qga4p8wxjvc8vx2l9p5y35ac7t0q0jqf8lmsf9y

Friday, May 29, 2015

Officer Turned Criminal, Discover Financial's Anti-Money Laundering Woes & The Fed Awards $65b In Term Deposits

Fraud charges against William Quigley 
Enforcement action against Discover Financial Services (DFS)
Two penny stock promoters charged in Canada
Fed awards $65 billion in 7-day term deposit offering
OFC publishes a paper that aims to predict stock market crashes
  • The SEC announced fraud charges against William Quigley of Long Island for "fleecing investors and stealing money from a brokerage firm" -- Quigley was the Director of Compliance at the firm. “We allege a classic situation of the fox guarding the henhouse as William Quigley subverted his position of trust as compliance director and stole money from investors and his own firm,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.
  • The Federal Reserve brought an enforcement action against the credit card issuer Discover Financial Services (DFS). The company has agreed to improve anti-money laundering policies through a series of plans that must be submitted to the Fed within 90 days. It is unclear what penalties have occurred or will occur if Discover fails to provide adequate improvements. This also suggests we may be seeing charges brought against Discover in the near future from other regulatory agencies such as the Department of Justice through the Foreign Corrupt Practices Act or the Federal Trade Commission.
  • The SEC charged two penny stock promoters in Canada, Mike Taxon and Itamar Cohen, with manipulating the stock of Raven Gold Corporation (RVNG) and natural gas production company Kentucky USA Energy (KYUS). “Taxon and Cohen lured investors to these stocks by depicting the illusion of an active market and positive market trends,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.
  • On May 28, 2015, the Federal Reserve offered a seven-day floating-rate term deposit with the rate set equal to the sum of the interest rate paid on excess reserves (IOER) plus a fixed spread of 1 basis point. The offering awarded 42 participants a total of $65 billion, $15 billion less than the offering held last week on the same terms.
  • The OFC published a paper that provides readers with a framework that can predict stock market crashes like the 2008 financial crisis. The framework is designed to predict a system-wide collapse with the use of  market liquidity indicators.

Thursday, May 28, 2015

Eurodollar Market, FDIC Reports 7% Increase In Bank Income & Survey Says Americans Unprepared For Economic Downturn

Fed Publishes A Primer On the Eurodollar Market
FDIC Publishes The Quarterly Banking Profile
Fed Publishes The 2014 Survey of Household Economics and Decision-making 

Liberty Economics, the research leg of the New York Federal Reserve, published a post titled The Eurodollar Market in the United States. It provides insight into the Eurodollar market and is a great primer for anyone looking for some background into the market. This comes months before the release of a new rate that will be based on both federal funds and Eurodollar transactions as reported on the FR 2420 Report of Selected Money Market Rates. The rate is expected to provide a broader measure of overnight funding costs for U.S.-based banks as a complement to the fed funds rate.

The FDIC released the Quarterly Banking Profile and it shows a marked improvement in the industry, with a 6.9% increase in net income, and a 2.6% increase in net operating revenue. Community banks lead the industry on net income growth of 16% over last year. Net interest margin continues to struggle, falling 3.02% in the quarter.

The Federal Reserve Board published the 2014 Survey of Household Economics and Decision-making. The survey provides information about how Americans view their economic security. According to the survey, 65% of respondents feel their families are "doing okay" or "living comfortably" financially, 29% say they expect household income to be higher next year. The results also suggest, as can be seen in the video to the left, that many Americans are not prepared for a financial crisis or retirement. Over 5,800 people completed the survey which was conducted in October and November of 2014.

Wednesday, May 27, 2015

Deutsche's $55M Settlement, Fischer in Tel Aviv & Gottbetter Settles For $4.6M

SEC charged Deutsche Bank with misstating financial statements
Vice Chairman of the Federal Reserve Stanley Fischer in Tel Aviv University
SEC charged Adam S. Gottbetter
Timothy Massad, Chairman of the CFTC, before the Natural Gas Roundtable

In the biggest story for the day, the SEC charged Deutsche Bank with misstating financial statements. The misstatement created a "gap risk" that left the general market exposed to higher levels of systematic risk. Deutsche has agreed to pay $55 million to settle the charges.

Vice Chairman of the Federal Reserve, Stanley Fischer, gave a speech at a conference held in honor of Professor Haim Ben-Shahar, ex-president of Tel Aviv University. He used the speech to discuss the ways in which U.S. monetary policy impacts other countries, and vice versa. Ultimately, the speech is an argument for the central bank liquidity swap lines extended from the Federal Reserve during the global financial crisis - the FOMC agreed to extend those lines at the last meeting. Only one committee member dissented on the grounds that this should be a fiscal decision.

The SEC charged Adam S. Gottbetter, a securities lawyer, with orchestrating promotional campaigns for microcap companies, Kentucky USA Energy Inc. (KYUS), Dynastar Holdings Inc. (DYNA), and HBP Energy Corp. (HBPE). He enlisted Mitchell G. Adam and K. David Stevenson to help in the 6 year scheme. According to the announcement, "The three rehearsed stories they would tell if ever questioned by law enforcement." Evidently, according to the announcement, Gottebetter even went so far as to complain about the difficulties of stock manipulation in comparison to robbing a bank. Gottbetter settled charges for $4.6 million and is barred from the penny stock industry. Stevenson also agreed to settle, but the case against Adam will be litigated in federal court in Newark, N.J. The U.S. Attorney’s Office for the District of New Jersey announced similar criminal charges against the trio. “As a securities lawyer, Gottbetter should have served as a gatekeeper and protected the capital markets and investors from fraudsters. Instead, he swung the gates wide open and illicitly profited at investors’ expense,” said Andrew Ceresney, Director of the SEC’s Division of Enforcement.

Timothy Massad, Chairman of the CFTC, gave a prepared speech before the Natural Gas Roundtable. He used the speech to discuss the CFTC's priorities with respect to the natural gas industry including: the steps taken to address the concerns of commercial end users, an update on the new rules on position limits as required by Congress, and the new rules on benchmarks and price indices.

Saturday, May 23, 2015

FOMCs $80b Term Offering, Mortgage Contract Design, Atl's Gray Financial Grp, & The Euro-bond Sell Off Opportunity

The FOMC conducted an $80 billion floating-rate offering on a 14-day term for IOER+.01%
The Fed published the opening remarks at a mortgage contract design conference
The SEC announced charges against Atlanta-based Gray Financial Group
An OFR paper suggests Europe is a hot investment due to QE

  • On May 21, 2015, the FOMC conducted a floating-rate offering of 14-day term deposits with a rate equal to the interest rate paid on excess reserves (IOER) plus 1 bps (IOER +.01%). The offering awarded $80 billion and had 53 participants. The "award" will settle on May 21, and mature on June 4. This is why the fed funds rate dropped a bps point, from .13% to .12% on May 19, one day after the Fed announced the offering, which suggests that while increasing the IOER acts like a magnate to pull interest rates up, term deposits at a rate of IOER + .01% can have the opposite effect. Expect to see this policy tool used frequently in the coming years as the Fed looks for ways to control rates.
  • The Federal Reserve published the opening remarks at the Mortgage Contract Design: Implications for Households, Monetary Policy, and Financial Stability Conference. The remarks were given by James McAndrews, Executive Vice President and Director of Research at the Federal Reserve Bank of New York. The conference is sponsored along with the NYU Stern Center for Real Estate Finance Research. I won't go into the details of this report as I will be providing a full write up due to its significance, but I can say that the speech provides a great deal of insight into the true nature of what drives interest rate design in the mortgage debt market, and therefore the securities that back it. This is a must read. 
  • The SEC announced charges against an Atlanta-based Gray Financial Group, its founder and president Laurence O. Gray, and co-CEO Robert C. Hubbard IV for "selling unsuitable investments to pension funds for the city’s police and firefighters, transit workers, and other employees." To be clear, these are stewards of public pension funds. Evidently, "Georgia law allows most public pension funds in the state to purchase alternative investment funds," the announcements states, "but the investments are subject to certain restrictions that Gray Financial Group’s fund allegedly failed to meet."  The order accuses the group of collecting over $1.7M from investors. Not only did the Group breach their fiduciary duty to the investor, but they profited from the breach of service. Expect heavy penalties if convicted.
  • The OFR published an interesting paper suggesting that Europe is a good place to put you monetary over the next QE season. "Over the last month, long-term euro area bonds experienced a sharp sell-off, leading to outsized moves in other major global bonds, including U.S. Treasuries," the write up states, adding that the, "sell-off reflects a partial unwinding of the euro area “QE trade,” in which investors established sizable positions in euro area bonds, equities, and the euro in response to the European Central Bank’s expanded asset-purchase program." In other words, asset prices went up in the US largely due to QE over the last 5 years, and now that Europe is about to embark on the same journey, the same will happen to euro area bonds and equities, most especially the euro itself. I see this unwinding as opportunity. Expect a new portfolio coming out focusing on euro area equities.

BHP Billiton, Data Jobs Pay $41.04/hr, New Reporting Rules, FOMC Minutes, Real GDP & Arjent LLC

Why Are Interest Rates So Low? 
SEC charges BHP Billiton  
Fed announces more charges against banks
Data jobs pay more? How much?
SEC votes for stronger reporting rules 
The FOMC released minutes from the last meeting
Real GDP increased .2%  
SEC charges Arjent LLC

  • A working paper published by the Federal Reserve titled Why Are Interest Rates So Low?  analyzes the former Chairman of the Federal Reserve System, Ben Bernanke's, three part post about why interest rates are so low.  The paper suggests that Bernanke believes rates are low due to a reduction in the natural rate of interest, saying that "Monetary policy has largely accommodated the decline in the natural rate of interest, in order to mitigate the adverse effects of the crisis, but the zero lower bound on interest rates has imposed a constraint on the ability of interest rate policy to stabilize the economy." The operative phrase is "the zero lower bound on interest rates has imposed a constraint." It implies that the Fed may be inclined to raise rates more so out of a need to be able to impose monetary policy than a real need to tighten economic policy.
  • The SEC charged BHP Billiton with violating the Foreign Corrupt Practices Act (FCPA) as it sponsored the "attendance of foreign government officials at the Summer Olympics." The company has agreed to pay $25 million in penalties to settle the charges. The charges allege that BHP Billiton did not maintain sufficient controls over the program after the company invited over 150 government officials to attend the Games at BHP's expense. “BHP Billiton footed the bill for foreign government officials to attend the Olympics while they were in a position to help the company with its business or regulatory endeavors,” said Andrew Ceresney, Director of the SEC’s Division of Enforcement.
  • The Fed announced that it will impose $342 million each for UBS AG, Barclays Bank PLC, Citigroup Inc., and JPMorgan Chase & Co.; $274 million for Royal Bank of Scotland PLC (RBS); and $205 million for Bank of America Corporation. The Fed also issued cease and desist orders over activities in wholesale FX. Five banks were charged with failing to detect illegal agreements between traders. Bank of America was charged with failing to detect traders that merely discussed the possibility of entering illegal agreements. The Federal Reserve also found UBS, Citigroup, JPMorgan Chase, and Barclays conducted unsafe FX sales. Action is being taken against UBS, Barclays, Citigroup, JPMorgan Chase, and RBS alongside charges from the Department of Justice (DOJ) regarding the FX markets, however, Bank of America was not part of the actions taken by the DOJ. Other actions from entities such as the Connecticut Department of Banking and the New York Department of Financial Services are taking separate actions.
  • According to the Department of Commerce's Economics & Statistics Administration data jobs are growing at a faster clip than non-data jobs. "The unemployment rate for data jobs was just 3.1 percent in 2014, or half the national average," said the official announcement. Data jobs are defined as occupations where data analysis is central to the work performed. 
    Source: Department of Commerce's Economics & Statistics Administration
    The average pay in the private sector for data jobs was $41.04 an hour.  During the Great Recession the unemployment rate related to data jobs was 4.9 percent compared to 9.6 percent for the national average. 
  • SEC voted for stronger reporting rules for investment companies and investment advisers. “These recommendations will vastly improve the type and format of the information that funds provide to the Commission and to investors,” said SEC Chair Mary Jo White.  The new reporting requires a new monthly portfolio reporting form, Form N-PORT. The form will ask for the following information as listed in the press release:
  • Data related to the pricing of portfolio securities.
  • Information regarding repurchase agreements, securities lending activities, and counterparty exposures.
  • Terms of derivatives contracts.
  • Discrete portfolio level and position level risk measures to better understand fund exposure to changes in market conditions.
The proposed rules also call for a new annual reporting form, Form N-CEN, which requires "registered funds to annually report certain census-type information to the Commission and would replace the form currently used to report fund census information (Form N-SAR)."  Additionally, funds must report data in a structured data format, and provide more information about fund financial statements, particularly relating to the fund’s securities lending activities. The new rules also allow mutual funds and other registered investment companies to provide shareholder reports on their website instead of printing and mailing. The comment period for the rules will be open for 60 days.
Source: BEA
  • The Federal Reserve Board and the FOMC released the minutes of the meeting held on April 28-29. I'll discuss my views on the minutes in an upcoming post. 
  • Real GDP increased .2% in the fist quarter compared to 2.2% in the fourth quarter of 2014. The drop was blamed on weather, strength in the dollar, West coast labor disputes, and lower energy prices. Lower energy prices may have dampened the energy economy but it also helped consumer spending, as can be seen in the chart to the right, as well as investments in inventory. However, exports, nonresidential fixed investment, and imports are down considerably.  
  • The SEC alleges that Arjent LLC and its UK-based affiliate Arjent Limited misrepresented themselves to investors on the value of the firm's assets and how investor money would be used. The CEO allegedly transferred the first $2.3 million raised in an offering directly to his own bank account and used it for his personal benefit.“We allege that DePalo and Gladtke sold overvalued interests in Pangaea and then raided investor funds for their own personal benefit,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. The New York County District Attorney’s Office also announced criminal charges against Robert P. DePalo and Joshua B. Gladtke. Gregg A. Lerman was also named in the charges. 

Thursday, May 21, 2015

Construction Up, How Banks Are Supervised, CFTC Meeting Agenda, NDDF & Sethi Petroleum

Residential construction statistics for April 
 Supervising Large, Complex Financial Companies: What Do Supervisors Do? 
The CFTC Market Risk Committee Agenda
NDDF, Sethi Petroleum, & Sameer Praveen Sethi's fraudulent oil and gas investments

The U.S. Census Bureau and the Department of Housing and Urban Development published residential construction statistics for April. Permits were up a staggering 10.1% from March and up 6.4% from April 2014. Housing starts were up 20.2 % from March and 9.2% from last year.

The Federal Reserve published a working paper titled Supervising Large, Complex Financial Companies: What Do Supervisors Do? The paper describes the Fed's "supervisory approach for large, complex financial companies and how prudential supervisory activities are structured, staffed, and implemented on a day‐to‐day basis at the Federal Reserve Bank of New York as part of the broader supervisory program of the Federal Reserve System." The ultimate goal of the paper is to provide an overview of what supervision is in order to determine its impact.  

The CFTC Market Risk Committee is having a meeting on June 2. The agenda is published on the website.

The SEC filed an emergency civil action against Sethi Petroleum, LLC and its president, Sameer Praveen Sethi. The action accuses the firm of offering fraudulent oil and gas investments. Since January 2014 the firm raised ~$4 million "through the fraudulent offer and sale of securities in the Sethi-North Dakota Drilling Fund-LVIII Joint Venture ("NDDF")". The offering materials were for oil and gas wells in the Bakken Shale formation in North Dakota. The firm spent less than 25% for these purposes. The suit accuses the SEC of spending more than 75% of investor funds on unapproved expenditures. As a result "less than $1 million of the funds raised went to NDDF's actual oil and gas operations."

Tuesday, May 19, 2015

FRB Forecasting Models Predict Recovery, IMF On Global Energy Subsidies, and More Insider Trading

The FRBNY DSGE Model Forecast--April 2015
How Large Are Global Energy Subsidies
SEC charged several amateur golfers  
May 2015 Business Leaders Survey
Liberty Economics, the research leg of the NY Fed, published a post titled The FRBNY DSGE Model Forecast--April 2015. The post in the first in a two-part series by about the usefulness of various types of "economic forecasts, such as judgmental forecasts or model-based forecasts." All five models continue to predict "a gradual recovery in economic activity with a progressive but slow return of inflation toward the Federal Open Market Committee’s (FOMC) long-run target of 2 percent."

The IMF published a working paper titled How Large Are Global Energy Subsidies? The paper provides a summary of the updated picture on energy subsidies at the global and regional levels. The paper focuses on the effects of post-tax energy subsides and what happens when consumer prices are below supply costs.

The SEC charged several amateur golfers of insider trading. Douglas Parigian pled guilty to "criminal charges of conspiracy and securities fraud for his role in an insider trading ring involving trading in the stock of Massachusetts-based American Superconductor Corporation." Parigian pled guilty along with Eric McPhail, "for conspiracy and securities fraud and, for Parigian only, lying to FBI agents." Parigian evidently used the information provided by McPhail to profit on the purchase of American Superconductor stock and options. The case against Parigian, McPhail and another individual, Jamie Meadows, is ongoing, according to the press release.

Source: Business Leaders Survey
The Federal Reserve Bank of New York's May 2015 Business Leaders Survey was released on Monday. The survey shows moderate expansion in the region's service sector with the index up two points to 12.8. According to the survey, "respondents continued to view the business climate as worse than normal". The prices paid index also rose three points to 43.9, suggesting continued increases in input prices. At the same time the prices received index slipped two points to 6.6.

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Saturday, May 16, 2015

Fed Conducts More Repos Next Week, Good News For College Grads & Fed Staff Gives Economic Forecast

The FOMC's Statement Regarding Repurchase Agreements
The Class of 2015 Might Have a Little Better Luck Finding a Good Job
Empire State Manufacturing Survey Released
Industrial production Released
FRB staff provides an economic forecast 

The FRB released a "Statement Regarding Repurchase Agreements" regarding the FOMC approved open market transactions for the month of May. The desk plans on conducting "two small-value repo operations next week" from 9:40 – 9:50 a.m. ET on May 19, followed by a multi-tranche (Treasury, agency, and agency MBS) repo operation on Wednesday, May 20. The outcome of this could be interesting as this is the first time I've seen a multi-tranche repo used as the collateral. This is probably the reason why the offering is so small. I suspect it will have no impact, but you never know. 

Postings for College and Non-College Jobs
Source: Liberty Street Economics

Liberty Street Economics, the research leg of the NY Federal Reserve published an interesting article entitled The Class of 2015 Might Have a Little Better Luck Finding a Good Job. The article classifies job openings into two categories: college jobs and non-college jobs. The trend for both is shown in the chart. According to the article, postings for college graduates leveled off around 2013 and then declined slightly around mid-2014, but demand started to pick up again last summer, "rising by more than 10 percent through the first part of this year."

The Empire State Manufacturing Survey conducted by the Federal Reserve Bank of New York was released yesterday. The general business conditions index climbed four points to 3.1% indicating "that business conditions improved slightly for New York manufacturers."  New orders rose ten points to 3.9, shipments were flat and labor market indicators "point to a small increase in employment levels but a slight decline in the average workweek." Prices paid fell ten points to 9.4, the lowest level in almost three years. The Supplemental Survey Report, which provides past and expected changes in prices, will be released May 18 at 8:30 a.m.

Industrial production was released by the Fed on Friday. The index decreased 0.3% in April -- its fifth consecutive monthly loss. Manufacturing output was flat, the mining index was down .8%, its fourth consecutive monthly decrease.

The Federal Reserve Bank of New York (FRBNY) hosts the Economic Advisory Panel (EAP) in spring this year and the staff are presenting a forecast for "U.S. growth, inflation, and unemployment through the end of 2016." This is a short article and I highly recommend you read it in its entirety as it provides an overview of the Fed's view on the economy. This IS the staff recommendation to CEO Dudley and he will likely discuss it with Yellen. "After a period of robust growth during the middle of 2014," the post states, "GDP growth slowed to near zero in the first quarter of 2015, a performance reminiscent of last year."  The staff attributes this weakness to "transitory factors", in other words, the Fed does not see this as a long term problem. As a result, the staff forecast anticipates "that growth will rebound to around 2½ percent (annual rate) over the remainder of 2015 and 2016." The forecast goes on to say, "We see many of the underlying fundamentals of the economy as positive for growth, with household wealth and real income solid, fiscal policy slightly stimulative, and monetary policy still accommodative." Can you say rate hike?

Friday, May 15, 2015

Reg NMS, The FRBs $5B Term Deposit Facility, Nationwide Insurance & More Insider Trading

Commissioner Daniel M. Gallagher is not in favor of Reg NMS.
Federal Reserve will resume testing the Term Deposit Facility 
Nationwide Life Insurance charged
SEC charged a father and son in New York for insider trading
SEC settled with a former Microsoft employee and friend on insider trading charges

  • Commissioner Daniel M. Gallagher gave a statement at the Inaugural Meeting of the Market Structure Advisory Committee. Not surprisingly, Gallagher, being one of the Commission's most vocal advocates against financial regulation, is not in favor of Reg NMS. "Reg NMS in particular," Gallagher states, "has come to stand as the Commission’s poster child for unintended consequences and the need for the Commission to institute retrospective reviews of its rules." He goes on to say, "I am therefore thrilled the Committee is starting its review with an examination of Rule 611 of Reg NMS.  One would be hard pressed to find a more perfect example of regulatory distortion of market competition."
  • The Federal Reserve will resume testing the Term Deposit Facility (TDF). The first two operations will be on May 21 and May 28. The term will be 14-day and 7-day, respectively. The maximum individual award amount will be set at $5 billion, and the rate will be the IOER (currently 25 basis points) plus a fixed spread of 1 basis point. Complete details are to be announced the day prior to each offering.
  • The SEC charged Nationwide Life Insurance Company with violating pricing rules. Nationwide agreed to settle and pay an $8 million penalty. Nationwide’s prospectus "stated that mutual fund orders received before 4 p.m. at its home office in Columbus, Ohio, would receive the current day’s price and orders received after 4 p.m. would receive the next day’s price." However, the investigation found that Nationwide intentionally delayed picking up mail related to its variable contracts business. "Therefore, in spite of receiving customer orders and other variable contract mail in its P.O. boxes at least several hours before the 4 p.m. cut-off time". "For more than a 15-year period, Nationwide intentionally delayed the delivery of untracked mail containing orders from customers and processed them at the next day’s prices in violation of the law," said Sharon B. Binger, Director of the SEC’s Philadelphia Regional Office. Shame on you Nationwide, shame on you.
  • The SEC charged a father and son in New York with conspiring to create an insider trading scheme involving tips of nonpublic information via coded e-mail messages about golf. The SEC alleges that Sean R. Stewart, currently a managing director at Perella Weinberg Partners, a prominent investment bank, routinely provided his father, Robert K. Stewart, with tips and "confidential information about future mergers and acquisitions involving clients of two investment banks where he has worked during the past few years."  Prior to working for Perella Weinberg Partners, Stewart worked at JPMorgan Chase & Co.  The father is a certified public accountant and was arrested Thursday morning. The son has not yet been arrested.
  • The SEC settled with a former Microsoft employee and friend on insider trading charges filed in 2013. The two were accused of unlawfully trading nonpublic information about Microsoft (Nasdaq: MSFT). Brian D. Jorgenson, a ex-Senior Portfolio Manager within Microsoft's corporate finance department and Sean T. Stokke, a long time friend of Jorgenson's, admitted to the scheme and they will both be jointly liable for over $400,000 in " ill-gotten gains realized from their illegal trading as well as prejudgment interest." Both men pled guilty to criminal charges and Jorgenson was sentenced to 24 months in jail, while Stokke was sentenced to 18 months in jail.

Thursday, May 14, 2015

Wednesday, May 13 GAFI Recap: FX&Beyond, The Seaboard Report, Tri-Party Repos, Iftikar Ahmed & The Repercussions Of Being A Failed Bank Director

The SEC filed a subpoena against FX & Beyond Corporation

Ceresney tells companies how to avoid fines through cooperation

Chairman of the FDIC spoke about the repercussions of being the director of a failed bank.

 OFC published "The Influence of Systemic Importance Indicators on Banks’ Credit Default Swap Spreads"

NY Fed published "Financial Innovation: Evolution of the Tri-Party Repo Arrangement"

SEC charged Iftikar Ahmed, an investment professional, with fraud

  • The SEC filed a subpoena against Virginia-based FX & Beyond Corporation and its president, Steve H. Karroum. The subpoena application suggests that the SEC is investigating whether or not the firm and Karroum violated "anti-fraud or other provisions of the federal securities laws through an investment scheme that has raised nearly $4 million and involves possible foreign currency trading, Ponzi payments, and the misappropriation of investor funds," the statement reads. FX & Beyond has failed to respond to the SEC's subpoena in any way and this application is a court order "directing FX & Beyond and Karroum to show cause why they should not comply with the administrative subpoenas." Good luck with that.
  • Andrew Ceresney, Director, Division of Enforcement at the SEC gave remarks at the University of Texas School of Law’s Government Enforcement Institute in Dallas, Texas. Ceresney used the speech to discuss how cooperation with the SEC can result in lower fines. The speech referred to a report called the Seaboard report in which the SEC outlines four broad factors that the SEC considers when making judgement and penalties against a company, they are: self-policing, self-reporting, remediation, and cooperation. Ceresney uses Goodyear Tire & Rubber Company as an example of what cooperation can get you. In the case of Goodyear, it resulted in no penalty at all. "...Seaboard continues to provide a framework under which entities can receive cooperation credit in settlements," says Ceresney. This is a must read for anyone in a regulatory, audit, or legal function of the company.
  • Martin J. Gruenberg, Chairman of the FDIC spoke to the American Association of Bank Directors about the responsibilities and repercussions of being a director of a failed bank. "From the beginning of 2007," says Gruenberg, "through the end of 2014, 510 banks and thrifts failed. That's less than 8 percent of the approximately 6,500 FDIC-insured institutions." He goes on to warn that "The FDIC fully investigates potential claims in connection with all failed institutions, big or small. Actions are not brought lightly or in haste. Most investigations are completed within 18 months from the time an institution is closed, although the FDIC generally has three years, depending on state laws, to file suit against directors and officers." I'm sure he had an extremely attentive audience.
  • The OFC published The Influence of Systemic Importance Indicators on Banks’ Credit Default Swap Spreads. The paper "examines credit default swap (CDS) spreads in a sample of international banks for evidence of a benefit related to possible measures of systemic importance." The authors find that there's a negative relationship between five year CDS spreads of banks "and nine different systemic importance indicators." The benefit is evidently most severe for banks of a certain asset range and weaker for those banks deemed "global systemically important banks".
  • The SEC charged Greenwich, Connecticut, based Iftikar Ahmed an investment professional, with  fraud and self-dealing at Oak Investment Partners, the venture capital firm where he was employed. The charges allege that Ahmed "transferred approximately $27.5 million in illegal profits to accounts under his control at the expense of investors in the Oak funds, including public pension investors."

Wednesday, May 13, 2015

Dudley Talks Fed Funds, SEC Charges ITT, The Quarterly Debt Report, SIFI Progress & The Next FSOC Meeting Is Announced

William C. Dudley, President and CEO of the Fed talks rates
The SEC announced charges against ITT Educational Services Inc.
The NY Fed: Quarterly Report on Household Debt and Credit
The Chairman of the FDIC on SIFI progress
The next FSOC meeting - May 19
  • William C. Dudley, President and Chief Executive Officer of the Fed, gave a speech entitled The Global Implications of Diverging Monetary Policy Settings in Advanced Economies at the Sixth High Level Conference on the International Monetary System: Monetary Policy Challenges in a Changing World in Zurich, Switzerland. Dudley used the speech to discuss the global implications of U.S. monetary policy normalization, especially for emerging market economies (EMEs).  Dudley adds this remark about rates to the introduction: 
To be as direct as possible: I don’t know when this will occur.  The timing of lift-off will depend on how the economic outlook evolves.  Since the economic outlook is uncertain, this means the timing of liftoff must also be uncertain. At the same time, though, I can be clear about what conditions are needed for normalization to begin. If the improvement in the U.S. labor market continues and the FOMC is “reasonably confident” that inflation will move back to our 2 percent objective over the medium-term, then it would be appropriate to begin to normalize interest rates. 
Dudley ends the speech by taking credit for not moving fast enough on rates in 2008, and says, "The largest problems that countries create for others often emanate from getting policy wrong domestically. Recession or instability at home is often quickly exported abroad." Here here.
  • The SEC announced charges against ITT Educational Services Inc., its chief executive officer Kevin Modany, and its chief financial officer Daniel Fitzpatrick. The SEC alleges that the company and two executives fraudulently concealed the true nature of the company's poor performance from investors.  ITT formed two student loan programs to help provide loans for ITT’s students following the collapse of the private student loan market. The company provided a guarantee to investors to purchase the student loan pools. 
Our complaint alleges that ITT’s senior-most executives made numerous material misstatements and omissions in its disclosures to cover up the subpar performance of student loans programs that ITT created and guaranteed. Modany and Fitzpatrick should have been responsible stewards for investors but instead, according to our complaint, they engineered a campaign of deception and half-truths that left ITT’s auditors and investors in the dark concerning the company’s mushrooming obligations. - Andrew J. Ceresney, Director of the SEC’s Division of Enforcement. 
ITT also allegedly made payments on borrower accounts to "temporarily" keep loans from defaulting which would have triggered the beginning of the company's guarantee payments. I've long said the writing is on the wall for the "for-profit" school sector.
  • The New York Fed released the  Quarterly Report on Household Debt and Credit for the first quarter of 2015. "As of the end of March, total household indebtedness was $11.85 trillion, a $24 billion, or 0.2 percent, increase during the first quarter of this year." One thing is also certain, the issue is student loans. "Non-housing debt balances increased by 0.7 percent from the end of last year, largely due to increases in student loans ($32 billion) and auto loans ($13 billion)."
  • Martin J. Gruenberg, Chairman of the Federal Deposit Insurance Corporation gave a speech to the Peterson Institute for International Economics entitled "A Progress Report on the Resolution of Systemically Important Financial Institutions". To see the full speech click below:
Video of Chairman Gruenberg’s Speech to the Peterson Institute (
  • Finally, on Tuesday, May 19, Secretary Lew will preside over the infamous Financial Stability Oversight Council (FSOC) at the Treasury Department.  The agenda includes:
    • An " update from member agencies regarding resolution planning for bank holding companies and a discussion of international market developments." 
    • A discussion of the FSOC 2015 annual report.  
    • A discussion of charters for committees.This meeting can be viewed via webcast here.

Tuesday, May 12, 2015

Tri-party Repos, SCE Survey, SEC on Market Structure & Talk Show Hosts Charged With Fraud

Liberty Economics publishes connects tri-party repo to increased market risk

SCE credit access survey released

SEC charged Stephen Goodrich with fraud

Fed announced that it was barring five ex-private bankers and senior managers of Credit Suisse

SEC Commissioner talks Market Structure

SEC sent out yet another alert warning investors about Government impersonators

SEC charged former radio talk show hosts with fraud

  • Liberty Economics, the research leg of the New York Federal Reserve, published the first article in a two part series about financial innovation titled, Financial Innovation: The Origins of the Tri-Party Repo Market.  "While tri-party repo ultimately evolved in ways that created and amplified systemic risk (as we will describe in our next post)," the authors state, "its origin was as a solution to inefficiencies and risks associated with the repo settlement arrangements prevailing at the time." The post goes on to suggest that the tri-party repo, a financial innovation created to reduce risk more so than increase profits, actually contributes to systemic risk in the market. In the follow up post the authors will show how tri-party repos led to a large increase in volume which allowed for the financing of riskier securities. Very interesting article, I'm looking forward to the follow up.
  • The SCE Credit Access Survey was released. The Survey provides information on consumer credit demand access. Once a quarter SCE panelists are asked about credit applications and their expectations for credit in the future. Information is collected for auto loans, credit cards, credit card limit increases, mortgages, and mortgage refinancing. The April 2015 Survey of Consumer Expectations indicates "that one-year ahead inflation expectations fell while three-year ahead inflation expectations increased." Expectations around earnings and household income growth were unchanged while household spending growth expectations declined.  
  • The SEC charged Stephen Goodrich, 57 years old resident of Rocky Hill, Connecticut, with fraud. Goodrich worked as an un-registred investment adviser from 2006 to 2012 and pled guilty to one count of mail fraud and one count of false tax returns and on February 26, 2015. He was then sentenced to 60 months imprisonment followed by three years of supervised release and ordered to pay $1.8 million in restitution for operating an investment scheme that defrauded 10+ investors out of more than $1.8 million. Goodrich also used $600K of the funds raised for his own personal expenses. 
  • It is rare that the Federal Reserve Board bars individuals, extremely rare, but it happened yesterday. The Fed announced that it was barring five ex-private bankers and senior managers of Credit Suisse, AG, Zurich, Switzerland from working in the banking industry. This is in connection with a civil money penalty against Credit Suisse for failure to comply with certain federal banking laws.  Markus Walder, Marco Parenti Adami, Susanne Ruegg Meier, Michele Bergantino, and Roger Schaerer were all named on the order and were previously indicted for conspiring to "defraud the U.S government by assisting U.S. citizens' evasion of federal income taxes through the creation and maintenance of bank accounts that were not declared to U.S. tax authorities." Walder was the head of Credit Suisse's North American Offshore Banking business, responsible for the bank's "undeclared U.S. cross-border banking business".  He also supervised teams of private bankers in Switzerland and New York. Here's a final statement from the Board explaining the reason for the action:
In issuing today's enforcement actions, the Board found that the continued participation by Walder, Adami, Meier, Bergantino, and Schaerer in the affairs of a depository institution would impair public confidence in the institution.  The prohibition is effective indefinitely, unless the criminal charges against Walder, Adami, Meier, Bergantino, and Schaerer are dismissed.
  • SEC Commissioner Luis A. Aguilar published a public statement entitled "U.S. Equity Market Structure: Making Our Markets Work Better for Investor". The statement discusses the many criticisms of inefficiency concerning the US market structure. These criticisms are coming from industry insiders. The public statement comes just one week after the SEC announced it would be using a pilot of 1400 small caps to increase tick-size from $.01 to $.05. The goal of the change is to reduce market manipulation created via high frequency trading.  In conclusion, Luis remarks that there are more areas that need examination if the markets are to be fair and balanced including:
...the possibility of excessive intermediation in our markets, the reasons institutional investors’ trading costs have failed to see any meaningful improvement in the last 13 years,[184] possible avenues to incentivize market makers to provide liquidity during periods of market volatility, the propriety of the fees that exchanges charge for data and ancillary services and, of course, an in-depth study of the practices employed by high-frequency traders and the quality of the liquidity they provide.
  • The SEC sent out yet another announcement warning investors about Government Impersonators.
SEC staff is issuing this updated Investor Alert because we are aware of continuing fraudulent solicitations that purport to be affiliated with or sponsored by the Securities and Exchange Commission.
  • The SEC charged a retirement planning firm with falsely telling customers "that interests in life settlements they offered and sold were "guaranteed," "safe as CDs," and "federally insured."" The principals of Novers Financial, Christopher A. Novinger and Brady J. Speers, who live in Mansfield, Texas, and hosted a financial radio show called Retirement Experts Radio Show weekly on WBAP-AM (820), were charged yesterday. The charges allege that from 2012 to 2014 the firm sold ~$4.3 million in life settlement interests to 26 investors. The SEC also charged ICAN Investment Group LLC and Speers Financial Group LLC for acting as unregistered broker-dealers.

Saturday, May 9, 2015

Jackson's "Hard Money" Panic of 1837, New Fed Group, Automated Investor Tools, DATA Act Phase II, Fraud & What Do Negative Nominal Rates Mean?

  • Was the panic of 1837 was caused by Andrew Jackson's "hard money" policies?

  • New Group at the Federal Reserve?

  • Dudley's in the Bronx

  • Beware of Automated Investor Tools

  • Phase II of the DATA Act

  • What do negative nominal rates mean?

  • ClearPath Wealth Management charged with fraud by SEC

Liberty Street Economics, the research leg of the New York Fed, published a paper entitled Crisis Chronicles: The Man on the Twenty-Dollar Bill and the Panic of 1837. Jackson believed that gold and silver were the only "real money" and demanded that all land purchases be made in "hard money". According to the article, "he despised the elites running the banking system, so he embarked on a crusade to abolish the Second Bank of the United States (the Bank). Both of these efforts by Jackson boosted the demand for specie and revealed the soft spots in an economy based on hard money." This article ultimately shows how this move toward "hard money" led to the Panic of 1837. 

The Federal Reserve Bank of New York announced a new group called the Wholesale Product Office (WPO) which will be managed by Richard P. Dzina as executive vice president and Group Head. Prior to this role, Dzina ran the market operations, monitoring and analysis function in the Markets Group. The WPO will manage the "Fedwire Funds, Fedwire Securities and the National Settlement Service."  “The designation of the Wholesale Product Office as a stand-alone group with direct reporting to the president of the Bank reflects the critical nature of these payments and settlement services to our financial system,” said William C. Dudley, president and CEO of the New York Fed. 

William C. Dudley, the same one mentioned in the note above, also gave remarks at the 17th Annual Bronx Bankers Breakfast. Dudley used the time to provide an overview on the benefits of community banking and the need for greater support of small business at the community level.

The SEC issued an "Investor Alert" against automated investment tools. According to the announcement, tools range from "personal financial planning tools (such as online calculators) to portfolio selection or asset optimization services (such as services that provide recommendations on how to allocate your 401(k) or brokerage account) to online investment management programs (such as robo-advisors that select and manage investment portfolios)." In particular, the SEC warns against tools that promise better portfolio performance. 

A year ago Congress passed the Digital Accountability and Transparency Act of 2014, or the DATA Act. The goal of the act was to create a "more data driven government" by making it more available and transparent to those that need it. Yesterday marked the beginning of the next phase of the DATA Act. Over a two-year period the DATA Act will be requiring Federal agencies to streamline the reporting process by reporting funds received from the government into specific pre-determined categories. It will also require agencies to use common government-wide data standards when posting information. 
Today we are beginning the rollout of 57 data standards. Some are final based on public input we have already received, and others will require additional input as we finalize them this summer. As a result of input from our partners in Congress, industry stakeholders, federal agencies, and taxpayers through feedback on our public GitHub collaboration space, 15 final data standards available today will be used by all agencies for all federal spending data posted on, the Federal Government’s one-stop shop for spending data..
The 2016 budget should allow for $84 million to help agencies make progress in implementing the DATA Act. 

James McAndrews, Executive Vice President and Director of Research gave remarks at the University of Wisconsin. In a speech entitled Negative Nominal Central Bank Policy Rates: Where Is the Lower Bound? Andrews discussed how the Swiss National Bank (SNB), the European Central Bank (ECB), Danmarks Nationalbank (DNB), and the Swedish Riksbank "have pushed short-term interest rates to levels below the “zero lower bound.”" And refers to the depth of the action as unprecedented. The main question is whether or not a "zero lower bound" is even valid -- what does it mean? He uses the speech to suggest that:
...the zero lower bound on policy interest rates is much like the low tide mark on a beach: Standing at that border between the land and the ocean, you can continue to lower your elevation by walking into the water, but with each additional step, you will need to push against the increasing resistance of the water. There is a distinct qualitative difference between positive and negative nominal interest rates, just as there is a distinct qualitative difference between the beach and the ocean.
The SEC charged Rhode Island investment adviser, ClearPath Wealth Management, LLC, and its president and owner, Patrick Evans Churchville, with fraud "for operating a fraudulent scheme that resulted in at least $11 million in losses to investors." Clearpath and Churchville diverted deposits from new investors into old investors' accounts and stole $2.5 million of investor funds to purchase a waterfront home in Rhode Island. Four other entities are named on the order as relief defendants including: ClearPath Multi-Strategy Fund I, L.P., ClearPath Multi-Strategy Fund II, L.P., ClearPath Multi-Strategy Fund III, L.P., and HCR Value Fund, L.P. The SEC is seeking disgorgement of gains. 

Upcoming Events

Tuesday, May 12, 2015: Andrew Ceresney, Director, Division of Enforcement and Stephanie Avakian, Deputy Director, Division of Enforcement, will participate in the Annual White Collar Crime Institute. 1:30pm. Location: New York City Bar Association, 42 West 44th St., New York, Contact: Darianne Deleon, 212-382-6731,

Wednesday, May 13, 2015: Andrew Cereseny, Division of Enforcement, will give the keynote presentation at the University of Texas School of Law 2015 Government Enforcement Institute @ 10 a.m. (9 a.m. CT), Location: Bello Mansion, 2101 Ross Ave., Dallas. Contact: Sarah Hollingsworth,

Wednesday, May 13, 2015: SEC senior officials and staff will participate in the Securities Enforcement Forum West 2015, including Enforcement Director Andrew Ceresney, San Francisco Regional Director Jina Choi, and Los Angeles Regional Director Michele Wein Layne. @ 11 a.m. (8 a.m. PT) See agenda for details. Location: Four Seasons Hotel, 757 Market St., San Francisco, Contact: Bruce Carton,

In Case You Missed It
  • Monday, May 4, 2015 Recap: FRB Reports on Credit & Lending Practices, May CRA, Deutsche Bank Maintains WKSI Status, Peer Analysis May Lead To Overvaluation  
  • Tuesday, May 5, 2015 Recap: Does Compliance Matter For Bank Performance, Alger Fair Fund Established, FTC Allows $12.4B Merger
  • Wednesday, May 6, 2015 Recap: Does Tick Size Matter, Asia Economic Review, FDIC Strategic Plan, Low GDP Blamed on Baby Boomers, and The FRAC Wants You! 
  • Thursday, May 7, Recap: CCP's, #MMT Fraud, Census Data Reports, LSAPs & IFRS

Last week 

  • Monday, April 27, 2015 Recap: Credit Detail, More CFTC Charges, Puzzling Low T-Yields, and the Fed Testifies Before The Senate 
  • Tuesday, April 28, 2015 Recap: Ex-Evercore Banker & Girlfriend Charged, IMF on Islamic Banking, Bank Profitability, and a $600K Payday For Whistleblower 
  • Wednesday, April 29, 2015 Recap: Fed Funds, Bernake's Response To Taylor's Rebuke, GDP, China's Looming RE Battle & Pay Vs. Performance 
  • Thursday, April 30, 2015 Recap: Algorithmic Trading, Community Banks, Personal Income Report, Another FX Scheme, Banking Applications and Compliance Outreach
  • Friday, May 1, 2015 Recap: Financial Literacy, 18yrs For Investment Fraud, FCStone Sanctioned, Pan-African Banks, Piwowar's Dissent and Alaska's $51B Fund

Two Weeks Ago 
  • Monday, April 20, 2015 Recap: Treasury Auctions, FX Ponzi, BlackRock Fail, Dudley's Fed Speech, and the FFER
  • Tuesday, April 21, 2015 Recap: More Regulation For Large Banks, Youth Savings, Piwowar's Speech, Flash Crash Culprit, the OFAC & FNRG Halted
  • Wednesday, April 22, 2015 Recap: #EXIM2015, Obama's PPPs, Goldman Sachs In The "Dark", $1.5M Payday, Massad Speaks, and Yellen Stabilizes
  • Thursday, April 23, 2015 Recap: GDP, Deutsche Bank, Community Banks, Repos, and the Treasury Gets New Blood
  • Friday, April 24, 2015 Recap: New Federal Reserve Auditor, Inventories Up, CEI Same, Insider Trading, Fair Fund Delays & Alizadeh's Grand Jury Indictment