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Thursday, June 18, 2015

SEC Charges 36 Firms In Massive Muni-Underwriting Shakedown Including Citigroup, Merrill, Morgan Stanley & Goldman Sachs

The SEC announced enforcement actions against the banks listed below. These are actions specifically for violations in municipal bond offerings. What's interesting about this case is that banks got off easy.

As a way to incentive banks to self-report material misstatements and omissions in muni-offerings the SEC offered firms favorable terms for self-reporting. This is referred to as the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative.

“The MCDC initiative," said SEC Chair Mary Jo White, "has already resulted in significant improvements to the municipal securities market, including heightened awareness of issuers’ disclosure obligations and enhanced disclosure policies and procedures. This ongoing enforcement initiative will continue to bring lasting changes to the municipal securities markets for the benefit of investors.”

LeeAnn Ghazil Gaunt, Chief of the Enforcement Division’s Municipal Securities and Public Pensions Unit had this to say, “The settlements announced today reflect these underwriters’ cooperation in self-reporting their own misconduct and agreeing to improve their procedures going forward. Because these 36 firms underwrite a substantial portion of the country’s municipal bonds each year, we expect a large number of bondholders will benefit from the resulting improvements in due diligence and disclosure.”

The firms did not admit or deny the findings, but agreed to "cease and desist" from any future violations -- typical legal doublespeak.

The maximum penalty for each firm was $500,000.  Of the 36 firms charged, 8 received the maximum penalty.

Link to the SEC’s orders and penalty amounts:
•           The Baker Group, LP – $250,000
•           B.C. Ziegler and Company – $250,000
•           Benchmark Securities, LLC – $100,000
•           Bernardi Securities, Inc. – $100,000
•           BMO Capital Markets GKST Inc. – $250,000
•           BNY Mellon Capital Markets, LLC – $120,000
•           BOSC, Inc. – $250,000
•           Central States Capital Markets, LLC – $60,000
•           Citigroup Global Markets Inc. – $500,000
•           City Securities Corporation – $250,000
•           Davenport & Company LLC – $80,000
•           Dougherty & Co. LLC – $250,000
•           First National Capital Markets, Inc. – $100,000
•           George K. Baum & Company – $250,000
•           Goldman, Sachs & Co. – $500,000
•           Hutchinson, Shockey, Erley & Co. – $220,000
•           J.P. Morgan Securities LLC – $500,000
•           L.J. Hart and Company – $100,000
•           Loop Capital Markets, LLC – $60,000
•           Martin Nelson & Co., Inc. – $100,000
•           Merchant Capital, L.L.C. – $100,000
•           Merrill Lynch, Pierce, Fenner & Smith Incorporated – $500,000
•           Morgan Stanley & Co. LLC – $500,000
•           The Northern Trust Company – $60,000
•           Oppenheimer & Co. Inc. – $400,000
•           Piper Jaffray & Co. – $500,000
•           Raymond James & Associates, Inc. – $500,000
•           RBC Capital Markets, LLC – $500,000
•           Robert W. Baird & Co. Incorporated – $500,000
•           Siebert Brandford Shank & Co., LLC – $240,000
•           Smith Hayes Financial Services Corporation – $40,000
•           Stephens Inc. – $400,000
•           Sterne, Agee & Leach, Inc. – $80,000
•           Stifel, Nicolaus & Company, Inc. – $500,000
•           Wells Nelson & Associates, LLC – $100,000
•           William Blair & Co., L.L.C. – $80,000

Saturday, June 6, 2015

Fed's CEO Talks Rate Hike Timing, Consumer Credit Up 7.25% & SEC Charges $CSC

William C. Dudley, President and Chief Executive Officer of the Federal Reserve, gave remarks at the Economic Club of Minnesota’s June Luncheon in Minneapolis on Friday. In his remarks he provided his views on the timing and pace of rate hikes over the short- and long-term. It's clear that Dudley is less optimistic about growth, but he's still hopeful about the future in terms of inflation and labor trends. 

"Putting this all together," he says, "I still think it is likely that conditions will be appropriate to begin monetary policy normalization later this year." Dudley also takes some time to address concerns that the Fed has the ability to control the fed funds and the impact of a rate hike on asset prices. 

"We have the appropriate tools to push up short-term interest rates," Dudley says. "However, lift-off may not go so smoothly in terms of the impact on financial asset prices. After all, lift-off will represent a regime shift after more than six years at the zero lower bound." Only time will tell.

The SEC charged Computer Sciences Corporation (NYSE: CSC) and its executives with manipulating financial results. Former finance executives involved with the company's international businesses were also charged for ignoring basic accounting standards. CSC agreed to pay $190 million, former CEO Michael Laphen agreed to return more than $3.7 million under the clawback provision and pay a $750,000 penalty, and former CFO Michael Mancuso will return $369,100 and pay a $175,000 penalty. Allegedly items were added to the company's accounting models that artificially increased profits leading to significant reductions in company earnings in 2010 and 2011. 

“When companies face significant difficulties impacting their businesses, they and their top executives must truthfully disclose this information to investors,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement. 

The SEC also found that finance executives in Australia and Denmark manipulated financial results of the company’s businesses in those regions. "They overstated CSC’s operating results by more than 5 percent in the first quarter of fiscal year 2009 and allowed the company to meet analysts’ earnings targets during that period," the report said.The stock currently trades at $67.69 and is up 41.67% in the last 5 years.

According to the Federal Reserve, consumer credit increased at an annual rate of 7.25% in April. Revolving credit is up 11.5%, while non-revolving credit increased at 5.75%.

Friday, June 5, 2015

Fry's Electronics' Bank Fails FDIC Inspection & SEC Freezes $2M In Assets

The June 2015 List of Banks Examined for CRA Compliance was published. As usual, most banks passed, however, there were two that received a "needs to improve" including: Sewickley Savings Bank or Sewickley, PA, and First State Bank of Socorro, NM. Only one bank, First Electronic Bank of Sandy, UT, received a non-compliance rating. First Electronic Bank is a wholly owned subsidiary of Fry's Electronics. This is the first time I've seen this low rating given out. 

The SEC froze $2 million in assets of two brokerage accounts connected to trading schemes. The schemes were set up to manipulate Avon and other stocks.  
Only three weeks after the manipulation of Avon stock occurred, this emergency court order keeps not only the alleged illicit profits from being transferred offshore, but preserves the SEC’s ability to recover substantial penalties. -Andrew Ceresney, Director of the SEC Enforcement Division
Strategic Capital Partners Muster Ltd., Strategic Wealth Investments Inc., and PTG Capital Partners LTD were also charged. According to the announcement, the stock schemes: 
followed similar patterns where the accounts had substantial holdings in a company that had been losing value and the companies’ stock values substantially increased after a false filing or press release originating from Bulgaria.
Evidently, the firms hid behind proxy serves, false filings and phony foreign entities to hide their tracks, a strategy which clearly didn't work.

Thursday, June 4, 2015

Balance With OPEC Shifted To Surplus, Beige Book Shows Expansion, and Insider Trading Schemes

  • The U.S. Census Bureau and the Bureau of Economic Analysis (BEA) announced that the goods and services deficit was down almost $10 billion, from $50.6 billion in March. April exports were ~$190 billion, or ~$2 billion more than March. Imports were $7.8 billion less than March. The report also showed a deficit increase of $6.4 billion to 89.1 billion with China. Additionally, and perhaps most salient, the "balance with OPEC countries shifted from a deficit of $1.5 billion to a surplus of $6.2 billion." 
  • The Beige Book was released. The report, which is consolidation of the twelve Federal Reserve Districts, says economic activity expanded from early April to late May. The pace of growth increased in all areas except Dallas and Atlanta. This is just the kind of data Yellen would need to see prior to the June meeting in order to commit to a rate hike.
  • The SEC announced charges against day trader Steven Fishoff, his brother-in-law Steven Costantin, his friend and neighbor Ronald Chernin, and his friend Paul Petrello, also a former day trader who resides in Florida. The U.S. Attorney’s Office for the District of New Jersey also filed criminal charges against the foursome. The SEC alleges that the four were engaged in a $4.4 million insider trader scheme which involved at least 15 stocks. Evidently, the group posed as portfolio managers in order to get information out of investment bankers with insider information in exchange for business. Ballsy.

Wednesday, June 3, 2015

Is There An FOMC Data Disconnect & New DFA Stress Tests For Medium Sized Banks

Federal Reserve Governor Lael Brainard Talks About The FOMC Data Disconnect
The Fed Issued A Joint Release On Stress Test Requirements For Medium Sized Banks
A summary of noteworthy news and publications from financial regulatory and supervisory agencies on June 2, 2015.
This spring marks the end of the Federal Reserve's calendar-based forward guidance and the return to full data dependency in the setting of the federal funds rate. So it is notable that just as policy making is becoming more anchored in meeting-by-meeting assessments of the data, the data are presenting a mixed picture that lends itself to materially different readings.
These were the words of Federal Reserve Governor Lael Brainard in a speech delivered at the Center for Strategic and International Studies. This is the first speech I've seen coming out of the Fed to acknowledge the disconnect between Federal Reserve Staff Forecast data and the real data that's coming in. Fed staff believes Q1 was transitory, but the data suggests that low growth may be the norm. 

Brainard is clearly not in favor of a rate hike in June, but he hasn't ruled one out for the year and reminds the audience that "the stance of monetary policy will remain highly accommodative even after the federal funds rate moves off the effective lower bound, because the real federal funds rate will initially still be low and because of the elevated size of the Federal Reserve's balance sheet and the associated downward pressure on long-term rates." This is a point most don't appreciate -- the Federal Reserve isn't lowering the real fed funds rate, only the interest rate on excess reserves. The hope is that raising this rate will also increase the fed funds rate, but the actual fed funds rate will start off low. June 17, the date of the next FOMC "statement", should be interesting.

In other regulatory news, the Board of Governors of the Federal Reserve System issued a joint release with the FDIC on the Dodd Frank Wall Street Reform and Consumer Protection Act (DFA). The DFA states that starting in June 2015, banks, federal and state savings associations, and bank holding companies with assets between $10 billion and $50 billion must undergo stress tests "that include the annual public disclosure" of test results. Starting June 2015, medium sized banks will be required to "publicly disclose DFA stress test results on an annual basis." The press release stated that the test requirements are significantly less than they are for large banks so this should have little impact on stock prices.

Tuesday, June 2, 2015

Disposable Income Up, Merrill Lynch's ETB Charges, Buyouts & Beta, Monetary Policy Vs Income Inequality And More

  • Personal income and disposable income went up 0.4 percent in April, according to the Bureau of Economic Analysis. In March, personal income decreased less than 0.1% and disposable income increased less than 0.1%. 
  • Merrill Lynch was charged by the SEC for using inaccurate data for short sale orders. The firm is expected to pay $11 million to settle the charges. “Firms must comply with their short-selling obligations by making sure they do not rely on inaccurate ETB lists,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “When firm personnel determine that a security should no longer be considered easy to borrow, the firm’s systems need to incorporate that knowledge immediately.”
  • Liberty Street Economics, the research leg of the New York Federal Reserve, published a fascinating paper titled What Drives Buyout Booms and Busts? The paper suggests that buyout activity is a function of the overall risk in the market more so than the availability of financing. The authors use the cost of capital to show that when the risk premium increases, the discount rate for firms with high beta increases at a faster rate. "By extension," the authors figure, "the present value of the buyout declines more for high beta firms than low beta firms." As a result, when the risk premium is high there are fewer buyouts of higher beta firms. The authors expect the same logic to hold true for IPO's, mergers and acquisitions, and other types of corporate actions; that is, corporate actions are a function of the time variation in the risk premium more so than access to credit. It's hard to say what the ultimate implication of the paper is for investors, but it appears to be saying that this is a great time to own high beta stock.
  • Liberty Street Economics published another fascinating paper titled Regional Heterogeneity and Monetary Policy in which the authors looked at the effect of monetary policy on households in different regions of the country. "We find," said the authors, "that if regions with low relative income also have depressed collateral values (as in 2008), then expansionary monetary policy will further exacerbate regional dispersion of economic activity and will also be less effective at stimulating aggregate spending." The implications of the paper are clear and somewhat disturbing as it seems the current monetary policy supports income inequality.
  • Federal Reserve Vice Chairman Stanley Fischer gave a speech at the International Monetary Conference in Toronto, Canada titled What have we learned from the crises of the last 20 years? "No-one," says Fischer, "should underestimate the costs of the financial crisis to the United States and the world economies. We are in the seventh year of dealing with the consequences of that crisis, and the world economy is still growing very slowly." Fischer goes on to suggest that we may have either entered a period of "secular stagnation as Larry Summers argues", or a "deep and long" recession, "as Carmen Reinhart and Ken Rogoff's research implies." 
Fischer also makes no apologies about the wave of supervisory action over banks suggesting that the increased regulation may have failed only in its ability to go after the individuals with bad behavior rather than just the banks involved. "Individuals should be punished for any misconduct they personally engaged in", Fischer said. This is a fascinating read as Fischer has held many roles including his role at the IMF, his role as Governor of the Bank of Israel, and his role now as Vice-Chairman of the Fed which he's held since 2014.
Source: United States Department of Commerce
The good news is that as the Federal Staff has consistently said, Q1's manufacturing challenges were most likely transitory in nature which is supported by the March reading.
  • The Federal Reserve published an enforcement action against State Street Bank after identifying deficiencies in SSC's firm-wide compliance particularly with respect to "internal controls, customer due diligence procedures, and transaction monitoring processes." The bank has 60-90 days to correct deficiencies to avoid penalty.

Monday, June 1, 2015

GDP Revised Down, #FFIEC Requests Public Comment, #CEI Shows NY Deceleration and FDIC Issues Q3 CRA Schedule

GDP Was Revised Down
The #FFIEC Requests Public Comment
The #CEI Shows Deceleration in NY &
The FDIC Issued Its Q3 CRA Schedule

A summary of noteworthy news and publications from financial regulatory and supervisory agencies on May 29, 2015.

Source: BEA Website
Perhaps the biggest news of the day is that GDP was revised down to a .7% decrease from a .2% increase in the first estimate. Either way the economy slowed in Q1 and either way the Fed will dismiss negative news as transitory in nature. 

The Survey also showed that profits of domestic financial corporations decreased $2.6 billion in Q1, compared with a decrease of $12.5 billion in Q4, while profits of non-financial corporations decreased $100.4 billion compared to an increase of $18.1 billion in Q4. Taxes on corporate income increased $9.3 billion in Q1 in contrast to a decrease of $4.8 billion in Q4. Dividends increased $5.1 billion in Q1, compared with an increase of $18.6 billion in Q4. 

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Every 10 years the Federal Financial Institutions Examination Council (FFIEC) examines the relevance of certain rules and regulations on financial institutions. Due to Dodd-Frank the review will be a sizable one this year. The FFIEC is requesting public comment for 90 days. You can provide your comments about the need for regulation of the financial industry at the following website:

The April Index of Coincident Economic Indicators was published and showed a deceleration of economic activity in New York City, however it grew at a moderate pace in New York State and New Jersey.

The FDIC issued the Q3 schedule for CRA bank examinations. Your bank might be on the list. To view the schedule by region click here.