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rampant fraud, rape & pillage at the top . . . what's a paper to do. Pull back the covers, feign surprise, never connect the dots . . .
Finger-Pointing in the Fog
By GRETCHEN MORGENSON
UNEARTHING the story of the financial crisis is like conducting an archaeological dig. New shards keep emerging from the dust.
Here’s an interesting find. The Securities and Exchange Commission has sued Stifel Financial, a regional brokerage firm in St. Louis, accusing it of fraud in connection with complex debt securities it recommended to five Wisconsin school districts in 2006. Rather than settle with the commission, as many firms do, Stifel is defending the matter.
The S.E.C. sued Stifel on Aug. 10 because the firm advised the school districts to buy the three ill-fated securities, which the regulator said were unsuitably risky for unsophisticated investors. David W. Noack, the firm’s sales representative, misled school district officials when he told them that the deals, involving corporate bonds and rated AA-minus, were nearly as safe as United States Treasuries, the S.E.C. said. The Wisconsin school districts lost tens of millions of dollars on a $200 million investment, most of which was borrowed.
Stifel earned $1.6 million in commissions. But it did not create the securities — and this is where the case gets murky and interesting. Royal Bank of Canada built the failed investments, using parameters set out by Stifel and secretly profiting on the deal, Stifel said. The S.E.C. has not sued the bank.
In a lawsuit against Royal Bank of Canada, Stifel points to internal bank documents indicating a $5.4 million profit on two of the Wisconsin deals. Stifel also maintains that Royal Bank of Canada hid these and the third deal’s profits and had undisclosed conflicts as the deals’ originator. As such, RBC failed to abide by the contract with the school districts requiring “complete expense and fee transparency and disclosure,” Stifel said.
Kevin Foster, a Royal Bank of Canada spokesman, called Stifel’s allegations meritless and said the firm was trying to deflect blame to others for its central role in the troubled investments. “We never misrepresented our estimated profit to Stifel or the districts,” Mr. Foster said in a statement. “Stifel’s math is flat-out wrong and based on erroneous assumptions. The transactions were not profitable to RBC.”
Stifel and a lawyer for Mr. Noack declined to comment.
In 2005, the school districts faced a $400 million shortfall. Mr. Noack had been financial adviser to the districts for decades; he suggested they borrow money and invest in securities rated AA-minus that would generate more in yield than they had to pay in interest.
This becomes maddeningly complex: The bank from which the school districts borrowed — Depfa, of Ireland — told Stifel that it preferred collateralized debt obligations as the securities against which it would lend money to the districts. Stifel asked for proposals from banks. Royal Bank of Canada won the assignment and began to construct synthetic collateralized debt obligations linked to about 100 corporate bonds. It worked with ACA Management and UBS to select the underlying portfolios.
Depfa lent the money to the districts on a “nonrecourse” basis, meaning that the districts would not have to repay the loan if the securities bought with the borrowed funds defaulted. This arrangement, Stifel argues, shows that Depfa, a sophisticated institution, believed that the investment was not high-risk. Under the deal’s terms, Depfa could seize the collateral if the security’s asset values fell to 95 cents on the dollar and did not return to $1.01 within 30 days.
It didn’t take long for the deals to go south, and for the school districts to lose their $37 million investment. Depfa seized the underlying collateral supporting its $163 million loan. Lawsuits began flying.
Once again, we see the same toxic ingredients that have appeared repeatedly in the aftermath of the crisis: collateralized debt obligations, credit default swaps, ruinous leverage, an overreliance on credit ratings, greed and extreme naďveté.
But the case raises questions about a largely unexplored part of the collateralized debt obligation mania — whether Wall Street firms putting together these deals knew how to game the ratings agency models and profited by selecting debt issues to suit their purposes.
If, for example, a firm was designing an instrument to be used to bet against the underlying collateral — Goldman Sachs’s famous Abacus deal was created so the hedge fund manager John Paulson could short risky mortgages — a firm could assign debt issues to the deal that carried overly optimistic or misplaced ratings. Later, when reality intervened and the ratings were cut, those betting against the underlying collateral would prosper.
Because ratings agencies were slow to recognize the severe deterioration in mortgages in 2006 and 2007, taking advantage of this tardiness turned out to be highly profitable to those taking a negative view.
The Royal Bank of Canada concoctions were not created for the purpose of betting against them. And they contained corporate issues which the ratings agencies have historically been better at assessing.
Nevertheless, in its lawsuit, Stifel accuses the bank of increasing its profits by gaming the model used by Standard & Poor’s, the ratings agency on the deal. “RBC understood the mathematical models used by S.& P. to assign ratings on synthetic C.D.O.’s,” the firm maintained. “Armed with this information, RBC constructed the reference portfolios with the objective of maximizing its profits while technically achieving the AA-minus rating from S.& P.”
Stifel was heavily involved in these deals, to be sure. And this is the only suit brought against Royal Bank of Canada for C.D.O.’s that it created, said Mark Kirsch, co-chairman of litigation practice at Gibson, Dunn & Crutcher, who represents the bank.
But there appears to be plenty of blame to go around, as has been typical throughout the crisis. The S.E.C. said its investigation is continuing. It would do well to examine closely any allegations of gaming ratings agency models.
In the meantime, the Wisconsin Circuit Court in Milwaukee will decide whether Stifel will be held liable for the school districts’ losses. Who will prevail in Stifel’s battle with the S.E.C. remains to be seen.
This much, however, is clear: Lawsuits filed against institutions involved in the credit mania continue to reveal much about practices that led to titanic losses in this crisis. Because we still don’t know the whole story of this mess, even four years after it erupted, how these lawsuits play out will help determine whether such an episode ever happens again.
http://www.nytimes.com/2011/08/21/bu...r=1&ref=global
Hey Gretchen, may I suggest you start your 'education' by reading "Confessions of an Economic Hit Man" to see how unknowable all of the above really was . . . of course you would then be working elsewhere, if working at all.
Finger-Pointing in the Fog
By GRETCHEN MORGENSON
UNEARTHING the story of the financial crisis is like conducting an archaeological dig. New shards keep emerging from the dust.
Here’s an interesting find. The Securities and Exchange Commission has sued Stifel Financial, a regional brokerage firm in St. Louis, accusing it of fraud in connection with complex debt securities it recommended to five Wisconsin school districts in 2006. Rather than settle with the commission, as many firms do, Stifel is defending the matter.
The S.E.C. sued Stifel on Aug. 10 because the firm advised the school districts to buy the three ill-fated securities, which the regulator said were unsuitably risky for unsophisticated investors. David W. Noack, the firm’s sales representative, misled school district officials when he told them that the deals, involving corporate bonds and rated AA-minus, were nearly as safe as United States Treasuries, the S.E.C. said. The Wisconsin school districts lost tens of millions of dollars on a $200 million investment, most of which was borrowed.
Stifel earned $1.6 million in commissions. But it did not create the securities — and this is where the case gets murky and interesting. Royal Bank of Canada built the failed investments, using parameters set out by Stifel and secretly profiting on the deal, Stifel said. The S.E.C. has not sued the bank.
In a lawsuit against Royal Bank of Canada, Stifel points to internal bank documents indicating a $5.4 million profit on two of the Wisconsin deals. Stifel also maintains that Royal Bank of Canada hid these and the third deal’s profits and had undisclosed conflicts as the deals’ originator. As such, RBC failed to abide by the contract with the school districts requiring “complete expense and fee transparency and disclosure,” Stifel said.
Kevin Foster, a Royal Bank of Canada spokesman, called Stifel’s allegations meritless and said the firm was trying to deflect blame to others for its central role in the troubled investments. “We never misrepresented our estimated profit to Stifel or the districts,” Mr. Foster said in a statement. “Stifel’s math is flat-out wrong and based on erroneous assumptions. The transactions were not profitable to RBC.”
Stifel and a lawyer for Mr. Noack declined to comment.
In 2005, the school districts faced a $400 million shortfall. Mr. Noack had been financial adviser to the districts for decades; he suggested they borrow money and invest in securities rated AA-minus that would generate more in yield than they had to pay in interest.
This becomes maddeningly complex: The bank from which the school districts borrowed — Depfa, of Ireland — told Stifel that it preferred collateralized debt obligations as the securities against which it would lend money to the districts. Stifel asked for proposals from banks. Royal Bank of Canada won the assignment and began to construct synthetic collateralized debt obligations linked to about 100 corporate bonds. It worked with ACA Management and UBS to select the underlying portfolios.
Depfa lent the money to the districts on a “nonrecourse” basis, meaning that the districts would not have to repay the loan if the securities bought with the borrowed funds defaulted. This arrangement, Stifel argues, shows that Depfa, a sophisticated institution, believed that the investment was not high-risk. Under the deal’s terms, Depfa could seize the collateral if the security’s asset values fell to 95 cents on the dollar and did not return to $1.01 within 30 days.
It didn’t take long for the deals to go south, and for the school districts to lose their $37 million investment. Depfa seized the underlying collateral supporting its $163 million loan. Lawsuits began flying.
Once again, we see the same toxic ingredients that have appeared repeatedly in the aftermath of the crisis: collateralized debt obligations, credit default swaps, ruinous leverage, an overreliance on credit ratings, greed and extreme naďveté.
But the case raises questions about a largely unexplored part of the collateralized debt obligation mania — whether Wall Street firms putting together these deals knew how to game the ratings agency models and profited by selecting debt issues to suit their purposes.
If, for example, a firm was designing an instrument to be used to bet against the underlying collateral — Goldman Sachs’s famous Abacus deal was created so the hedge fund manager John Paulson could short risky mortgages — a firm could assign debt issues to the deal that carried overly optimistic or misplaced ratings. Later, when reality intervened and the ratings were cut, those betting against the underlying collateral would prosper.
Because ratings agencies were slow to recognize the severe deterioration in mortgages in 2006 and 2007, taking advantage of this tardiness turned out to be highly profitable to those taking a negative view.
The Royal Bank of Canada concoctions were not created for the purpose of betting against them. And they contained corporate issues which the ratings agencies have historically been better at assessing.
Nevertheless, in its lawsuit, Stifel accuses the bank of increasing its profits by gaming the model used by Standard & Poor’s, the ratings agency on the deal. “RBC understood the mathematical models used by S.& P. to assign ratings on synthetic C.D.O.’s,” the firm maintained. “Armed with this information, RBC constructed the reference portfolios with the objective of maximizing its profits while technically achieving the AA-minus rating from S.& P.”
Stifel was heavily involved in these deals, to be sure. And this is the only suit brought against Royal Bank of Canada for C.D.O.’s that it created, said Mark Kirsch, co-chairman of litigation practice at Gibson, Dunn & Crutcher, who represents the bank.
But there appears to be plenty of blame to go around, as has been typical throughout the crisis. The S.E.C. said its investigation is continuing. It would do well to examine closely any allegations of gaming ratings agency models.
In the meantime, the Wisconsin Circuit Court in Milwaukee will decide whether Stifel will be held liable for the school districts’ losses. Who will prevail in Stifel’s battle with the S.E.C. remains to be seen.
This much, however, is clear: Lawsuits filed against institutions involved in the credit mania continue to reveal much about practices that led to titanic losses in this crisis. Because we still don’t know the whole story of this mess, even four years after it erupted, how these lawsuits play out will help determine whether such an episode ever happens again.
http://www.nytimes.com/2011/08/21/bu...r=1&ref=global
Hey Gretchen, may I suggest you start your 'education' by reading "Confessions of an Economic Hit Man" to see how unknowable all of the above really was . . . of course you would then be working elsewhere, if working at all.
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