New Kids on the Prime-Brokerage Block

Bulge Bracket trading and other services to hedge funds scaled back last year as their clients posted losses or closed. Prime-brokerage businesses, including some just launched in 2009, competing fiercely to attract hedge funds as clients. Some of the newer and lesser-known players: Cantor, FBR Capital Markets, Jefferies, Merlin, Conifer Securities. Merlin plans to announce a partnership with Northern Trust, to allow Merlin clients seamlessly to "custody" (hold in safekeeping) assets at NT. 9/15 WSJ for more.

Inspection of Wall Street’s New Pecking Order

Economists debate cause and effect of Lehman Brothers' collapse a year ago and politicians and the public seem to blame the financial crisis on the banking sector. Furor has died down, some banks proving to be surprisingly resilient, yet Wall Street still faces increased regulation and political pressure. Update from Economist.com: "Wall Street's new shape" leads off: AT THE press of a button, double doors sweep open: Welcome to the office of Lloyd Blankfein, chief executive of Goldman Sachs.

Credit Suisse, Goldman Want to Buy Life Insurance from Sick and Old for Cash, Package as Bonds to Trade

Credit Rating agency DBRS is reviewing nine proposals for life-insurance securitizations including from Credit Suisse. Goldman Sachs has developed a trading index of life settlements, so traders/investors can bet whether people will live longer than expected or die sooner than planned. The index is similar to stock indices that allow investors to bet on the direction of the market without buying individual stocks. Moody's has been approached about securitizing life settlements, but has yet to see a portfolio that meets its standards.

Andrew Terrell thinks securitized life policies have big potential, explaining that investors want to spread their risks and constantly looking for new investments that do not move in tandem with their other investments. Terrell was co-head of Bear Stearns's longevity and mortality desk - which traded unrated portfolios of life settlements - and later worked at Goldman on a trading platform for life settlements. "It's an interesting asset class because it's less correlated to the rest of the market than other asset classes".

Not quite a done deal: The insurance industry is girding for a fight: Just as all mortgage providers were tarred by subprime mortgages, so too is the concern for life insurance companies that they would be tarred with the brush of subprime life insurance settlements. Both Standard & Poor’s and Moody’s, which gave out many triple-A ratings for securitized subprime mortgages and later were burned, are approaching life settlements with greater caution.

“The securitization of life settlements adds another element of possible risk to an industry that is already in need of enhanced regulations, more transparency and consumer safeguards,” said Senator Herb Kohl, who is chairman of the Special Committee on Aging. More from NYT.

Accumulators? Dangerous Derivatives Return

Derivatives nicknamed “I kill you later” - Accumulators - making a comeback, Wall Street Journal reported today. Accumulators generated controversy after wiping out enormous sums among high net-worth individuals in Asia.

Senator Wants Broad SEC Market Review

There are now potential conflicts of interest on trading desks serving both retail and high-frequency trading clients: Delaware senator Ted Kaufman is asking the SEC to review stock market structures, part of a debate over the impact of computer-based trading. WSJ.

These days, about half of all the equity stocks traded in the US are handled by nimble computers. NJ.com has a feature on Jersey City-based Direct Edge and notes how the NYSE plans to consolidate existing Secaucus and Brooklyn data centers in a huge Mahwah site. NJ.com has photo of a Trader on the support desk at Direct Edge with a Glossary of terms such as • High frequency trading • Flash orders • Liquidity • Dark pools • Best bid and offer.

Guaranteed Bonuses Back and Face Scrutiny

WSJ 8/13 $100 Million for Mr. Hall?
As trading has been the main source of recent Bank profits, the biggest bonus commitments are being made to Bond Salesman, Currency and Derivatives Traders, and computer programmers and others who support those operations. “Is Wall Street again going to overpromise, and then when the market turns down, we’ll have another set of pay problems?” asked pay consultant Alan Johnson?

Guarantees are roughly a third smaller than at the 2007 market height, although they are bigger than last year, Johnson said. “The absolute levels are by historical standards moderate, but it is a big change from where we were at the beginning of the year”.
Summary of some well-known Employers:
Citi and B of A have offered guarantees, arguing that they are necessary to attract new employees and keep existinG. Foreign banks like Nomura (Japan), Credit Suisse (Switzerland) and Barclays (Britain) making guarantees in hopes of poaching talent.

Stronger banks that have repaid bailout money and not subject to restrictions — Goldman, JPMorgan Chase and Morgan Stanley — have also begun offering guarantees.

Former Goldman partner in London, signed a multimillion-dollar contract recently with B of A that she told former associates was worth $15 million a year for two years and included a guarantee, according to a person with knowledge of her pay.

In the last few months, Citi has lured several senior derivatives traders — including Dan Petherick, Rachel Lord and Stefanos Bitzakidis — away from MS with multimillion-dollar, multiyear guarantees. Citi spokesman said that attracting and retaining the best talent was “very important” to the success of Citi and all stakeholders, including taxpayers.

Morgan Stanley, after posting dismal second-quarter trading results, has been canvassing Wall Street trading desks. After picking off currency and rate traders at JPMorgan and Deutsche Bank, MS recently used one-year guarantees to hire three Citi traders and approached several more with similar offers.

Obama administration pay czar, Kenneth Feinberg (pictured) is preparing to review how compensation should be structured at seven companies that received two or more federal bailouts. Resurgence of bonus guarantees underscores how difficult it is to control Wall Street pay, despite the public outcry over how taxpayer money is being spent. Feinberg amust decide how much overall compensation is too much, even when the pay is tied to performance, like the $100 million package that Citi promised to trader Andrew Hall. (See WSJ 8/13)

Companies must each submit 2009 compensation plans for their top 25 earners by Thursday, and Feinberg has 60 days to rule on them. He has the authority to single out any of those employees and adjust their pay packages. Some rivals of the bailed-out have already benefited from being out of reach of the government’s pay czar. Jeff Michaels, head of Citi’s US interest rate trading, found Nomura knocking with an offer that would guarantee him as much as $10 million for 2009 and 2010. That’s nearly twice the $6 million bonus he received last year when he joined Citi from Lehman.

Summary courtesy of Dealbook. Click for access to Full NYT article here to see 293 comments as of 8/10 August 10th 3:53 pm

SEC Says No More Messin’ Around

WSJ story: that you ain’t gonna have the SEC to kick around anymore — at least if Mary Schapiro (pictured smiling in a pearl necklace) has her way. Quotes Paul Weiss Attorney: Clearly the message going out is that the SEC is going to be much tougher with regard to settlement postures, in terms of penalties. They want to demonstrate there is a tough, new cop on the beat. Headline courtesy WSJ Law Blog.

Will Stockbrokers Exist After This Generation?

FINRA reports that registered reps have seen their job numbers dwindle. 25,810 reps have lost their jobs. Registered Rep magazine reports Smith Barney--now Morgan Stanley Smith Barney following its sale from Citigroup saw its number of financial advisers fall 17% 1Q 2009.

A broker can be a "mentor" for investors to guide them. Others hold out less hope for brokers. In a Forbes article, Bill Singer foresees stock brokers not existing after this generation and instead the market will have commission-paid phone operators who dole out information. If there are going to be brokers and other investment advisers in the future, Singer advocates each professional to take exams with more emphasis on product knowledge and CE than on one's ability to make cold calls. Since the retail investor doesn't often know the difference between a financial consultant and a financial adviser, Singer wants to eliminate those distinctions. More at Forbes' Intelligent Investing Panel.

Read here to see someone disagree: who writes to announce the death knell of the advice business is as ludicrous as saying there will no longer be a demand for teachers or doctors. Are educational or medical websites robust and helpful enough to do away with those professions? How about self-diagnosing and self-medicating in times of illness?
The Reformed Broker also tackles the claim that most investors will just do it themselves: "We were told that online brokerages would be the death of the full-service broker in 1999. Most of those online brokerages have since disappeared or have been swallowed up and the ones remaining now charge zero dollars or so for trade execution. Nice business model:E*Trade’s stock looks like Mickey Rourke’s face, currently hovering around a buck, with flies buzzing around it’s sunken eye sockets. Read more at The Reformed Broker.

CAPCO:Insurance Co. for Big-Money

Capco is virtually unknown even in financial circles, now thrust in spotlight. Creditors and former customers battling over who will get what and when from Lehman. Robert Menendez, Democrat of New Jersey, wrote the Treasury secretary, Timothy F. Geithner, in June to express his concern: “It has become clear that this entity is thinly capitalized,”

Pitch was that while Capco would not insure against investment losses, it would compensate them if firms failed. Capco provides virtually unlimited coverage above $500K offered by SIPC and British equivalent. Its members include Morgan Stanley and Goldman, JPMorgan Chase, Wells Fargo, Robert Baird, Edward Jones and Fido. Capco was initially registered in New York but later moved to Vermont, where state law enables it to operate without disclosing much. More than $32 billion of assets have been tied up in Lehman’s London prime brokerage unit. Untangling the mess could take years. Some former Lehman clients, which include big hedge funds, are looking to Capco for answers — and money. (Picture: Exploring Lehman 'Caves' in Great Basin National Park)

Schumer: Regulatory Flash Order Crackdown | Goldman: More Regulation, Lower Profits or Dimmer Glow?

New York magazine looks at how Goldman is seen as the “ugly essence of capitalism at its most cynical,” and how it is handling so much attention. Includes a stroll through Goldman’s 50th-floor trading room in One New York Plaza, where Goldmanites are seen hovering over computer screens. Read summary via NYT and link to NY Magazine.

Flash orders allow certain members of Direct Edge, Nasdaq and BATS exchanges access (for a fee) to order information for milliseconds prior to that information being made available to the public. High-speed computer software can take advantage of that brief period to allow those members to trade ahead — at better prices — and therefore profit from advanced knowledge of buying and selling activity. ”If the S.E.C. fails to curb this practice, I plan to introduce legislation in the U.S. Senate to prohibit the use of flash orders,” Sen. Schumer said. Go to Article from AP via The NY Times

Cuban Victory Over S.E.C. "ceiling of the Sistine Chapel for securities lawyers."

Cuban backstory and links of the high-profile lawsuit, which lawyers said was an aggressive move by the agency. Cuban Lawyer said it "is the ceiling of the Sistine Chapel for securities lawyers." Others said implications limited because Cuban was judged not to have a fiduciary duty.

Cuban denied the allegations and played hard ball with the agency in statements on his blog and in court. For an extraordinary email exchange between Cuban and an SEC attorney from Fort Worth, click here.

Accused Goldman Code Swindler: Thief or Whistleblower?

Coverage of Sergey Aleynikov, arrested July 3 on charges of stealing proprietary trading code from Goldman Sachs as reported by Baristanet: Before you get yourself involved in a major espionage, it's a good idea to first get rid of embarrassing videos on YouTube.
Reuters has been on the Soprano-Sergey connection. Over the weekend, a Reuters reporter went to North Caldwell to take a look at Aleynikov's house. Aleynikov is being hailed by some not as a thief but as a whistleblower. On Facebook, there is now a Sergey Aleynikov Fan Club, thanking Aleynikov for giving "us all a priceless insight into the the dark side world of the mega market makers in the world of finance."

Two Regulators Better Than One? CFTC/SEC Merger Debate Cont'd

More about merging the S.E.C. and C.F.T.C. in a hearing before two Congressional panels about regulatory changes to the derivatives market. When the Obama administration chose the new chair of the S.E.C., there was speculation that, because she was previously head of the C.F.T.C., she would push to combine the two. Last month, the White House announced its plan to overhaul the nation’s financial regulatory regime, there was no mention of such a move;some lawmakers just can’t seem to let the topic go.

“We should merge the S.E.C. and the Commodities Futures Trading Commission,” Walt Minnick, Democrat from Idaho, said before the House Financial Services Committee and the House Agricultural Committee. “Financial derivatives, whether they originate in a commodity, a security, or neither, like weather futures, are functionally identical and must traded, cleared and settled subject to the same rules. Bifurcated responsibility might be made to work temporarily but is a poor long term solution and discourage bold acting when crises arise.” “Just for clarification, the gentleman spent a lot of time looking at this, but Mr. Frank and I, at least the two of us, have come to the conclusion, that we are not going to be merging the S.E.C. and the C.F.T.C.,” Collin Peterson, Democrat from Minnesota who leads the agricultural committee, said right after Minnick’s remarks.

Widely speculated that a turf war between the two committees has kept the two agencies from merging, Barney Frank, head of the financial services committee, disputed that theory. “I want to begin with an apology to our friends in the media,” he said. “There is no fight to cover between these two committees.”He praised colleagues on both committees, however, he acknowledged that the current system less than ideal.

“I will say that if we were starting from scratch, I don’t think we would have the current organizational structure. But we’re not starting from scratch, and I don’t think it is practical to talk about making major changes.” Hearing’s only witness, Treasury Secretary Geithner, seemed to agree with Frank. When asked about his thoughts, he said the administration was more concerned with “bringing statutes and laws into conformity” rather than merging the agencies.
Summary above courtesy NYT Dealbook where you can also see Video of Geithner speaking about Regulating Derivatives.

Red Flags Rule - Could FINRA treat like AML & Patriot Act?

FINRA doesn't plan to give broker dealers more time than they've already had to deal with a Federal Trade Commission identity theft rule that's effective Aug. 1.

Guidance posted Monday by FINRA, about how to comply with the Red Flags Rule means it expects adherence from the onset. The rule will be a likely focus of upcoming Finra examinations and sweeps, say compliance consultants.

The FTC will require broker dealers to periodically reassess whether they offer or maintain certain types of accounts covered by the rule and, if so, have a written program for identity theft prevention. Such a program should include, at a minimum, policies and procedures to detect certain "red flags" that could indicate identity theft. Broker dealers would also have to update those policies in response to changing risks to customers.

The rule applies to financial institutions and creditors who offer or maintain certain types of accounts, which could include margin accounts. The rule initially caused widespread confusion among broker dealers and other industries about exactly who was affected, and as a result, the FTC extended the compliance deadline twice from its original Nov. 1, 2008 effective date.

As quoted in A DOW JONES COLUMN, Tim Pedregon, a Los Angeles-based compliance consultant and former FINRA examiner, says the self-regulator's interest in the Red Flags Rule mirrors activity beginning in 2002 related to a Patriot Act provision requiring financial institutions to establish money laundering procedures. The National Association of Securities Dealers included Patriot Act anti-money laundering compliance as a focus in its brokerage audits. It often imposed administrative fees for small infractions and, in more egregious cases, fines, he said. An enforcement sweep in about six months is also possible, says Pedregon.(Suzanne Barlyn writes Compliance Watch, a column that focuses on compliance and regulatory issues affecting financial advisers. She can be reached at 212-416-2230 or by email at suzanne.barlyn@dowjones.com)

Be Ready For Your Close-Up and mindful of your Internet Footprints

You should always be ready for your close-up, that could be an Interview or Networking opportunity: have your resume polished when planning or considering a new position and if employed or not check out and be mindful of your Internet "Footprints." To learn more read this article about a job candidate who blogged and tweeted herself out of a job interview.

Hiring managers access Facebook, Twitter and LinkedIn through friends of friends. One is quoted "In the business of networking, people know people. You have to decide what you want your social media face to be. It's like talking in an elevator. You don't know who's listening." In an instance of reverse networking, one job applicant who became virtual friends with as many current employees as possible, thinking that would give him an in when interviewing. It had the opposite impact. Continue reading "Internet footprints follow you into real world"

SEC Blew Chance to Expose Madoff in '04 | Stern's 'Bernie' Near Miss

In 2004 an SEC staff attorney in Compliance, Inspections and Examinations (who previously worked at the American Stock Exchange and understood complicated trading strategies) figured out that there was something wrong with Madoff and submitted a list of detailed questions to her supervisor to pursue the investigation. However, her supervisor told her to turn her attention to mutual funds; at that time the SEC was feeling the heat because the NY Attorney General's market-timing investigations made SEC look bad. Madoff inquiry went nowhere, and the SEC attorney left the agency in 2006.WPost, Staffer at SEC Had Warned Of Madoff Lawyer Raised Alarm, Then Was Pointed Elsewhere.

Did Madoff miss out on a chance to be a part of Howard Stern’s Radio show? A frequent guest on the show nearly escaped with a gold-plated recording of Madoff’s sentencing before she was arrested inside the courtroom.
Ivy Supersonic was caught recording the Court proceeding by Federal Protective Service officers and her “recording device” was confiscated, according to an order signed by Judge Denny Chin. Federal court rules bar the public from recording court proceedings. Device was actually a BlackBerry that belonged to Stern sidekick Robin Quivers, according to Silberstein. Ivy was removed from courtroom before Madoff was officially sentenced.

The Federal Protective Service has deleted the recording but made a copy of it “in the event Supersonic (real name: Silberstein) wishes to assert any rights thereto,” according to the court order. Silberstein, who describes herself as a fashion designer, entertainer, publicist, event planner and animated character designer, told NY Times that the recording “could be worth $1 million.” More at NYT Dealbook.