Articles Posted in derivatives

  

 

United States v. Standard &
Poor’s

By R Tamara de Silva

January 5, 2013

 

       The Department of Justice filed a civil lawsuit yesterday against one of the of big three credit ratings agencies, Standard & Poor’s (“S&P”) and its parent company, McGraw-Hill, Inc.[1]  The suit alleges that S&P deliberately gave its coveted triple-A ratings to sub-prime debt in order to win fees.  The suit does not address the structural conflicts of interest within the three credit ratings agencies that are Nationally Recognized Statistical Rating Organizations (“NSRO”), nor will it address or cure any of the underlying causes of the credit crisis.  While there are problems with the credit rating agency business model, it will be difficult to prove that S&P knew any more than even the audit committees of the investment firms on whom it relied, or the issuers of debt instruments themselves.  The suit will of course result in the levy of a fine.
But while S&P’s hands may not be entirely unsullied- far more importantly to the untrained public eye, they are as good a scapegoat as any other.

       S&P is a credit rating agency whose business is to provide credit ratings represented by letters from triple-A to D, in exchange for fees.  Federal laws require that certain institutions only hold investments that have a credit rating of “investment grade,” but most of the financial world relies on credit ratings agencies to weigh and measure risk, risk defined in terms of the credit worthiness of investments and institutions.    S&P is the largest of three credit ratings agencies that is recognized by the Securities and Exchange Commission (“SEC”)
as an NSRO.   From 2004 towards the end of 2008, S&P assigned credit ratings on nearly $4 trillion of debt instruments.  In terms of sheer size and credibility, despite this suit and skepticism of the NSROs particularly in Europe, the world has no credible alternative to credit ratings agencies and specifically nothing to replace, Standard & Poors.

       Keep in mind that almost five years after the worst financial crisis in United States history, the Department of Justice has yet to criminally charge a single culpable senior executive or firm.  If history is any guide, the Justice Department will reach a civil settlement with S&P wherein the firm will agree, without admitting any wrongdoing, to pay a fine that in relative terms, will have as large a fiscal impact on S&P as the cost of one month’s dry kibble would have to the owners of the Grumpy Cat.  The suit asks for a fine in excess of $1 billion but these will typically be negotiated down and the government has not latterly demonstrated a willingness to go to trial with these suits.
Like so many Wall Street settlements reached over the past ten years,
the cost of the settlement fine imposed will ultimately be a pittance relative to the quarterly earnings of the offending firm-S&P is not likely to become the first exception to this rule.
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Why MF Global’s Last Days May Have Been CriminalBy R. Tamara de Silva December 19, 2011

Last Thursday December 15, 2011 was MF Global Holdings Ltd.’s and MF Global Inc.’s Chief Executive Jon Corzine’s third time to testify before Congress. He may not have faired all that well in light of Chicago Mercantile Exchange Group Chairman Terrance Duffy’s testimony on December 13, 2011, which seemed to contradict Corzine’s previous testimony. Corzine adjusted his testimony on December 15, 2011 to account for the seeming contradiction. However, how well Corzine may have done to avoid perjury or any role in a possible fraud remains to be seen. A closer examination of Corzine’s testimony and the events leading up to MF Global’s bankruptcy on October 31, 2011 suggests problems. If there is any purpose to be achieved in having Corzine testify again, lawmakers should focus their questions towards the failed purchase of MF Global by Interactive Brokers and all customer agreements, including emails between MF Global and account holders leading up to the purported transfers of $175 million and $700 million in as yet missing customer segregated funds and the firm’s use of a type of repurchase agreement.

Were the Transfers Legal?

Was Corzine’s Testimony About MF Global Truthful?
By R. Tamara de SilvaDecember 13, 2011

Testimony before Congress today revealed that MF Global had illegally transferred $175 million out of customer segregated funds towards its European broker-dealer operations before it went into bankruptcy proceedings and very much under Jon Corzine’s stewardship. On December 8, 2011 and again today before Congress, Corzine testified under oath that he was not aware of any illegal transfer. Today’s testimony of Chicago Mercantile Exchange Group Chairman, Terrance A. Duffy suggests that Corzine did know about the transfer.

By R. Tamara de Silva October 25, 2011

On October 24, 2011 the Federal government announced that it would revise the Home Affordable Refinance Program (“HARP”). HARP was originally launched in March 2009 as a $75 billion plan to put a stop to the foreclosure crisis. HARP was supposed to prevent millions of the 9 million American homeowners facing foreclosure from defaulting on their mortgages and losing their homes. Yet as of this past July, HARP has only helped 865,000 of the 9 million homeowners who must refinance their home loans or soon default.

The housing crisis is by all accounts far from over. The bottom has yet to be reached in the housing market and one cannot but wonder how mortgage defaults would be affected were the Federal Reserve not to keep interest rates continually suppressed. Recently, Moody’s announced that foreclosures will rise to unprecedented levels in 2012, enveloping 30% of all mortgages and totaling over 1.5 million defaults.