In the aftermath of Enron came SarBox,  arguably the most destructive regulatory reform to hit capital formation in a generation. Post 911 we saw an emotional Congress rush to judgement. Who can calculate the half life of the damage done both domestically and abroad by this rush to judgement? And now, we’ve got a bill that’s custom tuned to a reactionary refrain. While it is far from certain that the bill gets passed, it is well to be aware of hastily made decisions and their aftermath. One thing is certain: new regulation is coming. 

And while it is true that the failures and excesses of decisionmaking at the big banks beggers the imagination, and while it is also true that fantastic amounts of wealth have been destroyed, (and one might wonder at the relative lack of oversight at the big firms while small firms are punished daily) it is important to guard against the potential of reactionary regulation which would further hamstring the process of cap formation. There is still money on the sidelines, money that did not get washed away in this latest implosion called subprime.  There is still a tremendous amount of money in Private equity, and all of it needs a home. And it is imperative, going forward, that the  coming transformation in private capital formation doesn’t get tied up in a web of new counterproductive regulation.

Now that consolidation is creating several “favored”, gigantic, can’t-fail banks, those banks are ratcheting down risk parameters. Folks who engage in capital formation may no longer find happy homes at the majors, as the majors gravitate toward an ever more rarefied clientelle.  And this is where it gets interesting –  this author believes that contrary to popular opinion, there will likely be a plethora of new tiny capital formation boutiques coming to market, filling the gaps.   And this, ironically, after the FINRA has done so much work to eliminate small firms… But private capital formation may become a much more active space, as small firms and advisors work to service a range of smaller clients – with larger Risk.

Private capital formation may start to ocurr in new ways, as a new generation of boutiques enter the market. Club deals may become all-but ubiquitous. And the growth of smaller, faster players may be exactly what the market needs.

Already we’re seeing signs of new kinds of activity in the PPX. Smaller firms are becomming much more active in recent days – in contrast to the relative lack of activity on the street. The question is whether this momentum will be sustained, or if it is simply a temporary reaction due to the current seeming impassivity on the street.

If past is truly prologue, then we have our work cut out for us, insofar as prevention of potential bad regulation. With a potential proliferation in small firms (or simply more small firms engaging in capital formation), there will likely  be a proliferation of regulation. It is our job to make sure that Congess and the regiulators understand the dangers of reactionary regiulation.

We all, as individuals, must all take a good look at any proposed regulation. This is now more important than  ever before. And we need to let our representatives know when proposals would be counter productive. There will always be cheats and those looking to game the system, That is why we have laws – including the bankruptcy laws. We must make sure that the any new set of regs benefits the process of cap formation and the public trust alike.

Now is the time to act if you’re a Brokerage firm or Financial professional in America. We would like to hear your thoughts and opinions and present them to the House Banking Committee. Wall Street’s elite firms have run aground and now the Federal Government wants to bail them out. For many years, many have felt that Regulation was driving small firms out of business and there is an overwhelming amount of evidence hat indicates this may be true. However the government’s bailout plan does nothing to stop the abuses of these large Elite firms. In addition, the government’s plan does nothing to increase CAPITAL FORMATION in America. Issuers have complained loud and clear that the likes of Merrill, Goldman and Lehman won’t even talk to them unless they are raising 200 million or more. In addition, small firms have complained that the cost of SARBOX along with FINRA compliance has made it nearly impossible to raise money for smaller issuers. The Government bailout does nothing to help raise capital in this country and get our economy moving.

We have also heard many concerned voices from small and mid sized firms who are upset at the fact that it was hard enough to compete with these large Wall Street firms before , but now that for all intent and purposes, they are owned and backed by the Federal Government, it will be impossible to compete fairly.

Lastly, we have heard from many small firm owners who are calling for the release of funds from FINRA due to the fact that the large firms are getting government bail outs. Indeed, it’s estimated that FINRA, the regulatory body of the securities industry, is sitting on $1.5 BILLION in cash, (hopefully not in a reserve money market!), money that belongs to members. It has been suggested that the federal government order FINRA to release to all firms immediately and equal share of that surplus in order to help small firms help rebuild capital formation and grow the economy. That would amount to over 300K per firm! Firms throughout the country could use that money to hire more brokers, invest in better software and marketing and even hire more compliance officers to ensure the mistakes of Wall Street do not repeat. In addition, at a time when Americans have lost confidence in our markets and the stability of the Brokerage firms, that money could be used to infuse a ton of extra net capital into firms across the country.

The time to voice your opinion is now.

There’s no place like home…

Truly the unimaginable has happened. The Fed has spent a trillion dollars in bailouts in the last week alone, and wall streets’ Wizards decisionmaking has been exposed as bankrupt and full of artifice,  and the old regulatory matrix may be headed the way of the dodo. But what does this mean to the average rep on the street? Maybe more than you’ve bargained for.

(more…)

Main Entry: in·san·i·ty
Pronunciation: in- san- t-
Function: noun Inflected Form(s): plural -ties
1 : the condition of being insane especially when serious enough to keep one from being convicted of a crime or from performing duties required by law
2 a : extreme foolishness or unreasonableness b : senseless conduct
 
Today is a very sad day on Wall Street. Lehman Brothers (LEH) has declared Bankruptcy and Merrill Lynch ( MER) has been bailed out in a fire sale to Bank of America. Two of the most well known names in Wall Street history have flamed out within a matter of moments and American investors have been shaken to their core. How could this all happen so quickly and how in the world did these two titans of Wall Street get into this mess to begin with?
The answers are long and arduous but in our eyes this has been a disaster that has been 20 years in the making. Let’s be honest, despite the fact that these companies have long been considered the standard bearer on Wall Street in terms of name recognition and power, these companies have been pushing the envelop for many, many years. Along with Bear Stearns, Smith Barney, Goldman and a host of other legendary names on Wall Street, these companies have repeatedly taken obscene risks, followed by unethical and ‘senseless conduct” over the last 20 years that has gone largely unnoticed and for the most part unpunished. In the mid 1990’s these firms were part of the greatest collusion and price fixing this country has seen since OPEC was formed. The market makers all colluded and had built in mark-ups and mark down’s on every single share of stock. Despite the fact that they already held most of the market share and would still receive the lion’s share of profits, these largest firms on Wall Street were still not satisfied. This insatiable greed and monopoly was punished by the regulators (NASD and SEC) in a manner that still leaves most confused. The regulators enacted things like OATS and decimalization and lowered the spreads. That was great in theory but most small market makers were driven from the industry and these same large Wall Street insider firms now had several times the volume they had before. In other words, they lowered the profit spread on each share of stock but also increased 10 fold the volume these firms now were able to get. Throw in the fact that they each bought their own ECN and now you have even more forced volume into these firms…..Some punishment.

In 2001 and 2002 The Wall Street Elite firms were fudging numbers and coming out with erroneous and false research reports in an effort to bolster stocks like WCOM and ENRON. One noted and trusted analyst was so brazen he sent an e-mail that stated “let’s put some lipstick on this pig” just moments after telling a National Audience that Citigroup “likes the stock at these levels and prices”. This act alone cost millions of Americans Billions of Dollars and destroyed many 401k plans and retirement accounts. The punishment for this brazen lie? They paid a fine and went back to business. In fact, it was the Attorney General of NY who actually put the feet of these firms to the fire…But the NASD and SEC? Nothing that would impact them or STOP THEIR BAD BEHAVIOR.
In 2003, once again The Attorney General of NY had to stop some of the madness on Wall Street and went after Firms for Market Timing Mutual funds and more disturbingly, Firm’s that were buying mutual funds YESTERDAY with TODAYS news. For instance, Bear Stearns had an actual software program made that would conduct these after hour trades and market timing trades!!
It was estimated that Bear made over ONE BILLION from these illegal activities….their Punishment however was a 250 Million dollar fine from the SEC.!!

How insulting that you could actually allow this type of behavior to take place and basically reward it! Imagine telling a crook that “if you steal 10,000 bucks from a gas station, we are going to fine you 2500??” Do you think Crime would go down from this type of attitude??
These elite Wall Street firms consistently pushed the limits on what was legal and ethical for the sake of making an extra buck. Each month NASD’s Notice to Members lists dozens of firms and individuals who were fined and sanctioned for their behavior or lack of compliance. Every month the largest firms on Wall Street would pay a petty fine and sign a settlement agreement and promise never to do it again. A quick glance of Lehman, Bear and Merrill’s public disciplinary history shows Lehman has 360 regulatory hits, while Merrill has 250 and Bear a paltry 114( Yes that was sarcasm!). Combined that’s 750 regulatory (from FINRA, SEC or a State) actions against them. Bare in mind that these firms have additional arbitration marks to the tune of thousands and this figure does not include the many additional marks on related companies that engage in Market Making, Investment banking and other securities related businesses. In other words, these firms and their sister companies had well over 1000 regulatory actions against them!!!

Not once in all this time were any of these firms ever suspended from trading, or ordered to cease doing business. Over 1000 regulatory actions yet not once were these firms told that they could only accept SELL orders for the next 30 days and must cease doing a particular line of business. Imagine the loss of revenue and the screaming of shareholders if Lehman or Merrill were told they could not do any investment banking for six months and could only accept unsolicited sell orders for 30 days as punishment for recidivist behavior and hundreds of regulatory violations? Imagine if Bear Stearns was told that it could not add any new clearing correspondents for one year due to egregious and habitual violations?

Shareholders would have demanded heads on a platter and a change in mental attitude toward rules and regulations. This immunity from the wrath of regulation however created a false sense of security because in the end these firms were not immune from ” Extreme foolishness and senseless conduct”

It boggles the mind to read where Lehman held over 600 Billion in mortgage debt…They are a Stock Brokerage firm first and foremost yet they were playing with the real estate house of cards. One has to wonder why Regulators never questioned why a stock firm put all its eggs in one basket. Merrill Lynch is even more disturbing in that only 3 years ago they boasted excess NET CAPITAL of 86 billion dollars! That is pure hard cash that they put to risk and destroyed for shareholders. Sure, Bank America bought them for ‘50 billion in stock” but read between the lines. They paid in stock not cash. In other words, BA printed some extra shares from the vault for a company that once had 86 billion in CASH! Imagine owning a home outright that you paid 200k for and then the value goes to 1 million…rather then cash out, you decide to take out home equity lines and buy additional homes…then when the crash comes, you’re overjoyed because somebody gave you 200 shares of Google for your house!!! Merrill is essentially the same.

With billions and billions in liquidity these companies could have paid handsome dividends to shareholders, bought other companies, invested in other areas, spread the risk versus reward ration yet they put all their risk capital into real estate egg basket… Extreme foolishness and senseless conduct

When will this insanity on Wall Street end? It may be right now….because these extreme fools are being punished now by the markets and investors in a way they could have never imagined and in a way that regulators never dared think of before……they are out of business due to their Extreme foolishness and senseless conduct

The Demise of Wall Street’s elite firms could reshape Regulation.

The sudden and shocking demise of the Wall Street elite has left an industry in shambles and the American investor in jitters. The collapse of the largest names on Wall Street is being felt all across the world and has caused the Political landscape to suddenly pay more attention to the Economy and less attention to Governor Palin’s “my space page”. President Bush cancelled his fund raising campaign drive and Barrack Obama is already running commercials blaming the Republicans, while lost in all this is John McCain’s suggestion that “Chairman Cox should be fired for betraying the public trust and falling asleep at the wheel”

While there is a lot of positioning by politicians and pundits alike, there is a huge black hole being created that may reshape regulation as we know it. FINRA was formed by the hasty and controversial merger of NASD and NYSE Regulation in 2007. Large payments were made in anticipation of the ‘cost savings’ the merger would create and more importantly, small firm’s rights were reduced and Large Elite firms were given a seat front and center at the Board level. The Streamlined regulation of NASD and NYSE was supposed to provide more efficient regulation that would also provide better public protection to investors. The SEC endorsed this consolidated regulation overwhelmingly and even made mention that if the members of NASD did not approve the merger that they may have to take action separately. Be careful what you wish for!

The single largest meltdown in Wall Street history is happening right before our eyes and where are the leaders of our regulatory bodies? That’s a question everyone, including John McCain, is asking right now. The warning signs are everywhere that the current regulatory system is going to end. Quite frankly it doesn’t seem to work, unless of course you are guilty of OATS violations or Failure to implement something into your WSP’s!

Bear Stearns was one of the largest firms on the Street and cleared for almost 1000 Broker dealers across the country. They were bailed out in a deal over a weekend that involved Treasury Secretary Paulson, JP Morgan and other federal entities…Like everyone else, Christopher Cox, the Head of the Securities and Exchange Commission learned about the deal on the following Monday while watching CNBC. The message from the Government to the SEC Was clear: You don’t matter anymore, this is bigger then you!

Lehman Brothers collapsed this past week while Merrill Lynch, the largest Brokerage firm in the world made a fire sale deal with Bank America to bail itself out before things got worse. Once again, the Fed and Treasury was involved and gave assurances regarding Merrill’s debt…however one has to wonder: Where is FINRA? Where is the SEC? They have become an afterthought.

There have been rumblings that the Treasury Department may take over the SEC and that Congress is going to demand big changes in the coming months. However there is one undeniable factor that is taking place: The shape and face of the FINRA board is changing. There will be no more Lehman and Merrill’s…and by the end of this week possibly no more Morgan Stanley or Goldman. The large outsider banks may very well become the ultimate power brokers and quite frankly, as evidenced by the Bear sterns and Merrill Lynch bailouts, they have no use for FINRA or the SEC. They deal directly with the Fed chairman and the Treasury. Bank America could shape how or more to the point if FINRA continues. Bank America was forced out of the Clearing business by SEC and FINRA regulators in 2003 for Mutual Fund market timing. Even though Bear Sterns was guilty of the same, only Bank America was forced out and many believe this was the result of Merrill, Goldman and Bear whispering in the ears of regulators to get rid of their institutional competitor.

JP Morgan is in a similar boat in that they do not rely on nor need FINRA or the SEC to get things done. They deal directly with treasury secretary Paulson and most recently have been helping Paulson by putting up money for AIG and other firms and were prodded by Paulson to buy Washington Mutual or Lehman in the last week. Do you really think the heads of Bank America and JP Morgan are going to sit down with a strait face at a table full of FINRA board members and take orders?

 These two firms have been bailing out Wall Street and I would be surprised if they would want anything to do with the current regulatory system. In a matter of days we now have a Board that is no longer representative of the make up of the Member firms. Current Board members from Merrill and Lehman no longer represent the largest firms on the Street. Board members from Goldman as well as Citigroup may also soon cease to b a relative facto in the board make up.

So the important question is whether its time to just do away with the whole Board concept and start over again? Clearly, single self regulation isn’t working and Bank American and JP Morgan have put up way too much money to just suddenly share power with small Broker dealers around the country. It’s hard to imagine either of those entities agreeing to any rule or regulation that restricts any of its business or takes and competitive edge.

Quite frankly Treasury Secretary Paulson is relying on Bank America and Jp Morgan to continue to buy out and help finance the remaining struggling financial giants like Morgan Stanley. With the many BILLIONS and BILLIONS these companies just put up to bail out the Street and America, it is extremely hard to believe that they will want the current Regulatory system and in our opinion, A deal has already been cut with the Treasury and The Fed to have these large companies governed by them Directly. Once that happens, is there really a need for a FINRA board anymore?

Quite frankly, given the lack of regulation that has occurred, one has to wonder whether FINRA will still be in existence a year from now. Perhaps too much time was spent trying to consolidate and control power on the Board and not enough time was spent regulating the elite firms on the Board? The first major test for the single regulator has been a colossal failure of epic proportions and Congress will be making whole sale cages with the Treasury Secretary now the most powerful man in our industry.