Last major investment banks change status

Last major investment banks change status
Sunday September 21, 9:41 pm ET 
By Martin Crutsinger, AP Economics Writer

Federal Reserve changes status of Goldman Sachs and Morgan Stanley to bank holding companies

WASHINGTON (AP) -- The Federal Reserve says it has granted a request by the country's last two major investment banks -- Goldman Sachs and Morgan Stanley -- to change their status to bank holding companies.

The Fed announced late Sunday that it had approved the request of the two investment banks. The change in status will allow them to create commercial banks that will be able to take deposits, bolstering the resources of both institutions.

The change continued the biggest restructuring on Wall Street since the Great Depression.

5 Failures of SEC Chairman Cox

da http://seekingalpha.com/article/96487-5-failures-of-sec-chairman-cox

Almost all paths of incompetence in the current crisis run through the office of the Chairman of the SEC, Chris Cox. McCain’s solution to fire Cox isn’t tough enough. Exile is better. Fortunately for Cox this isn’t the Stalinist Soviet Union or his fate could be a lot worse.

Cox’s failures are too numerous to count. However, I’ll give it a try. Below are what I think are his top 5 failings.

1. Failure to enforce disclosure laws and regulations.
   

   Disclosure rules and regulations protect investors by requiring companies to disclose everything that is needed for informed investment decisions. And, CEOs and CFOs are required to sign certifications that such disclosure is materially accurate, complete, and that their companies have adequate internal controls to ensure such accuracy and completeness.

   Enforcement of disclosure rules and regulations has been a joke. CEOs lie to shareholders with impunity and without fear of SEC enforcement. It is impossible to conclude that SEC filings for Freddie, Fannie, AIG, Lehman, or Bear Stearns complied with SEC rules and regulations.

   However, instead of enforcement by the SEC, there is silence. While not all management actions are criminal, why hasn’t the SEC used its civil enforcement authority, i.e., assessing fines and penalties? How about protecting future investors by banning failed executives and boards of directors from serving in executive management at other public companies? 

2. Failure to enforce accounting standards.
   

   When Cox states that the SEC doesn’t have regulatory authority over capital adequacy of financial services companies, he isn’t telling the truth. The SEC has regulatory authority over the financial statements of ALL publicly traded companies in the U.S. which of course includes the financials. If Cox had required greater reserves and transparency of financial services companies it would have happened.  

   Every quarter all publically traded companies file reports with the SEC that are provided to shareholders and the SEC has review and comment authority. If the SEC deems financial disclosure inadequate, incomplete or opaque it has the authority to force the company to amend its filings. It also has authority to establish accounting standards for publically traded companies which means it can have different requirements than GAAP. 

   So when the AIG filed its last quarterly report and decided that it didn’t need to have loan loss reserves against defaulting mortgages and securities, the SEC had the ability to require additional loan loss reserves. When Freddie and Fannie decided to pretend that defaulted mortgage were good assets because it changed its accounting standards, the SEC could have just said “no”. When Lehman manufactured $2.4 billion of pre-tax income by pretending that it wasn’t going to repay its debts (one of the dumber aspects of mark to market accounting), the SEC should have protected investors with disclosure. 

3. Failure to supervise the rating agencies.
   

   Cox wants everyone to believe that despite being the rating agency’s only regulator, the SEC has no oversight or enforcement authority and cannot influence their performance. Once again, the SEC’s statements are false. Cox assumes that no one will take the time to read the Credit Rating Agency Reform Act of 2006 which states that the SEC has the right to suspend or revoke the license of any of rating agency for a wide range of reasons.  Rating agency regulation and reform is Cox’s responsibility. 

4. Failure to investigate and prevent market manipulation, i.e., naked short selling.
   

   Free markets are supposed to be honest markets. The naked short selling issue isn’t new and the SEC’s knee jerk emergency response is an embarrassment. The ban on short selling of 799 stocks is very similar to Putin’s actions this week to manipulate the Russian stock market. I haven’t a clue whether or not the uptick rule works, but I know that enforcing rules on naked short selling shouldn’t have required destructive and ill thought out emergency orders. In the middle of the 1800’s the legendary financial scoundrel, Daniel Drew, understood naked short selling was bad (as he lost his fortune covering a short squeeze) when he said, “He who sells what isn’t his’n, Must buy it back or go to prison.” Too bad Cox never took economic history in school (or googled economic trivia).  

5. Failure to protect small investors.
   

   It is no coincidence that according to the FT, stock ownership by individual investors is at an all-time low. The average individual investor knows that his chances in the market aren’t good. And the SEC doesn’t seem to care if the average guy is disenfranchised from the economic future of America. In addition to the above failures, Cox forgot that it was his job to make sure that brokers shouldn’t engage in deceptive sales practices (like in the sale of auction rate securities and the sale of Freddie and Fannie common and preferred stock to small investors because they were “guaranteed” by the government). Cox refuses to support private litigation by individual investors who were ripped off in the stock and bond market. If the SEC doesn’t protect the little guy, who will? 

It is hard to think of how anyone could have done a worse job than Chris Cox (other than engaging in illegal conduct). But if anyone can think of things that I have missed, please feel free to tell everyone reading this by commenting. I doubt that my list is complete.

Treasury Secretary Paulson on Taxpayer Bailout

NEWSWEEK COVER: King Henry

Treasury Secretary Paulson on Taxpayer Bailout: 'It's Very Unpleasant for Me, But It's a Lot More Attractive Than the Alternative' The Former CEO of Goldman Sachs has Emerged as Investment Banker in Chief; Says There Will be Housing and Mortgage Issues for Years; 'The Key is to Get Stability'

Last update: 12:34 p.m. EDT Sept. 21, 2008

NEW YORK, Sept 21, 2008 /PRNewswire via COMTEX/ -- Henry Paulson -- free-market thinker, former CEO of Goldman Sachs and Treasury secretary to a conservative Republican president -- was unveiling to the world a massive taxpayer bailout of the American financial system, a message he never thought he'd have to deliver, reports Senior Editor Daniel Gross in the current issue of Newsweek. Afterward, as he headed into yet another weekend of nonstop work with his team, carrying the weight of the troubled markets on his shoulders, the former college-football star was clearly conflicted about what he'd just proposed. "It's very unpleasant for me, but it's a lot more attractive than the alternative," Paulson tells Newsweek. "We can spend a lot of time talking about how it happened and how we got here. But we have to get through the night first."

In the September 29 Newsweek cover, "King Henry" (on newsstands Monday, September 22), Gross profiles Paulson, who came to Washington from Wall Street in 2006 expecting to deal with issues like Social Security reform and trade agreements. At a time when President Bush seems to have largely checked out, Gross reports, the teetotaling 62-year-old has emerged as the nation's most powerful leader -- the investment banker in chief. As he did on the Street, Paulson continues to advise CEOs on the best course of action, to arrange financing and to get the best terms possible for his clients. Only now his clients are American taxpayers, the president and the global financial system.

While bailouts are regrettable and expensive, Paulson argues that one is needed to restore confidence in the system. "We're going to have housing issues and mortgage issues for years," he tells Gross. "The key is to get stability." But unlike other recent actions, this one will require greater cooperation from Congress. And there Paulson is likely to run into some roadblocks.

Paulson works at a pace to which Washington isn't quite accustomed. All month the staff dining room at Treasury has remained open on weekends, with a buffet of tuna-fish and peanut-butter sandwiches. Paulson doesn't use e-mail and prefers to get information by phone. Staffers refer to him as a "serial dialer." But he doesn't spend a lot of time making small talk. "He's a no- bulls--t kind of guy," says Barney Frank, chairman of the House Financial Services Committee. "He gets down to business and gets things done."

This brusqueness, and the desire to move on to the next problem, doesn't always go over well on Capitol Hill. The criticism of Paulson has come mostly from conservative Republicans in the House who are incensed over the bailouts. "I think for all intents and purposes, Congress has been left out of the loop and treated after the fact," says Rep. Scott Garrett, a New Jersey Republican. Having already acquiesced to the creation of hundreds of billions of dollars in potential taxpayer obligations, Congress isn't likely to just hand over hundreds of billions more without demanding some concessions like assistance for strapped homeowners.

The decisions made on the fly these past several months will have impacts that last deep into the next administration, long after the end of Paulson's tenure -- perhaps one of the most eventful of any Treasury secretary since Alexander Hamilton.

    (Read cover story at  www.Newsweek.com)  http://www.newsweek.com/id/160119