January 6, 2003
Lawless and Listless
Lawless
It has been more than a year since Enron blew-up, yet the verdict is still out on whether or Citigroup, JP Morgan and other banks created illegal finance deals aimed at gussying up Enron’s decaying balance sheet. The situation would seem to be cut and dry: did the banks break the law or not? However, in the world of ‘structured finance’ the real question is whether any ‘laws’ exist.
“The Subcommittee recommendations propose joint action by the Securities and Exchange Commission (SEC) and bank regulators to bridge a current gap in federal oversight that exists because the SEC does not generally regulate banks, and bank regulators do not generally regulate accounting practices overseen by the SEC.”
Senate Subcommittee Report Charges U.S. Financial Institutions with Aiding Enron Deceptions (HTML)
Fishtail, Bacchus, Sundance, and Slapshot: Four Enron Transactions Funded and Facilitated by U.S. Financial Institutions (PDF)
If bank regulators, which include the Federal Reserve Board and Office of the Comptroller of the Currency, carry no influence crafting accounting practices how do these parties know that the banks are abiding by their standards? After all, are not many banking standards predicated on the information contained within audited financial statements? By contrast, those parties that craft accounting policies, which include the SEC and FASB, do not generally regulate banks. As such, for the SEC it is not a matter of whether or not questionable loan arrangements were made to Enron, but what such loans looked like within financial statements. If the SEC does not regulate banking practices how can they effectively craft the method in which the financial numbers that supposedly represent these practices?
Suffice it to say, what the Subcommittee is asking for is for regulatory harmony.
“The subcommittee called on the SEC, Fed, and OCC to report on structured finance oversight by June 2003 and to take a firmer legal stand on the issue.” Reuters
Quite frankly, such a request is unlikely to be fulfilled unless disaster strikes. For an example of why this is the case consider the OTC derivatives markets: the Fed believes OTC derivatives should not be regulated at all, the SEC believes derivatives exposure (not necessarily OTC derivatives) should be loosely explained within financial statements, the OCC believes that a monthly survey of OTC positions is sufficient information, and the NFA works hard discussing the OTC derivatives market but does not regulate it. Given the full plate each of these parties has, and the fact that no party has the authority to single handedly regulate/audit/monitor the OTCD market, a simple realization emerges: OTC derivatives will remain largely unregulated unless (until) there is blow-up that rocks the system and forces change.
With the OTC example in mind, one would think that the demise of Enron would be enough to bring about changes in structured finance. However, and beyond the natural steps being taken by banks to monitor their dealings more closely, now that Enron is yesterday’s news no one (meaning Bush and SEC Chairman ______ ) wants to start attacking banks when all can be forgotten. To be sure, throwing a CEO that schemed to rip-off investors in jail is one thing, but attacking the major U.S. financial institutions, regardless of what crimes they may have committed, is quite another.
“Enron's deceptions were shocking, and equally shocking was the extent to which respected U.S. financial institutions like Chase, Citigroup and Merrill Lynch helped Enron carry out its deceptions and mislead investors and analysts.”
On a related note, JP Morgan has asked the SEC to look into the rumors that goldbugs keep spreading about its gold derivatives book. The company says that these rumors (that its gold positions are losing billions), are ‘false and irresponsible.’ I’ll be the first to admit that the Blanchard lawsuit filed against JPM and ABX smells like an advertising campaign (if Blanchard had any hard evidence to support their claims they would not resort to using a nonsensical comparison to Enron). I’ll even admit that the GATA’s purpose is to spread rumors about a massive gold short position that may have existed 4 years ago but may not exist today (the Fed has a knack for dissolving contracts into thin air when need be). However, what I will not admit is that the SEC should be wasting their time investigating rumors unless a company first proves those rumors false. JPM has provided no proof to investors that their gold derivatives exposure is negligible.
As for the Blanchard case against JPM and ABX, this is the suits foundation:
“By using privately negotiated derivative contracts…”
You can not charge parties for breaking the law when no law, referring to the unregulated derivative contracts JPM and ABX used to manipulate gold, exists…
Listless
The upcoming week promises to be unpredictable, if for no other reason than the key report arrives on Friday (December jobs report). Breifing.com reports that a flat reading of 6% unemployment is expected, along with a slight increase in payrolls (from 10-21K). Other reports due out this week include ISM Service index, Factory orders (Nov), and Wholesale inventories (Nov).
As Time first reported, Bush is “set to propose that taxes on dividends be eliminated entirely.” I interpret the elimination of the double dividend tax in a mixed manner: it is great news for investors but a near non event for the economy. To be sure, conservative dividend investors are not about to take all their winnings and buy another new SUV, and dividend paying companies are not about to take any money they save and spend it on computer upgrades. Everyone seems to be missing the point: dividend yields are mired near historic lows and few dividend paying companies have pristine balance sheets. As such, if the Bush plan passes look for dividend minded investors to be moderately pleased and look for companies to use excess capital to pay down debt.
Despite the time of the year – early January! – there are too many unpredictable variables for stocks to make an energetic move higher: earnings warnings are expected to heat up this week, despite increased output talk from OPEC oil remains firm above $30 a barrel, gold continues to spike above $350, and the U.S. dollar appears to be under pressure until the Iraqi situation is resolved. Look for listless trade this week.
|
|
All data and information within these pages is thought to be taken from reliable sources but there is no guarantee as such. All opinions expressed on this site are opinions and should not be regarded as investment advice.
Copyright © 2000, 2001, 2002
FallStreet.com