UK Financial Regulators Probe Interest Rate Swaps
(Mar 2012)
The Financial Times reported yesterday that the Financial Services Authority -- the counterpart of the SEC in the UK -- will investigate the possible mis-selling of interest rate swaps by banks, including Barclays. The regulator decided to look into the issue after The Telegraph provided detailed information about the potential misconduct of banks when selling interest rate swaps to small businesses.
In one of its reports, the Telegraph details a situation in which a manufacturing company...
Greg Smith Leaves Wall Street
(Mar 2012)
The New York Times published an op-ed by Greg Smith, a Goldman Sachs' Executive Director who is resigning from his job after almost 12 years with the firm because, as he puts it, the firm's culture has veered far from what it was when he first joined the firm. He says in spite of the firm's recent scandals "the interests of the client continue to be sidelined in the way the firm operates and thinks about making money." At SLCG, we have come across many examples of the issues raised by Mr....
WSJ on Innovation in Commodity ETFs
(Mar 2012)
Yesterday the Wall Street Journal ran an article about recent innovation in the commodity ETF space. Our work on commodity ETFs has focused on their use of constant-maturity rolling futures strategies, which incur a roll yield depending on conditions in the futures markets. Now, according to the WSJ, many ETF issuers are choosing more complex strategies to try to mitigate these and other effects in commodities markets:
Some of these new products use complex formulas to identify commodities...
In the News: Structured CDs
(Feb 2012)
Bloomberg News reported this week that FINRA is investigating a relatively new type of product that ties the returns of certificates of deposit (CDs) to derivatives. These products are known generally as 'Structured CDs' (SCDs) but also go by 'Index-Linked CDs', 'Equity-Linked CDs' or 'Market-Linked CDs'. There have also been news stories concerning Market-Linked CDs issued by Wells-Fargo and Equity-Linked CDs issued by Goldman Sachs in recent years.
SCDs have existed since the late 1980s,...
Massachusetts Security Regulator Latest to Take Action on BoA CLOs
(Feb 2012)
The Wall Street Journal today reported that Massachusetts is investigating Bank of America for their role in the LCM VII and Bryn Mawr II CLOs. Secretary of the Commonwealth William Galvin is leading the investigation as to whether the two CLOs priced their underlying assets truthfully at the time of sales to investors. The subpoenas have also been picked up byBloomberg, Fox Business, and Reuters, amongst others.
SLCG initially reported the mispricing of these CLOs in a research paper earlier...
Could Credit Rating Agencies be Held Accountable This Time?
(Feb 2012)
A recent wall street journal article reports that U.S. lawmakers plan to introduce a bill that would require top credit-rating firms to review their credit ratings on a quarterly basis, hoping that more frequent reviews would increase the accuracy of their ratings and help identify potential problems.
According to Wall Street Journal, the bill would "amend the Securities Exchange Act of 1934 to require the chief executive officer of each [credit-rating firm] to attest, quarterly, to the...
Reserve your Clever ETF Ticker Before it's Too Late
(Feb 2012)
The Wall Street Journal reported yesterday that descriptive and catchy tickers for Exchange Traded Funds (ETFs) are getting harder and harder to come by these days. From the article:
But finding a catchy symbol can be tough these days. Many have already been taken: 1,350 symbols are in use on the NYSE Arca alone, the biggest U.S. market for exchange-traded products. That's up 108% over the past five years, says Ms. Morrison. In addition, fund firms have reserved 2,446 symbols for future...
A Wipeout That Didn't Have to Happen
(Feb 2012)
This weekend the New York Times' Gretchen Morgenson wrote an article about the recent FINRA award against Banc of America Securities for their LCM VII CLO. We have blogged about this case before, and have put together a research paper describing the underlying issue of warehousing assets in structured credit derivatives. We are very grateful to the New York Times and Gretchen Morgenson for giving this story the attention it deserves.
The fundamental problem with structured credit and many...
Schwab Sues FINRA RE: Class Action and Consolidated Claims
(Feb 2012)
There has been some buzz on the blogosphere concerning the ongoing dispute between Schwab and FINRA concerning the issue of class action waivers attached to securities products.
FINRA recently alleged that Charles Schwab & Co. violated FINRA rules by including class action waivers in their customer agreements. From their press release:
FINRA's complaint charges that in October 2011, Schwab amended its customer account agreement to include a provision requiring customers to waive their rights...
President and CIO of Direxion admits that leveraged ETFs are not appropriate for most investors
(Jan 2012)
Today Seeking Alpha posted an interview with Dan O'Neill, President and CIO of Direxion, one of the first and best known issuers of leveraged ETFs. Readers familiar with our work on leveraged ETFs know that we feel these products are almost always unsuitable for retail investors.
Surprisingly enough, Mr. O'Neill agrees completely:
The leveraged indexed ETFs are used by very tactical investors, and so there we have bull and bear funds. They have daily betas, which means that essentially...
