The short sellers put up collateral, agreed to pay dividends, and paid a small amount of interest. These middle-men companies took a big slice of the earnings.  The 401k funds got only a little,  but did not complain because they thought it was essentially a risk free source of extra money.

Unfortunately, the middle-man companies overseeing the transactions got greedy, and started investing the collateral in commercial paper, instead of safer T-bills.  When the financial crisis hit, and Lehman Brothers went bankrupt, there was a panic in the commercial paper market, and some of the invested collateral suffered losses.

These Wall Street firms then passed the losses onto the funds.  Ultimately, it was the “little guy retirees” who are paying the price.  Effected S&P 500 funds, for example, lagged their benchmark index by 11 basis points (0.11%) before fees.  Mortgage-backed funds lagged by up to 53 basis points (0.53%).

Even though these losses caused by poorly invested collateral are insignificant compared to the overall loss in the mutual funds (e.g. the S&P 500 index lost 36% in 2008), they still angered some investors – who have filed class action law suits.

Overall, this situation seems to be limited to mutual funds.  People with brokerage accounts who buy individual stocks do not have to worry.  All the major brokerages keep 100% of any fees from lending securities to short sellers.  In return, they cover any losses.

Today stock loans are very popular.   Since the financial markets have been turned up-side down and banks are not lending, one method of financing has gained a lot of attention – securities based lending.

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Securities Lending is a long-established process.  In fact, hundreds of successful stock-lending transactions have been executed involving the American Stock Exchange (AMEX), National Stock Market and Small Cap Stock Market (NASDAQ), New York Stock Exchange (NYSE), Over-the-Counter Bulletin Board (OTCBB), and certain foreign exchanges.

For those with money invested in marketable securities, there is a safe way to leverage their assets and take advantage of the golden opportunities now available to cash-in on terrific RE investment opportunities which are available today.

If you are a forward-thinking investor who wants to retain the future ownership of your assets as well as leverage the present value of your securities for immediate cash needs, this can be a terrific program.

These loans are –

·         Simple & Quick – NO Credit Check / NO Income Verification / NO Upfront Fees / NO Closing Costs / NO Personal Guarantee

·         Loans are “Non-Purpose” – loan can be used for virtually anything borrower wants to accomplish (personal or business)

·         Loans are “Non-Recourse” – giving the borrower the opportunity to simply “walk away” if the collateral falls below a set floor amount

·         High Loan-to-Values – up to 80% LTV (depending upon security); which is much higher than banks and brokerage companies can offer

·         Loans are Interest Only – principal payment at maturity; otherwise loans can be refinanced or extended

·         Low Fixed Interest Rates – usually between 2% to 4%

·         Loan Term – minimum of 3 yrs; also 5 yr / 7 yr / 10 yrs

·         Quick Funded – usually within 5 to 7 business days

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The three primary rating agencies; Moodys, Standard and Poors, and Fitch made “negligent misrepresentations” to the pension fund. The agencies’ ratings “proved to be wildly inaccurate and unreasonably high.” Calpers goes on to say that the methods used to assess these securities were “seriously flawed in conception and incompetently applied”.

It has been my contention all along that this group is by far the most culpable in this affair, because they took perfectly lousy financial instruments and slapped triple A ratings on them; the equivalent of United States Bonds. These complicated instruments that only the most sophisticated financial engineers could understand, were pushed onto countries, cities, municipalities and large pension funds as the greatest and safest investment since the United States Savings Bond, yet they were the farthest thing from safe. Most of these instruments have now lost ALL of their intrinsic value.

It wasn’t until the three credit agencies set their stamp of approval on these incredibly risky investments that the mortgage backed securities boom on Wall Street exploded. Wall Street entrepreneurs sold their new product to anyone looking for a larger annual return.

After they were sold, the inflow of money (billions or more likely trillions of dollars) was then funneled back to mortgage lenders like Countrywide and New Century Mortgage, who were busy underwriting these risky high yield, subprime loans; the key element within the financial instruments that the giants on Wall Street were so successfully selling. In other words, the securities were selling like hot cakes and Wall Street couldn’t get enough mortgages to back them, and so they pushed their lending partners to create more loans no matter how risky. Why….because they already had them sold to China, Calpers, cities in Norway, etc….. and why were they so easy to sell….. because Moodys, and Fitch, and Standard and Poors were slapping triple A ratings on them…. the highest rating possible.

It makes one wonder why Calpers, who has probably some of the most sophisticated financial experts in the industry, could not detect the risk in these securities? The reason was because of their opaqueness.

The information about what was inside of them was kept hidden from the buyer under the guise that “the securities in these packages were considered proprietary and unavailable for review”. Hence the triple A rating was the key measuring gauge the investor had, to determine the risk in the product that they were buying.

Furthermore, Calpers contends in their suit that the rating agencies were not only responsible for inaccurately rating these financial securities, but that there was an “inherent conflict of interest”, since they were actually paid by the companies issuing the securities.

Finally, the insidious behavior of these institutions reached a new ethical low when Calpers revealed in their lawsuit that the agencies themselves actually assisted, for a hefty fee, those who were creating these securities, so that they would produce a product that would receive the prestigious triple A rating.

No wonder Calpers decided to sue the rating agencies. My only question is what took them so long?

Furthermore, why hasn’t a criminal investigation been initiated? There are people and corporations out there that are undeniably responsible for our financial mess, and in my opinion, should be held accountable. After all, as financial agents they have a fiduciary responsibility to the public, and by issuing triple A ratings on these securities they not only abandoned their responsibility, but assisted in the meltdown of our global economy.

In this time of re-regulating the banking industry, and trying to create laws that would prevent a similar situation, if we do not address this conflict of interest, between Wall Street and the agencies that rate their financial instruments, we are certain to repeat the mistakes that led us into this current financial crisis.

*primary source The New York Times July 2009

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It was known that banks did not use the bailout money to lend. They were simply sitting on the cash and only buying out distressed banks. Credit market remained closed even though there were some signs that credit was moving. Wall Street responded in negative way as many Americans could not get a loan. Therefore, white house stepped in.

“What we’re trying to do is get banks to do what they are supposed to do, which is support the system that we have in America. And banks exist to lend money,” White House press secretary Dana Perino said.

Anthony Ryan, Treasury’s acting undersecretary for domestic finance, made the same point in a speech in New York before financial executives.

“As these banks and institutions are reinforced and supported with taxpayer funds, they must meet their responsibility to lend, and support the American people and the U.S. economy,” Ryan told the annual meeting of the Securities Industry and Financial Markets Association. “It is in a strengthened institution’s best financial interest to increase lending once it has received government funding.”

Treasury is buying preferred shares in banks in return for cash infusion, however; about 6,000 banks are not publicly traded and cannot get funding due to restrictions Treasury currently has.

Treasury is currently working on a plan where both banks, publicly traded and private can qualify for the program.

Treasury has pumped up money to help economy get back on its track and avoid national recession. Treasury Department will buy $125 billion of preferred stocks from nine largest banks, which account for 50 percent of all U.S deposits. An additional $125 billion will be passed to banks in upcoming weeks.

Rep. Henry Waxman, D-Calif., chairman of the House Oversight Committee, asked banks who received $125 billion to address executive pay, employee pay and other bonuses.

“I question the appropriateness of depleting the capital that taxpayers just injected into the bank through the payment of billions of dollars in bonuses, especially after one of the financial industry’s worst years on record,” Waxman said.

Many reports were surfacing when news spread out that banks are only buying other banks and have no intension of lending and opening their credit lines. Indeed, the government approved PNC Financial Services Group Inc. to receive $7.7 billion in return for company stock on Friday and, at the same time; PNC said it was acquiring National City Corp. for $5.58 billion.

However, there is no language in bailout plan that would tell banks to use the money for lending. Many officials argue that attaching requirements, banks will discourage to take advantage of this program.

Other efforts have included:

-A Federal Reserve program, to commercial paper or business debts.

-Temporary guarantees by the Federal Deposit Insurance Corp. of new issues of bank debt fully protecting the money, for a fee, even if the institution fails.

-Emergency loans from the Fed for financial institutions.

-A temporary increase in the cap on deposit insurance from $100,000 to $250,000 on interest-bearing accounts, and unlimited deposit insurance for non-interest bearing accounts, which small businesses often use to cover payrolls and other expenses and which frequently exceed $250,000.

-The Fed’s half-point reduction in its target interest rate on Oct. 8, done in conjunction with rate cuts by other central banks around the world.

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