There seems to be a growing feeling that US regulators have gotten completely out of control:
Rather than trying to take a stand on the conspiracy theory, I am raising the fundamental question of the regulatory dysfunctioning of the United States regulatory system.
The accumulation of fines and legal fees could potentially, more than market movements affect the performance, reputation and future of the US largest bank. Is that the objective? Of course not, even thought the accumulation of recent fines represents almost 10 percent of the bank’s equity.
The problem is that nobody is in charge of asking that question, and therefore focusing on its answer. Where is the Federal Reserve on this? Absent, since it does not want interfere with other agencies: the usual intra regulatory “territorial respect.” This is the biggest failure of the current regulatory reform: by not rationalizing the number of institutions and by not giving a global leadership to the Federal Reserve who is in charge of the US Systemically Important Financial Institutions, they become the target of every single of the 22 agencies who has some money to ask or some issues to resolve.
It is urgent to call it off. Fines should be suspended until the Administration comes with a sensible way to deal with failures and misbehavior of financial institutions. Unless they would like to spend billions in lawyers’ fees to answer class actions from SIFI’s shareholders, some form of coordination is needed.
The US regulatory web has definitely become a systemic risk. Jamie Dimon had actually anticipated it.
Jonathan Weil of Bloomberg points out:
One nagging question: Which federal securities laws did JPMorgan admit to violating? The bank didn’t say. It’s as if the lawyers for the SEC and JPMorgan were going out of their way to frustrate any outsider who was trying to read and understand the document’s contents.
The SEC, which fined JPMorgan $200 million as part of an administrative proceeding, clearly specified which laws it accused JPMorgan of violating. Those included Section 13(a) of the Securities Exchange Act of 1934, which sets requirements for companies’ disclosures to investors.
Why couldn’t the SEC get JPM to admit exactly what laws it violated? Beats me. The agency should have had the company over a barrel. Once again, the SEC has demonstrated that requiring defendants to admit to violations of specific rules or laws is the third rail of U.S. securities regulation. The SEC simply won’t go there and won’t touch it. Instead, the commission is content to say that JPMorgan agreed to admit “wrongdoing,” which is a spinmeister’s term that has no precise meaning.
Matt Levine mocks the FERC fines:
The details are in this marvelously complicated FERC order and settlement agreement,1 but the outlines of the story are simple. FERC built a terrible box, and the box had some buttons that were labeled “push here for money,” and JPMorgan pushed them and got money. You can understand the category mistake very easily:
- FERC thought the box was for generating electricity at market prices but with a robust backup system to ensure reliable supply, and
- JPMorgan thought the box was for dispensing money.
…
BCR is “bid cost recovery,” the system under which CAISO pays operators non-market bonuses to basically make sure they have their plants on when needed. The strategy is simple enough:
- The market clearing price for electricity will be, say, $30/MWh.
- Your inefficient old plants cost about $40/MWh to produce electricity.
- So you offer to be a price taker every third hour, selling your electricity at $30/MWh.
- The other two hours you offer $80/MWh, which is way way way above market.
- The system always lifts the offers of price-takers, so you’re contracted to supply electricity every third hour.
- But the system, in its infinite wisdom, understands that you can’t just turn a power plant on and off like that.
- So it tells you to produce energy, at the prices you offered – effectively $80, $80, $30 – for each of those three hours.
- The system, in its frankly circumscribed wisdom, doesn’t understand (1) that you are fucking with it or (2) that your average price for those three hours is actually $63.
- So you make a profit of $23/MWh instead of the loss of $10/MWh that you’d have at market rates.
I mean! The only proper response to that is, the first time you do it, CAISO calls you up and tells you to knock it off, and then changes its rules to prevent this sort of obvious gaming. JPMorgan didn’t write in big block letters at the top of its bid that day “HI GUYS WE FOUND A LOOPHOLE AND THIS IS IT” but surely its bid should have had the same effect.
So in other words. FERC fined JPMorgan because JPMorgan pointed out that the boys at FERC are stupid.
This, by the way, is similar to another kerfuffle involving idiots writing idiotic contracts:
But not that many people used the IDCH/Nasdaq interest rate swap futures contract, for reasons having to do with territoriality (no bank wants to give up its lucrative OTC swap business to trade exchange-traded products) and with the fact that the contract was terrible. The terribleness was that the contract was meant to, and IDCH/Nasdaq advertised that it would, exactly replicate the value of an over-the-counter interest rate swap. But it didn’t. IDCH/Nasdaq just designed it wrong, so its value was slightly but meaningfully different from the value of a swap with the same terms. What they got wrong isn’t exactly rocket science but it’s, let’s say, footnote science, so.**
And Matt Levine observes:
The upshot is that about half of the JPMorgan fines so far are not for the traditional bread-and-butter of financial enforcement, disclosure failings, but for just doing dumb trades.*****
Mostly I just want to flag how odd that is. But I guess there are a few other things to think about it.
Thing one is: There’s a reason why regulators tend not to pursue cases against big companies just for dumbness. I mean, there are a lot of reasons, like a general assumption that businesspeople know their business better than regulators do, and a policy desire not to deter innovation by punishing mistakes. But there’s one big reason, which is that dumbness is its own reward. You actually don’t need to fine JPMorgan $900 million for losing $6.2 billion! Losing $6.2 billion completely and accurately punishes them for losing $6.2 billion.******Thing two is: How dumb was this trade, really? I have myself been pretty sneery about some of the decisions made in putting it on, but the basic crash-hedge theory at its heart was not nuts. More importantly, though, the notion that this trade exposed JPMorgan to material risk of unsoundness is odd. I mean, $6.2 billion is a lot of money to lose. But JPMorgan’s net income in 2012, after those losses, was $21.3 billion. The $6.2 billion loss was less than 2 percent of the assets in JPMorgan’s Chief Investment Office, and less than 0.2 percent of JPMorgan’s total assets. Spinning it into an existential threat to the bank looks … I mean, just sort of wrong.
And to complete the regulatory review for today it looks like the solution I first advocated twenty years ago will be adopted:
The federal government has struck a deal with Ontario and B.C. to create a new securities regulator that covers roughly two-thirds of Canadian capital markets, reigniting a long fight over a national securities regulator.
The three governments said Thursday the other provinces and territories will be invited to join the new “co-operative” regulator, slated to be operational by 2015.
The regulator would be based in Toronto, with offices across the country and initially run jointly by Ontario and B.C.
Spend-Every-Penny grabbed the mic:
Finance Minister Jim Flaherty said the proposed new system would help attract more investment, better protect investors, make it easier to prosecute white collar criminals and manage risks to the financial system.
I find it very difficult to believe that it will make enforcement better. But I support it because it will make compliance cheaper … or, at least, less of a complete waste of time registering the same information with different provincial regulators.
It was another good day for the Canadian preferred share market, with PerpetualDiscounts winning 32bp, FixedResets up 4bp and DeemedRetractibles gaining 1bp. A relatively long Performance Highlights table is skewed towards winning PerpetualDiscounts and insurance-issued DeemedRetractibles. Volume was above average.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.4692 % | 2,591.7 |
| FixedFloater | 4.28 % | 3.59 % | 30,170 | 18.12 | 1 | 0.0000 % | 3,880.4 |
| Floater | 2.61 % | 2.86 % | 65,123 | 20.08 | 5 | 0.4692 % | 2,798.3 |
| OpRet | 4.62 % | 0.78 % | 68,813 | 0.52 | 3 | -0.0641 % | 2,643.2 |
| SplitShare | 4.76 % | 4.81 % | 57,050 | 4.07 | 6 | -0.0472 % | 2,945.5 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0641 % | 2,417.0 |
| Perpetual-Premium | 5.86 % | 5.83 % | 123,342 | 3.74 | 2 | -0.0984 % | 2,264.1 |
| Perpetual-Discount | 5.55 % | 5.64 % | 138,861 | 14.32 | 36 | 0.3195 % | 2,342.0 |
| FixedReset | 4.92 % | 3.67 % | 241,675 | 3.48 | 85 | 0.0383 % | 2,462.0 |
| Deemed-Retractible | 5.14 % | 4.66 % | 197,229 | 6.91 | 43 | 0.0076 % | 2,371.3 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| MFC.PR.F | FixedReset | -1.09 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.64 Bid-YTW : 4.29 % |
| SLF.PR.G | FixedReset | 1.01 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.95 Bid-YTW : 4.08 % |
| BAM.PR.T | FixedReset | 1.04 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-09-19 Maturity Price : 23.06 Evaluated at bid price : 24.35 Bid-YTW : 4.44 % |
| TRI.PR.B | Floater | 1.06 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-09-19 Maturity Price : 22.70 Evaluated at bid price : 22.94 Bid-YTW : 2.26 % |
| MFC.PR.C | Deemed-Retractible | 1.08 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.45 Bid-YTW : 6.30 % |
| GWO.PR.L | Deemed-Retractible | 1.09 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.00 Bid-YTW : 5.67 % |
| SLF.PR.B | Deemed-Retractible | 1.12 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.60 Bid-YTW : 6.00 % |
| FTS.PR.H | FixedReset | 1.18 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-09-19 Maturity Price : 21.50 Evaluated at bid price : 21.50 Bid-YTW : 4.18 % |
| POW.PR.D | Perpetual-Discount | 1.28 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-09-19 Maturity Price : 22.67 Evaluated at bid price : 22.92 Bid-YTW : 5.54 % |
| BNS.PR.Y | FixedReset | 1.30 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.12 Bid-YTW : 3.80 % |
| BAM.PF.D | Perpetual-Discount | 1.42 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-09-19 Maturity Price : 21.50 Evaluated at bid price : 21.50 Bid-YTW : 5.73 % |
| FTS.PR.J | Perpetual-Discount | 1.47 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-09-19 Maturity Price : 22.44 Evaluated at bid price : 22.78 Bid-YTW : 5.24 % |
| CIU.PR.A | Perpetual-Discount | 2.13 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-09-19 Maturity Price : 21.61 Evaluated at bid price : 21.61 Bid-YTW : 5.38 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| CU.PR.E | Perpetual-Discount | 227,700 | Nesbitt crossed 220,000 at 23.45. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-09-19 Maturity Price : 23.05 Evaluated at bid price : 23.35 Bid-YTW : 5.28 % |
| BNS.PR.P | FixedReset | 81,367 | RBC crossed 50,000 at 24.75; Nesbitt crossed 25,000 at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2018-04-25 Maturity Price : 25.00 Evaluated at bid price : 24.75 Bid-YTW : 3.71 % |
| BAM.PF.A | FixedReset | 60,288 | Scotia crossed 48,700 at 25.15. YTW SCENARIO Maturity Type : Call Maturity Date : 2018-09-30 Maturity Price : 25.00 Evaluated at bid price : 25.11 Bid-YTW : 4.40 % |
| PWF.PR.P | FixedReset | 57,914 | Nesbitt crossed 40,000 at 24.30. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-09-19 Maturity Price : 23.22 Evaluated at bid price : 24.30 Bid-YTW : 3.82 % |
| TD.PR.S | FixedReset | 55,471 | RBC crossed 50,000 at 24.80. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.80 Bid-YTW : 3.67 % |
| CU.PR.D | Perpetual-Discount | 54,135 | RBC crossed 49,600 at 23.50. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-09-19 Maturity Price : 23.11 Evaluated at bid price : 23.42 Bid-YTW : 5.26 % |
| There were 42 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| BAM.PR.G | FixedFloater | Quote: 22.20 – 23.02 Spot Rate : 0.8200 Average : 0.5955 YTW SCENARIO |
| SLF.PR.H | FixedReset | Quote: 24.90 – 25.25 Spot Rate : 0.3500 Average : 0.2192 YTW SCENARIO |
| MFC.PR.H | FixedReset | Quote: 25.66 – 26.02 Spot Rate : 0.3600 Average : 0.2455 YTW SCENARIO |
| BNA.PR.C | SplitShare | Quote: 24.02 – 24.39 Spot Rate : 0.3700 Average : 0.2564 YTW SCENARIO |
| FTS.PR.H | FixedReset | Quote: 21.50 – 21.95 Spot Rate : 0.4500 Average : 0.3382 YTW SCENARIO |
| PWF.PR.P | FixedReset | Quote: 24.30 – 24.66 Spot Rate : 0.3600 Average : 0.2601 YTW SCENARIO |
Either you are missing one crucial point about US Regulators or I’m just paranoid. The US Government, if it is in fact the US Government is a criminal organization dedicated to extortion and plundering the country for its own interests. I believe the US Government no longer exists and what we see is a phony money laundering front organization that has turned the populace into docile stupid amnesiacs. Either way, the criminal elite who are never legally guilty of anything (I guess) have gotten used to paying their extortion and protection money…..to who? The people they hurt? No never.
So much for Police State America.
I’m more interested in your opinion of Embridge’s upcoming $US 4.4% Rate Reset.
http://www.prefblog.com/?p=23101