High-Frequency Unhinged, Lending Sorta Rebounds, Mortgage Manipulator Nabbed

Receiving Wide Coverage ...

SEC to the Rescue: If awards were handed out for Most Reliable Lagging Indicator in U.S. financial markets, the Securities and Exchange Commission, sad to say, would likely walk away with the gold. (Such are the vagaries of overseeing financial markets with a revolving-door staff and politically polarized Commission.) Now, in the wake of the flash crash, Knight Capital Group's near suicide and the Nasdaq-Facebook IPO flub, comes word that the SEC has gotten around to looking into HFT "kill switches." The agency has in recent days requested details from major broker-dealers about internal controls for the automated trading systems involved in electronic trading, according to the Wall Street Journal, which cites "people with knowledge of the review." The chief securities overseer is also reportedly seeking information on any recent malfunctions, how they were handled and how firms can override their computers and shut them off. The new inquiries are said to go far beyond typical audits of financial firms carried out by the securities industry's self-regulator, the Financial Industry Regulatory Authority, or Finra. They also seek details on "automatic shut-offs or kill switches" that would turn off trading programs. It may be notable that the Journal's "people with knowledge of the review" decided to share their insights the same day the New York Times reports that regulators in several other countries, including Canada, Australia and Germany, have gotten a jump on the SEC and already adopted or proposed high-frequency trading limits. "The flurry of international activity is particularly striking because regulators have been slow to act in the United States, where trading firms and investors have been hardest hit by a series of market disruptions," the Times reports. Wall Street Journal, New York Times

London Barracuda Hooked: A former Credit Suisse banker accused of falsely inflating mortgage securities has been arrested in London, eight months after he was charged in the U.S., the Financial Times reports. Kareem Serageldin, the former head of Credit Suisse's structuring products group, is a dual U.S.-U.K. citizen, the Wall Street Journal reports. He is expected to appear in court Thursday in the U.K. If extradited, he will face charges from United States Attorney Preet Bharara of criminal conspiracy, filing false books and record and wire fraud, the Journal adds. Two other former traders, Salmaan Siddiqui and David Higgs, previously pleaded guilty to conspiracy charges. The two said they manipulated the profit and loss targets at Serageldin's direction to meet daily and monthly goals and increase their compensation, Bloomberg reports. The case appears to be a prime example of the adage that if you pay bankers to do bad things they're likely to fulfill your goals and often exceed them. That's especially true, it seems, in London (former workplace of JPMorgan Chase's London Whale and AIG-slayer Joe Cassano). Prosecutors allege that Serageldin directed bankers in New York and London to manipulate prices of mortgage securities from mid-2007 through early 2008 to give the false impression that their trading books were profitable. The alleged ruse resulted in a $1.7 million bonus for Serageldin in 2007, as well as a $5.2 million incentive award (later rescinded), according to the FT. Others involved also are said to have received bonuses as a result. Serageldin represents the highest-level Wall Street executive to be charged in a case relating to the 2008 financial meltdown, the Journal reports. Other banks have disclosed investigations over valuations, but to date no other cases have been filed. U.S. accounting rules require banks to mark trading positions daily using readily available prices or to turn to external benchmarks when trading dries up. "The case ... cuts to an issue at the heart of the financial panic," the Journal says. "As housing prices collapsed, some investors worried that Wall Street firms hid losses on mortgage-bond portfolios through inflated valuations. Financial firms later took hundreds of billions of dollars of write-downs on those portfolios, throwing markets into turmoil and triggering even-more losses when some markets seized." Financial Times, Wall Street Journal, Bloomberg News

Wall Street Journal

Consumer lending is back. In some regions of the country, anyway. That's the conclusion the Wall Street Journal arrives at this morning after crunching the pre- and post-crisis numbers. "The long-awaited recovery in bank lending to consumers is well under way in some smaller U.S. cities but remains depressed in large metropolitan areas on the East and West coasts," it says. Specifically, consumer lending recoveries are in place in Great Plains and Midwestern towns that rely on energy, food processing and manufacturing. However, larger coastal areas that were dominated by construction and finance continue to trail. The jump in lending was highest in Cedar Rapids among 200 U.S. metropolitan areas reviewed by Equifax and Moody's, according to the Journal. New lending in the Iowa metropolis was 52% higher in the fourth quarter of 2011 than it was in the same period in 2006. The largest drops were in the sand states of California and Florida, where the housing bust hit hardest. New lending in Merced, Calif., which experienced one of the worst housing collapses, ended last year 81% below its 2006 peak. The three largest U.S. cities—New York, Chicago and Los Angeles—experienced decreases of 38%, 44% and 55%, respectively, the Journal reports.

Consumers' borrowing appetites may be up, but their interest in mobile wallets is as flat as a yeast-free confection. That's the message Mini's Cupcakes has for the nation's banking and technology giants. The Salt Lake City bakery installed a mobile payments reader eight months ago and has since had a total of exactly zero customers use it, the Journal reports. "Mobile payments and purchasing at the physical point of sale have experienced little adoption in the U.S. marketplace despite abounding innovation in mobile and payments technologies," it reports, citing new research from Javelin Strategy & Research. Currently, everyone from Google (GOOG) to PayPal to JPMorgan Chase and Citibank (NYSE: C) appear to be pinning hopes for widespread adoptions on rollouts of so-called near-field communication chips. NFC devices enable consumers to make payments with at the point of sale using smart phones and no-touch wireless transactions.

Financial Times

The pain in Spain is back. Spain's borrowing costs rose and its IBEX-35 equities index fell 3.9% Wednesday on the eve of Madrid's announcement of new austerity measures. The bearish signs return Spain's shaky economy to the center of the action as Europe struggles to preserve its currency union. The euro, meanwhile, fell to a two-week low against the dollar. Interest rates for Italy, whose government is also burdened by high borrowing costs, also rose. Signs are that the race to save the euro, and head off an even more cataclysmic Continental recession (or worse), is now as much political as economic. Anti-austerity demonstrations continued for a second day in Madrid, after protests turned violent in front of the Spanish Parliament on Tuesday. In Athens, tens of thousands of demonstrators took to the streets to oppose expected budget cuts. This writer recently chatted with a Greek expatriate friend who returned to his homeland over the summer to find alarming signs that the ultra-right is on the rise. This might be a good time for policymakers to recall that economic crises often beget political ones and that those who ignore the lessons of history are doomed to repeat them.