Receiving Wide Coverage ...
Devil Advocates? The Journal reports this morning that the SEC is turning its sights on companies’ in-house and outside lawyers for obstructing investigations and for green-lighting questionable mortgage bond deals. The stonewalling includes tactics like “witnesses ‘forgetting’ what happened and companies conducting internal investigations that scapegoat junior employees and let senior managers off the hook.” Usually the agency only pursues lawyers for active involvement in fraud or misconduct, the paper says, but the SEC is getting fed up with what enforcement director Robert Khuzami calls “less-than-candid testimony.” Khuzami tells the Journal that SEC staff members have been reporting more lawyers to the agency’s general counsel, which can take action against them for misconduct on the job. The article briefly acknowledges the possibility that the SEC may be stepping on a slippery slope, and a Journal reader articulates this concern in the comment thread: “Whenever an unpopular defendant winds up in the dock … you will find unprincipled fanatics and opportunists going after his lawyers, including prosecuting attorneys and the news media. …In the United States defendants are entitled to legal representation to defend themselves against criminal and civil charges. This is the American way of life and it distinguishes us from dictatorships and authoritarian regimes. … Attacking a defendant's attorney is a backhanded way of attacking his rights under the constitution.” Separately, the Times reports on the growth of the “litigation finance” business, in which third-party investors pay plaintiffs’ legal expenses in exchange for a piece of the potential winnings from the case. These investments are apparently quite profitable, but some warn the activity could encourage frivolous suits and inappropriately influence cases. Responds one successful litigation financier: “This really is just corporate finance. … It just happens that the underlying asset is a litigation claim instead of an airplane or a photocopier.” Except you can know with certainty before you write a check whether the plane flies or the machine makes copies, but not whether the claim will prevail in court. Speaking of ethereal assets, we guess we ought to mention the Dewey & LeBoeuf situation here; the latest story in the Times says partners are now being encouraged to leave the wobbling global law firm. A rash of prior partner departures caused Dewey to breach its loan covenants, and bankruptcy is now a possibility.
Wall Street Journal
According to a story on the front page, more bloodletting is in store for Bank of America, and this round of 2,000 job cuts will target high-earning employees in the investment and commercial banking and wealth management lines. Previously, the “new BAC” slim-down program eliminated 30,000 consumer banking jobs.
The Treasury is considering issuing floating-rate term debt for the first time ever. We were about to say “…because that’s worked out so well for American homeowners,” but there’s a logic to the idea. The floaters would replace short-term T-bills, which the government is rolling over regularly. So the exposure to fluctuations in interest rates would be no greater, but there’d be less administrative hassle from auctions, and should market sentiment suddenly turn against U.S. debt (which seems a remote possibility, but you never know), the money is locked up for years rather than months.
Remember covenant-lite loans? They’re back with a vengeance — symptomatic of the broader trend of banks and junk-bond investors throwing “easy money” at low-rated corporate credits. “It’s not yet unduly dangerous, but we’re moving in that direction,” leveraged buyout king Wilbur Ross tells the Journal.
Columnist Francesco Guerrera takes a broad look at the realignment of trading in the bond market. New regulations (Volcker, Basel, etc.) have traditional Wall Street dealers “dumping bonds like there is no tomorrow” since they are “less willing to make a market and lubricate the system.” The resultant higher trading costs imply higher eventual borrowing costs for companies, hard as that may be to imagine at the moment given how cheap money is for corporates (see cov-lite item above). Meanwhile, other players like BlackRock, exchange operators and hedge funds are creating alternative trading platforms to cut out or replace the Street’s middlemen.
Executive and employee turnover at Fannie Mae and Freddie Mac is making it harder and harder for the government-run companies to function, the Journal reports. Managers and rank-and-file employees are leaving in droves because of compensation concerns (lawmakers are scrutinizing workers’ pay, and Freddie has already replaced performance-based pay with a fixed salary), conflicting objectives (supporting the housing market versus controlling losses) and low morale. “The companies' brands are toxic. Many employees say they often take pains to avoid telling people where they work, and swap stories about being met with hostility at Little League baseball games or social gatherings when people learn who their employers are.” Cleaning up other people’s messes is often a thankless job, and the only consolation we can think of for those still toiling at the GSEs is a quote from another famous Freddie: “What does not kill me, makes me stronger.” And in this case, perhaps more marketable for a higher-paying job in the private sector.
Satyajit Das takes a skeptical look at the hybrid instruments known as contingent convertible securities. They might help banks satisfy regulators’ new capital requirements at a lower cost, but from the investor’s perspective, they’re dicey, Das writes.
Cue the spooky theremin music. An FT editorial says that by requiring traditional banks to hold more capital, “Basel III and Dodd-Frank have, in effect, formed near ideal conditions for shadow banking — be it in wholesale finance (hello GE) or, in the real economy, in peer-to-peer and even payday lending.” Despite the eerie connotation of the term, shadow banking has its merits along with its dangers, the paper’s editorialists write. Regulators should focus “only on areas of shadow banking where risk concentrations can be systemically or socially detrimental,” such as the repo market.
New York Times
Despite all those DealBook stories we’ve read that reported the financial crisis and the Occupy movement have made it harder for Wall Street firms to recruit on campuses, guest writer Laura Newland says the opposite is true. This is not a welcome conclusion to her. “Unless our policy makers provide incentives to students to pursue more productive careers, Wall Street’s cachet will continue to highlight one of society’s ills: we charge heftily for an education, and then foolishly expect the educated to use their diplomas for the benefit of society.” (Newland’s a management consultant by the way; “at Duke, I was quickly seduced by a Wall Street recruiting machine that is reshaping the culture of higher education and diverting the career paths of our best and brightest.”)
Charlotte Business Journal: A city ordinance that was passed to beef up security for this summer’s Democratic convention will be put into practice sooner — for the annual shareholder meetings of Duke Energy Thursday and Bank of America next week, both of which are likely to be protested by environmental and Occupy groups. Among other “extraordinary” measures, “law enforcement will be given broader powers during these events to search backpacks, coolers, satchels and messenger bags. That includes briefcases and carry-on luggage — the kind with wheels often used by lawyers to transport reams of documents.” Counsel is advised not to pack any documents related to SEC matters.