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FEATURE STORY
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Are
Small IBDs Next On The Chopping Block?
By Christina Mucciolo
Some independent b/ds have already benefitted from the damage done to
the reputations of wirehouses in the credit crunch by gaining assets and
advisors. But not all independent b/ds (IBDs) are riding high on the
hog; many of the smaller fish in the business are stumbling in this
market.
In fact, small IBDs (loosely defined by industry experts as firms with
less than $150 million in client assets) are facing a number of damaging
crosscurrents: On top of increases in costs—both compliance and
overhead—they are now experiencing revenue losses and margin erosion
coupled with scarce credit. Those without a capital-rich corporate
parent, or a capital cushion of their own, may need to sell out, or risk
going under. “Over the next 12 to 18 months, if we see this market
continue, you are going to see an awful lot of firms trying to find a
partner that can take them out of the mess they are in,” says Larry
Papike, president and owner of Cross-Search, a Jamul, Calif.-based
recruiting firm.
Margins were already slim at small IBDs. With average payouts to
independent reps of 90 percent of revenue generated, some independent
b/ds are left with a paltry 3 percent to 4 percent pre-tax profit
margin, says Papike. And today, most brokerage’s assets are down
somewhere between 40 percent and 60 percent, he says, further pinching
profits—if not wiping them out.
Read
the full story here
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Top News of the Week
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Have Arthur Levitt's Words Come Back to Haunt Him?
By Bill Singer
Mark DeCambre and Kaja Whitehouse published a story today in the New
York Post titled: “Ex-SEC
Boss: Not My Fault,” which opened a window onto the thoughts of
those charged with regulating Wall Street. (Full disclosure: I am cited
in that story.) On the heels of the recent lurid discoveries about
Bernard Madoff's multi-billion-dollar fraud, former SEC Chair Arthur
Levitt is quoted in the article as saying: "At this point, I don't see
any evidence that the SEC dropped the ball.”
That comment infuriates me—and likely many others who have spent
countless hours this past week listening to the devastation brought upon
the life savings of many victims of Madoff's apparent fraud. It is
possible that Madoff made off (sorry for the pun) with billions of
dollars of other folks' money. I think the enormity of the theft needs
repeating: Billions of dollars. Billions. And this occurred right under
the nose of the SEC, which regulates RIAs and b/ds, and FINRA, which
regulates the latter only. We will need to see how this story unfolds to
know the extent of the regulatory failure and determine where to point
the finger.
Still, what kind of evidence does former Chairman Levitt need in order
to recognize that the SEC failed the investing public and the industry?
What evidence is required to convince this former industry cop that the
streets of Wall Street were not being patrolled … that the squad cars
were arriving too late while their occupants were munching on donuts and
slurping down coffee?
Read
the full story here
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SEC
Finalizes $30 Billion ARS Settlement With Citi And UBS
By John Churchill
Today the SEC resolved charges against Citi and UBS alleging that the
two firms misled investors about liquidity risks related to auction-rate
securities. The $30 billion settlement is the largest in SEC history and
restores liquidity to ARS investors at par value of their holdings.
According to the SEC’s release, Citi will offer to purchase ARS at par
from all current or former clients that bought them—even if the
customer moved accounts—restoring approximately $7 billion in
liquidity to Citi customers who invested in the securities. UBS will do
the same, restoring $22.7 billion to its customers. Importantly,
“eligible” customers at these firms who have already sold their ARS
below par will be eligible for reimbursement as well, according to the
release. The SEC’s complaints against the two firms stated that
between late 2007 and early 2008, both firms misrepresented the
liquidity risks inherent in the securities market by comparing them to
highly liquid money market funds, and failed to inform clients that
their own growing balance sheet constraints may prevent them from
supporting future auctions.
The auction rate-securities market—the obscure corner of the bond
market that municipalities, student loan organizations and other
institutional investors used for raising capital—was a popular cash
storage investment vehicle for wealthier investors. That is, before they
froze up in early February of this year. (Read Registered
Rep.’s May cover story, "A
False Sense Of Security", for details of the collapse.) The ensuing
liquidity crisis not only caused a lot of pain for investors and
institutions that relied on the market for short-term liquidity needs,
but it also revealed more problems and conflicts of interest in the
market’s structure (despite SEC attention to similar issues in 2005
and 2006).
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the full story here
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AIG
Executives: Fat Cats Or Valuable Management Worth Keeping?
By David A. Geracioti
Giving bonuses to company executives of a bankrupt,
government-rescued company, now that’s a story most news organizations
dream about. After all, nothing plays better than outrage—especially
when you can play the greedy fat-cat theme, too. So, on its surface,
AIG’s handing over $3 million to executives would seem absolutely
outrageous. With all due respect to our friend Paul Tharp, the veteran
newsman over at the New York Post, we think he miffed the angle
of his story
yesterday. He should have looked under the obvious story line for
mitigating circumstances.
The Post headline writer depicted the AIG’s CEO Edward
Liddy’s paying bonuses to key AIG executives as a “bungle.” Tharp
wrote in his lead, “Executives at government rescued AIG who are
taking cash perks to remain in ther jobs—some as much as $3
million—are lucky even to be employed.” The list of executives
hasn’t been disclosed yet, so we don’t know if any of the recipients
are undeserving. But not every one—not even senior managers—at AIG
is at fault. Certainly, we would agree that executives of the firm who
had a hand in its disastrous credit default swap strategy should be
fired (if they haven’t already resigned or been fired). Indeed, we all
can agree that incompetent executives who nearly brought down the entire
financial system should not be rewarded—public money or not. (AIG’s
lifeline is now a record $150 billion.) And, with layoffs having begun
at AIG, it would seem particularly galling to throw money at
“fat-cat” nincompoops.
But, we’re going to argue that Liddy actually had the right idea in
paying retention packages to key managers. Liddy may have had no choice.
(Yes, and Ken Lewis probably had no choice but to pay Merrill’s top
FAs to stay too. FAs didn’t cause the problem and, in a way, are
victims of bad management, too. And since the 16,000-strong advisors
represent 37 percent of Merrill’s revenue, Lewis could not take the
chance that they would bolt—taking their clients and assets with
them.)
Read
the full story here
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