SEC, SPE’s and SIV's - How Wall Street is constructed to take from YOU

The SEC,  SPE’s and SIV's

 Securities and Exchange Commission and Special Purpose Entities

and Structured Investment Vehicles

Started  2/17/04 and updated 12/05/07 -

When Harvey Pitt was placed in charge of the SEC, democrats screamed immediately that he was wrong, without really supplying any proof (that was reported in a reasonable fashion). So every time I heard it, I said to myself, and others I talked to, “give him a chance”. Then after a while, some evidence was presented that showed that Mr. Pitt should be removed.

Of course, the new Chairman, Mr. Donaldson, as it was in the beginning with Mr. Pitt, was heralded as “someone who knows where the skeletons are” on Wall Street. EXCUSE ME, but it occurs to me that if they know where problems on Wall Street are at, then they either would have made news telling where the problems were years before, or they are part of the problem!

Eliot Spitzer has done this country a great service – he has pointed out that Wall Street is set up for the rich to get richer (he has not necessarily said it in those words, but that is the result), and has been from the start. I don’t care what his political aspirations may be because he has done something that needed to be done; he has shone a bright light on the backroom dealings that are big business, and the rats there are being shot (figuratively).

Insider deals giving extremely rich (Mr. Bernie Ebbers comes to mind) people more ways to make money with no risk is one thing that now shines in the Spitzer light. Though in some cases the people actually did trade with the firms involved (new reports say Ebbers didn’t), it is still not a fair way to do business, here in this country of “equals”. How can anyone say that making sure that a select few rich people are given the chance to make money while shutting out millions of other potential investors is the right way to do business?

Mr. Spitzer is doing what the SEC would not – enforce the law, and in some cases cause new laws to be made. But everything that he is doing is just what the SEC was supposed to have been doing for the past 60 years! CNBC had a program on in 2003 by Sue Herrera that looked the SEC and the NYSE, what precipitated its founding, and whom was placed in charge. As I remember the show, a banker, and one of the richest men in America, was given the job of getting it all going. But that show also pointed out how many things were still done in the smoky back rooms. Funny how things never change over time, unless forced from the outside.

And then we come to SPE’s – those “Special Purpose Entities” dreamed up by accountants. That’s right – accountants. With all the purpose of a mafia lawyer, they looked at how they could modify legitimate methods of branching off sections of a company, but with the apparent purpose of filtering off assets and debt to places where no one could gain access to the records. Some of those, as profiled in news accounts, had companies created by corporate insiders funneling millions of dollars (both real and imagined, I believe) to places where the money could just disappear, leaving behind just the debt. And of course, a company with only debt files for bankruptcy and “dissolves into the night”. While there are still questions about the purpose of all of them, reports were that ENRON made over 4600 SPE companies. Some may have had legitimate reasons to exist, but NO ONE will ever convince me that these, with few exceptions, were for "sound business practices".

And where was the SEC while all this was going on? ENRON (and others) started making SPE companies years ago, so why had the SEC never investigated them? Surely they won’t try to say that they never had the funds to do their job, will they? Why, just one of these, with the proper penalties (read that as “how to fund the SEC through lawsuits against unscrupulous companies and individuals”) assessed, would have paid for then next, and then some. But of course, as I pointed out above, there is no way that these “skeleton” sleuths were going to rat on their cohorts.

Now don’t start thinking that Congress is going to start really getting involved either. Sure, they want to make a good showing, calling witnesses in so the elected officials can read their prepared remarks for the cameras, and then the witness can either “take the 5th” or sit there and claim “I don’t recall”. But you will never get any real action from Washington, because they all know where their campaign money comes from, and in over 200 years, we have perhaps had 2 officials upset the apple cart (read that: cut their political throats), and I may be generous in stating that much.

 

SEC is Run Amuck Again

Here we are in November 2007, and AGAIN we are faced with the SEC failing to do it's duty, this time in regards to lending institutions. Citigroup, Merrill Lynch, Bear Stearns, Goldman Sachs, even UBS, are now on the hot seat for risky lending in the many tens of billions of dollars! And what has become the quick way of getting the debt out of sight?: the equally wrong banking version of a SPE [the Special Purpose Entity of Enron fame]- called a SUPER "structured investment vehicle" [SIV - I can't think of a better acronym that they could have come up with. Rather than a bucket to hold the assets, they use something with HOLES!! read on]. [Note - there are also "conduits" that are smaller versions of these holders of failed investments.] They have quickly changed the 'name' to MLEC [Master Liquidity Enhancement Conduit - this is defined in another FT.com article, but I can't find it otherwise on the internet].

Just what is a SIV/MLEC? The Financial Times (FT.com) for U.S. & Canada states it thus: "The idea of the MLEC is to transfer the securities to a new vehicle that could hold the securities to maturity thus capturing the full value of the assets. Although the backers stress the MLEC would be a temporary solution, they say it is likely to last for three or four years." [from a 10/19/07 article - before the shit really hit the fan in the U.S.]

The article, however, not being the place to speculate, does not state this - that I am certain that rather than waiting years for maturity of these loans, and perhaps more importantly because many of these loans could never be re-paid, most will be written off their taxes, ultimately becoming OUR BURDEN as they get to claim it as a loss against the billions otherwise made, and therefore not pay any taxes! And where they can't do that, they will again come after US as they did with the "Long Term Capital Management" fiasco in the late 1980's [and later, the BCCI banking scandal], when the super rich lost billions in hedge funds [which ONLY they are allowed to invest in] then got bailed out by George Bush (#1), as it was determined that allowing these funds to fail could also take down banks. [See, the rich don't have to pay for everything up front (to be fair, neither do the moderately wealthy, when investing in "puts and calls") but instead "leverage" their investing by simply promising to pay if they lose the "bet" on the investment. Think of it this way - you go to a bookie and tell him you are betting on "Flower Power to WIN at 8:1" and place a bet of $100, but only give him $10. If the horse wins, you collect the $800, but if it loses then you have to cough up the other $90. If you don't YOU get your legs broken - but for the rich, they cry to the government an WE get OUR legs broken in the form of taxes to fund a bailout!]

 Here's another good one - most investment bankers and financial reporters, and some government officials claim that they don't really understand the SIV/MLEC. But that won't stop Washington from letting these banks set it up.

What the banks are doing with the SIV would be impossible, and perhaps illegal for you and me to do. Do you think you could really take, say, a couch that turns out to be really bad, throw it in the garbage, then tell the company that you are stopping payment on the check? What they are doing amounts to the same thing! They 'bought' these bad mortgages, that may be defaulted upon shortly, but now claim that they are worthless and so want to trash them without any consequences.

As some are now stating - "where were the regulators in all this?" Well, let's see - reports are that the BUSH #2 administration has cut many federal departments from 10% to 80%! Was the SEC one of these? Whether it was or not, it clearly has not been doing the job it was set up to do, and hasn't been doing it for many years!

Of course, there are those that think there shouldn't be any regulation of any business. Larry Kudlow [of CNBC - sorry Larry but since I watch a lot of CNBC & not the rabid "FOX'es", you are the one I am exposed to the most - which is why, with your 'let business do anything completely un-regulated' stance, and 'only Republicans can save the world' stance, I can't stand to watch your show anymore] is one of those staunch Republicans that believe the "market" will regulate companies, forcing bad companies into failure by not purchasing their products. But let's face it, America - if we didn't have regulations, drug companies would sell snake oil, crops would be sprayed with DDT, and auto companies would make bumpers out of plastic!! Now do you really want to have a country where that could happen without consequences? [oops - they do! Remember the "5 mph no damage to the vehicle" rule? Now a 2 mph bump, or a simple scrape, can cost hundreds to repair. But the bumpers looked hideous and weighed about 100 lbs., so they could hardly be allowed today.]

But as pointed out before, regulations are a necessity in this world. I'm not saying that government should list things that can be sold, or how they must be sold - I am saying that companies are out to make money, and many don't care how they do it! Remember the movie "Erin Brockovich"? A utility was poisoning people by dumping toxins, and when discovered they did everything they could to cover it up, then fought tooth and nail to not pay the victims. If companies really did want to make money without hurting people, then as soon as they realized that people where being harmed they would have jumped to solve the problem.