Week in Review
July 14, 2008
Subprime Debt Too Hot to Handle for Ratings Agencies
In a report the Securities and Exchange Commission released last week onwhat went wrong at the ratings agencies responsible for grading instruments tied to subprime debt, the Securities and Exchange Commission found a breakdown in communications-and executives overanxious for the business.
As the number of complicated securities tied to subprime mortgage debt soared, particularly collateralized debt, the big three ratings agencies-Moody's, Standard & Poor's and Fitch-often didn't add enough staff. And if analysts on hand voiced concern, they were often ignored.
One analyst lamented that collateralized debt obligation deals were becoming so complex, the ratings firm's models were inadequate to measure them. Deals, the analyst said, "could be structured by cows, and we would rate it."
In another frank exchange, a credit-rating manager confesses the business of rating CDOs had become a "monster. Let's hope we are all wealthy and retired by the time this house of cards falters."
The SEC also found a lack of documentation and proper risk surveillance at the ratings agencies, although it didn't disclose specifics for any one firm.
U.K. Hedge Fund Group Launches Third Standards
The Alternative Investment Management Association of the U.K. is about to launch a third set of codes for hedge funds-of-funds, on the heels of two other sets of best practices issued in the last 18 months. The association plans to publish its codes next year.
Meanwhile, another U.K. hedge fund association, the Hedge Fund Working Group, issued its own set of best practices in January. In the U.S., the President's Working Group on Financial Markets issued standards for hedge funds and hedge funds-of-funds in April.
Rob Mirsky, a partner with Ernst & Young who specializes in hedge funds, applauded the three efforts, saying he didn't think there would be too much overlap and that the codes will improve disclosure and governance for the hedge fund industries in the U.K. and the U.S., making them stronger.
But the U.K. National Association of Pension Funds issued a statement saying it would prefer one set of standards. "We would prefer one set of guidance which is both broad and clear and have each hedge fund sign up to that," the group said.
China Denies Holding Fund Officials Hostage'
A source for the China Securities Regulatory Commission recently stated that the CSRC only suggested that senior mutual fund officials remain in China until the Olympics in early August to keep a stable market, they are in no way barring them from leaving the country.
"The securities regulator won't restrict any senior fund officials from leaving China and it will not make a request to them to stay either," the source said.
A Shanghai-based newspaper, The Oriental Morning Post, reports that companies seem to be heeding the suggestions of the CSRC, as they are advising top officials not to leave the country prior to the Olympic Games. The paper further indicated that the fund managers may not even be allowed to sell shares on the market as it continues to weaken. When asked, money fund management companies denied acknowledgment of such suggestions.
As the Olympic Games approach, China has become continually worried about its public image and financial status. In response to global market concerns, tighter Chinese monetary policy and threats of higher inflation, the main Shanghai stock market index has fallen 45% so far this year. These issues have put pressure on the Chinese government and business sectors, as they both look to the Olympic Games to promote social and economic development for the country.
Vanguard Transfers Rest of Its ETFs to NYSE Arca
Vanguard has transferred the remaining 34 of its 38 exchange-traded funds to the NYSE Arca from the American Stock Exchange. This is a result of the merger between Amex and NYSE EuroNet, the holding company for NYSE Arca. The other four ETFs, Vanguard Mega Cap 300 ETF, Vanguard Mega Cap 300 Growth ETF, Vanguard Mega Cap 300 Value ETF and Vanguard Total World Stock ETF, are already traded on the NYSE Arca. The 34 transferred ETFs will begin trading after the Securities and Exchange Commission approves the merger.
Industry Mourns Loss of Legendary John Templeton
Sir John Templeton, founder of the Templeton Funds and who first came to Wall Street in 1937, passed away last week at the age of 95 from pneumonia in Nassau, the Bahamas. As noted on the home website of Franklin Templeton Investments, Templeton, who was knighted by Queen Elizabeth in 1987 for his charitable works, launched his first global mutual fund, the Templeton Growth Fund, in 1954, "when most people's concept of investing didn't extend beyond Wall Street.