ap SEC officials promise changes after Madoff failure

WASHINGTON (AP) -- The Securities and Exchange Commission's watchdog has recommended "employee-by-employee" action to ensure the agency fixes the breakdowns that allowed Bernard Madoff's colossal fraud to go undetected for years.

The question of whether SEC employees will individually be held accountable for the agency's embarrassing failure to detect the multibillion-dollar Ponzi scheme that Madoff ran for more than a decade emerged at a hearing Thursday by the Senate Banking Committee.

"The first thing you have to do is clean house," insisted Sen. Robert Menendez, D-N.J.

No SEC employees have been fired specifically in relation to the bungled investigations of Madoff, though the heads of the agency's enforcement division and inspections office, which conducted the probes, have left the SEC in recent months.

David Kotz, the SEC inspector general, testified Thursday that more than 20 employees were involved in the failed examinations.

"The entire SEC should be held accountable for what happened," he said.

Two top SEC officials pledged to fix the problems that led to the agency's failure to uncover for 16 years what could be the biggest Ponzi scheme on record despite numerous credible red flags raised by outsiders. The heads of the SEC's enforcement division and inspections office said they "deeply regret" the agency's failure in the Madoff affair and promised changes to avoid future breakdowns.

SEC Enforcement Director Robert Khuzami, who joined the agency in March, said he has started the most extensive restructuring of his division in at least 30 years.

"We intend to learn every lesson we can," he said. "There are no sacred cows."

Khuzami said every stone will be turned in revamping the agency, including personnel decisions on a case-by-case basis.

Harry Markopolos, the fraud investigator who brought his allegations to the SEC about improprieties in Madoff's business starting in 2000, testified that the agency's staff "was not capable of finding ice cream in a Dairy Queen."

"They need to start weeding out staff. ... There's a lot of turkeys that need to be let go," Markopolos said, suggesting that more than half of the agency's professional staff should get pink slips.

Khuzami disputed that, saying the deficiencies in the Madoff case are not "emblematic of the entire (enforcement) division."

Markopolos, who determined there was no way Madoff could have been making the consistent returns he claimed, repeatedly and specifically raised warnings to SEC staff members in Boston, New York and Washington about Madoff's operations.

Madoff, who pleaded guilty in March, is serving a 150-year sentence in federal prison in North Carolina for a pyramid scheme that destroyed thousands of people's life savings, wrecked charities and gave the financial system another big jolt. The legions of investors who lost money included Hollywood celebrities, ordinary people and famous names in business and sports -- as well as big hedge funds, international banks and charitable foundations worldwide.

Kotz revealed in a detailed report last week how the agency bungled five investigations of Madoff's business between June 1992 and last December, when the financier confessed.

SEC Chairman Mary Schapiro, appointed by President Barack Obama, has brought changes to the agency and revamped enforcement efforts.

Kotz said Schapiro's actions and the progress cited by Khuzami and John Walsh, acting director of the SEC's inspections office, are real.

"This thing has really affected the SEC greatly," Kotz testified. "The SEC understands, I believe, that things need to be done and (they) are taking action."

Markopolos said "the pace of reform is rapid but (the SEC) needs to keep that pace going."

Kotz has recommended that Schapiro consult with agency managers "so that appropriate action ... is taken, on an employee-by-employee basis, to ensure that future examinations and investigations are conducted in a more appropriate manner" and the failures aren't repeated.

Under government civil-service rules, employee terminations would normally involve an administrative procedure and adjudication on a case-by-case basis.

"We will thoroughly examine all of the conduct and take appropriate action," SEC spokesman John Nester said in a statement after the hearing.

Sen. Charles Schumer, D-N.Y., a member of the banking panel and close observer of the SEC, told reporters, "I certainly think you need an overhaul." He said he is looking into the issue of possible personnel actions

Kotz's report cited no evidence of improper ties between agency officials and Madoff, nor of senior SEC officials trying to influence the agency's probes of Madoff, who was a prominent Wall Street figure.

But it paints a grim picture of an agency hobbled by incompetence. Its failure to pursue the most obvious leads, disputes among inspection staffers and lack of communication among SEC offices cleared the way for Madoff to continue his scheme for nearly two decades.

Providing fresh embarrassment for the SEC, Massachusetts Secretary of State William Galvin on Wednesday released a transcript of a 2005 telephone call in which Madoff coached a potential witness about fooling the regulators, saying "you don't have to be too brilliant" to get away with it.

Galvin's office reached an $8 million settlement this week with New York-based Fairfield Greenwich Advisors, a Madoff feeder fund, to fully refund state investors burned by Madoff.

According to the transcript, Madoff dismissed an SEC investigation as a "fishing expedition" and highlighted how investigators develop cozy relationships with firms they are supposed to regulate.

"The guys ... ask a zillion different questions and we look at them sometimes and we laugh, and we say are you guys writing a book?" Madoff said. "These guys, they work for five years at the commission then they become a compliance manager at a hedge fund now."

Almighty dollar is not so mighty, but ...

The greenback has slid as investors flood back into stocks and commodities on end of recession hopes. But shouldn't a recovery be good news for the dollar?

NEW YORK (CNNMoney.com) -- The dollar goes down. Stocks go up. Lather. Rinse. Repeat.

One constant during the market's big rally -- now nearing its sixth month -- is that the greenback has taken a hit against the euro, yen and other currencies.

But some experts think that may be about to change. Stocks and the dollar could begin to move in the same direction. In fact, the dollar was up slightly Monday even as stocks once again moved higher.

It's been a strange ride for the greenback over the past year. The dollar rallied sharply from last fall until early March of this year -- even though that was the peak of the financial panic.

The thought was that investors were fleeing risky assets like stocks and commodities and plowing into the dollar, which, despite the many woes facing the U.S. economy, was still perceived as a safe place to park money.

But now that everybody on Wall Street is falling over themselves to declare that the recession is over, the dollar has begun weakening again as people sell dollars to invest in stocks, oil and other currencies.

Vassili Serebriakov, currency strategist with Wells Fargo, said this type of trade may not last for much longer though.

He said it made sense for the dollar and stocks to move in opposite directions during the height of the recession. But if the downturn is really nearing an end, investors should soon conclude that an economic recovery is good news for the greenback.

"Even if stocks do rally further, that may not be a negative. The dollar could stabilize because the U.S. economy is stabilizing," he said. "The gains in the stock market are a vote of confidence by international investors and at some point that should be a positive for the dollar."

A rebound in the dollar would be welcome news for consumers. The price of oil has marched higher in the past few months. Part of that is due to the recovery hopes but the weak dollar is also a culprit as well since oil is priced in dollars. Therefore, any time the dollar goes down, that usually leads to oil going up.

For that reason, Brian Dolan, chief currency strategist for FOREX.com, said that he thinks there are limits to how far the dollar could weaken. If the dollar falls significantly further, the resulting spike in crude prices could lead to renewed questions about whether the recession is really close to its final stages.

0:00 /3:17Weak dollar worries

"The biggest drawback with a weaker dollar is what it would do with commodity prices. We know what that does to gas prices and consumers. It could short-circuit a global recovery," he said.

Dolan added that another reason the dollar hasn't bounced back yet is because of momentum. It's now the sleepiest part of the summer. With trading volume so light, investors are unwilling to make any bold calls -- so that just leads to a continuation of the existing trend.

"The dollar has been the easy punching bag this summer," he said. "When the market returns to more normal conditions in the fall, there should be more diversification and people will move out of what's been the easy trade."

Omer Esiner, senior currency market analyst at Travelex Global Business Payments, a foreign exchange specialist, agreed that the dollar could stabilize in the fall once traders return from the beach.

But Esiner doesn't think the dollar and stocks will head higher in tandem. Rather, he believes a reversal of the summer stock rally and return to less risky assets will boost the greenback.

"A potential correction in stocks could be on the way and that should lead to a stronger dollar," he said. "Wall Street is factoring in a pretty rapid pace of recovery. Inevitably, there will be disappointment when the actual rebound undershoots the market's expectations."

Esiner added that any recovery for the dollar could be short-lived because investors may once focus on how costly the U.S. government's stimulus efforts are.

The Treasury Department is busy issuing new debt while the Federal Reserve has pumped a lot of cash into the financial system to try and jumpstart the credit markets. Esiner isn't expecting a wholesale collapse of the dollar, but he does think this printing of money will take its toll on the dollar's value.

"The key risks for the dollar are more long-term, not least of which are the soaring deficits in the U.S. and the deteriorating fiscal backdrop," he said.

But Dolan doesn't buy that argument. He thinks investors will instead soon realize that the U.S. isn't the only country trying to spend its way out of the downturn.

"The dollar has been to hell and back this year. Its status as the global reserve currency has been questioned. But we're not alone in issuing a lot of debt -- and the U.S. still has the ability to attract foreign investments," he said.

That may not hold true indefinitely. But for now, it does seem like the dollar's worst days may be behind it.

US Mortgage Delinquencies Up in July: Equifax

Rising unemployment continues to make more Americans miss their mortgage payments, a negative sign for the U.S. housing market that has lately enjoyed strong data on sales, prices and mortgage applications.

Among U.S. homeowners with mortgages, a record 7.32 percent were at least 30 days late on payments in July, up from about 4.5 percent a year earlier and 7.23 percent in June, according to monthly data from the Equifax credit bureau.

The rate of subprime mortgage delinquencies rose to 39.48 percent from 39.25 a month earlier, though it is still below levels reached earlier this year, according to the data obtained exclusively by Reuter

Mortgage delinquencies are driven by three factors, two of which appear to be solved or at least improving, said Dann Adams, president of U.S. Information Systems for Equifax [EFX 27.90 0.11 (+0.4%) ]. First, loose underwriting standards are largely a thing of the past, now that lenders demand higher credit scores and are more careful to verify income. Second, home prices are stabilizing, or even rising, in some U.S. markets, which puts less pressure on home owners.

But the third factor, unemployment, remains a worry.

"Even if it's in the 200,000 to 400,000 (job losses) a month range, it will be a driver of these delinquency rates," Adams said. "Until unemployment starts to flatten out and begin to return to hiring, these numbers will probably continue to push up."

iStock photo Foreclosed Home

Mortgages are more likely to be delinquent in parts of the United States where the housing bubble was biggest, and underwriting standards were the loosest, such as Florida, Nevada and California; delinquency rates are less acute in parts of the Midwest and on the East Coast.

The mortgage data come against a backdrop of an improving housing market, whose health is considered critical to any U.S. economic recovery.

Sales of new single-family homes rose more than expected in July. Home prices were up in June, from May, in 18 of 20 metropolitan areas tracked by the Case-Shiller index, a monthly measure of U.S. home prices. Applications for loans to buy a home rose for a fourth straight week, according to the Mortgage Bankers Association.

Demand has been helped in part by an $8,000 government tax credit for new home buyers that is to expire in November. Some home builders, meanwhile, have reported increases in signed contracts for the first time in years, such as Toll Brothers [TOL 23.14 0.83 (+3.72%) ], which reports quarterly results on Thursday.

Areas of Concern

Against that backdrop, rising delinquencies suggest U.S. housing is not yet out of the woods. Early-stage delinquencies are a leading indicator of future bankruptcy filings, and Equifax's July data suggest bankruptcies will continue rising in coming months.

Bankruptcy filings were up 35 percent in July compared with a year earlier, accelerating from both June and May. Still, while more Americans are late on their mortgage payments, they seemed to be keeping up with credit card bills.

The proportion of bank cards at least 60 days past due was down for the fourth straight month in terms of units, and down for the second straight month in dollar terms. Equifax said this reflects both tight underwriting standards by card companies and consumers cutting back on their spending.

The number of new cards issued in the first half of the year, at 14.7 million, is down 39 percent from the same period in 2008, and those cards are now likely to go only to "prime" consumers with high credit scores.

"It is definitely a prime play right now," Adams said.

Separately, Equifax said it saw a huge increase in credit inquiries from auto dealers this month, in response to the cash-for-clunkers program.

"It will be interesting to see the underwriting standards put on that volume of new cars," Adams said. "We'll be watching that portfolio over the next three to six months."

Auto delinquency rates rose for the third straight month in July and are up about 13 percent over last year, to 0.75 percent. Subprime auto delinquencies, at 3.19 percent, are also up for three months running.

Meanwhile, student loan delinquencies are also up, partly reflecting graduates' difficulty in landing jobs after college.

U.S. Cash-for-Clunkers program ends with jumping sales

CHICAGO, Aug. 24 (Xinhua) -- The popular Cash-for-Clunkers program, which has generated sales of nearly 490,000 vehicles in the U.S., worth more than 2 billion dollars, ended Monday night after a wildly successful run.

Car sales in July were the highest since August 2008 and up 13 percent over June.

Operation manager Abel Rivera matches keys with clunker vehicles traded in by customers during the last day of the "Cash For Clunkers" auto rebate program at Courtesy Chevrolet dealership in Phoenix, Arizona August 24, 2009. Americans swamped auto dealerships on Monday during the final hours of the U.S. government's popular "cash-for-clunkers" program, offering rebates of up to $4,500 to trade in older gas guzzlers.(Xinhua/Reuters Photo)

"This program has been a lifeline to the automobile industry, jump starting a major sector of the economy and putting people back to work," Transportation Secretary Ray LaHood said while announcing the deadline of the program at local time 8 p.m. on Monday (0000 GMT Tuesday).

"At the same time, we've been able to take old, polluting cars off the road and help consumers purchase fuel-efficient vehicles," he added.

Sean Kastrati, a car manager at Grossinger Toyota dealership in Chicago Lincolnwood, told Xinhua that the sales generated by the program have wiped out their inventory completely.

"We sold a total of 210 cars under this program," Kastrati said. "We wish it could go on longer and the government could do it again in the future. Now we are waiting for more cars to come in so that we can start selling again."

Lawrence A. Freeman, President and CEO of Global Business Consultants, told Xinhua that no one ever expected the program to be so popular.

Erlinda Sandoval goes over paperwork for her 1998 Dodge Caravan trade-in with salesman Blake Greenberg (R) during the last day of the "cash-for-clunkers" auto rebate program at the Courtesy Chevrolet dealership in Phoenix, Arizona August 24, 2009. Americans swamped auto dealerships on Monday during the final hours of the U.S. government's popular "cash-for-clunkers" program, offering rebates of up to $4,500 to trade in older gas guzzlers.(Xinhua/Reuters Photo)

"Regretfully, the legislation is tipped too much in favor of selling trucks and SUVs and not enough towards making an improvement in the fuel efficiency of the U.S. manufactured automobiles," Freeman said.

The program has motivated many consumers to open up their wallets.

John Gill, a consumer from Tennessee, said he had a very positive experience and felt fortunate that he had an old clunker that qualified.

"I think this was a once-in-a-lifetime deal for a new car," he said. "I am very pleased."

The higher sales generated by the Cash-for-Clunkers program are also spurring auto production in the United States.

General Motors said last week that it plans to boost production at several of its factories, bringing back about 1,350 laid-off workers in the United States and Canada.

Ted Ying, an auto industry veteran with more than 10 years' experience at Ford Motor Company, told Xinhua that the program definitely helped stimulate auto sales and benefited both the economy and customers.

Clunker vehicles sit in a parking lot during the last day of the "Cash For Clunkers" auto rebate program at Courtesy Chevrolet dealership in Phoenix, Arizona August 24, 2009. Americans swamped auto dealerships on Monday during the final hours of the U.S. government's popular "cash-for-clunkers" program, offering rebates of up to $4,500 to trade in older gas guzzlers.(Xinhua/Reuters Photo)

However, Ying added that the program helped Japanese automakers sell more cars than U.S. ones, who were not necessarily the greatest beneficiaries.

Toyota Corolla, a small and fuel-efficient vehicle, is the top seller under the program. Toyota vehicles accounted for 19.2 percent of the 489,269 sales, while General Motors came in second at 17.7 percent, according to government data.

Eight of the ten top-selling vehicles are foreign-made cars, while U.S. cars occupied all top 10 spots on the trade-in list.

Despite the program's popularity, it has its critics.

"We are taking it from other consumers and reducing demand for all the other goods in the economy and transferring it to those who take advantage of the program," said Jeffery Miron, a Harvard economics professor.

Under the program, which was signed into law by U.S. President Barack Obama on June 24, vehicles purchased after July 1 are eligible for refund vouchers worth 3,500 dollars to 4,500 dollars on traded-in cars with a fuel economy rating of 18 miles per gallon or less.

Earlier this month, Obama signed into law a 2-billion-dollar expansion of the program after the first 1 billion dollars ran out in the first days of the program.

The government decided to end the program as high demand from consumers threatened to outstrip the funding.

People walk by cars turned in as part of the "Cash For Clunkers" auto rebates program outside a Hyundai dealership in New York August 24, 2009. (Xinhua/Reuters Photo)

Special Report: Global Financial Crisis

A car turned in as part of the "Cash For Clunkers" auto rebates program sits outside a Hyundai dealership in New York August 24, 2009. (Xinhua/Reuters Photo)

Chinese Stock Market Bounces Back and Rises 4.5%

China’s main stock market index staged its biggest one-day rally in five months on Thursday, with a 4.5 percent rebound that clawed back the previous session’s steep loss.

Shares in most of the rest of Asia gained on relief that a two-week battering of the Chinese market had stopped — at least for a day. The main indexes in Hong Kong, Singapore and Japan all gained at least 1.5 percent or more during the session, and indexes in Britain, Germany and France followed suit with gains of about 1 percent by early afternoon. Wall Street was also poised for a higher open.

China’s economy, and its often volatile stock market, have gained increasing power to affect investor confidence overseas. As the United States and Europe lurch toward recovery, many investors are looking increasingly to China to help lift the global economy and stoke financial markets.

China’s economy is forecast to grow at least 8 percent this year. But fears that its comparatively muscular expansion could weaken amid tighter bank lending in the second half of 2009 briefly turned the country’s main stock index into a bear market this week, clouding some of those hopes.

On Wednesday, the Shanghai composite index had closed down 4.3 percent, capping a string of sell-offs that has pushed the market down 20 percent in two weeks. Shares were bolstered Thursday by reports that the nation’s stock regulator had approved new mutual funds this week to help underpin the market.

Investors have grown increasingly worried that an asset bubble may be forming in China, fueled by $586 billion in stimulus spending and an aggressive state-directed lending program that has led banks to hand out hundreds of billions of renminbi to businesses for infrastructure projects and other needs.

The mass of easy cash has helped China’s economy expand at a 7.1 percent clip this year, and propelled a 90 percent rise in the Shanghai market. But some economists worry that the government’s quick fix has been tilted too heavily toward investment, rather than consumption, setting the stage for unbalanced growth, a surge in bad loans and mounting government debt.

“If you are worried about the pace of recovery, you are looking to see where growth is going to be,” said Quincy Krosby, a market strategist at Prudential Financial.

“To have a pullback is normal,” she said. “The question you have to worry about is, ‘Is the Shanghai market a harbinger?’ ”

Economists say Chinese banks must now think about reining in aggressive lending. The central bank called last month for tighter supervision of loans, and China’s Banking Regulatory Commission ordered banks to lift their reserve ratios for bad loans by January.

Investors around the world have also taken notice. Wall Street and indexes in London and Frankfurt are flat or have fallen since early August.

Markets in New York fell at first on Wednesday as the declines in China reverberated, but recovered to finish higher as oil prices and energy stocks surged. The Dow Jones industrial average closed up 61.22 points at 9,279.16. The Standard & Poor’s 500-stock index rose 6.79 points, to 996.46, and the Nasdaq closed 13.32 points higher at 1,969.24.

In many ways, Wednesday’s sell-off on the Shanghai stock exchange represented a natural correction after the buildup that preceded it. “I see this as long overdue, very much so. It’s a healthy development,” said Stephen Davies, chief executive of Javelin Wealth Management in Singapore.

In the United States, the Treasury’s 10-year note rose 15/32, to 101 14/32. The yield fell to 3.45 percent, from 3.51 percent late Tuesday.

Companies with women on boards fare worse on stock market

WASHINGTON: Companies in which women are board members fare worse on the stock market, according to a study conducted by researchers at the University of Exeter.

The researchers have found that companies with female board members face stockmarket prejudice despite performing as well on all other measures as those with all-male boards.

Writing about their observations in the British Journal of Management, they say that shareholders respond negatively to women being appointed to their boards, causing share values to decline.

The researchers conducted a comprehensive analysis of performance data from all FTSE 100 companies between 2001 and 2005, which found that companies with all-male boards had a market valuation equivalent to 166 per cent of their book value, while companies with at least one female board member had a market value equal to just 121 per cent of book value.

They, however, also noticed that appointing a woman to a company board did not compromise objective measures of financial performance, specifically, Return on Assets and Return on Equity.

In fact, they found that, as a whole, companies with women on their board were a far better investment than those without.

The researcher say that their findings suggest that shareholders systematically over-value companies with all-male boards, while being unenthusiastic about the appointment of women to senior positions.

They say that this is despite there being no evidence that women's appointment has an adverse impact on company's performance.

The findings also fit with previous research from the University of Exeter which has shown that women are appointed to leadership positions when a company is in crisis. Dubbed the 'glass cliff' phenomenon, this trend involves women being placed in precarious positions when there is a high risk of failure. This has led to women being associated with weak performance.

Lead author Professor Alex Haslam, a psychologist at the University of Exeter, said: "Our study shows very clearly that shareholders tend to devalue companies with women board members and to chronically over-value those with all-male boards. What is not clear is whether this is because shareholders feel that women perform less well on boards than men or whether they see a woman's appointment as a signal that the company is in crisis. Whatever the reason, it is clear that this response is unwarranted, because there is no objective evidence that having female board members damages a company's performance. If anything, the opposite is true."

Stocks down on profit-taking

Philippine stocks fell on Friday as investors cashed in on gains made a day earlier when shares soared following the US Federal Reserve’s upbeat assessment of the US economy.

Concerns over a bigger budget deficit in 2010 also triggered a selloff, analysts said.

The benchmark Philippine Stock Exchange index or PSEi lost 0.21%, or 6.05 points, to 2,850.01, while the all-shares index slipped 0.27% to 1,806.98. A total of 3.4 billion shares worth P2.69 billion changed hands. Decliners led advancers 55 to 46, while 57 shares did not move.

"The slight slide in the share prices today was brought about by profit-taking by investors following the recent market advance, [especially after Fed announced that the US, the world’s biggest economy, is stabilizing]," Grace C. Cerdenia, chief operating officer of online brokerage firm 2TradeAsia.com, said.

The Fed said Thursday that US economic activity was leveling out, allowing rates to remain at near zero for an "extended period." That drove a rally in Asian markets that day, including the Philippines.

Ms. Cerdenia said investors unloaded their portfolios after economic managers raised the target budget shortfall to P233.4 billion for next year from P208.4 billion, as part of the government’s economic pump-priming efforts.

Justino B. Calaycay, Jr., analyst at Accord Capital Equities Corp., said investors bracing themselves for a slump in share prices during the traditional "ghost" month of August contributed to the price pullback.

Since investors normally stay on the sidelines in August, news pointing to a global economic recovery won’t help, he said.

"There is already a general consensus that we are not going into a recession, and this was already factored in by the investors," Mr. Calaycay said.

Select industrial, as well as mining and oil issues, pulled down share prices, with the Manila Electric Co. weighing down on the market with an 8.61% loss.

Industrial stocks lost 2.59%, or 111.46 points, to 4,186.82, while mining and oil tumbled by 2.72% or 233.14 points.

GMA Network, Inc., Philex Mining Corp., First Gen Corp., class "A" shares of Lepanto Consolidated Mining Co., Vista Land and Lifescapes, Inc., Aboitiz Power Corp., and Globe Telecommunications Co. all pulled down the PSEi.

On the other hand, International Terminal Container Services Inc., which advanced by 6.49%, led upward movers among index stocks.

Other PSEi stocks that gained on Friday were Ayala Corp, Ayala Land, Inc., SM Prime Holdings, Manila Water Co., Rizal Commercial Banking Corp., Banco de Oro Unibank, Inc., Robinsons Land Corp., Jollibee Foods Corp., and SM Investments Corp. — Gloria Krisana L. Gallezo