Administration Targets Exotic Securities

The New York Times off-leads, the Wall Street Journal leads its "Money & Investing" section, and Bloomberg reports that the $684 trillion over-the-counter derivatives market is next up to get a regulation makeover. At a news conference yesterday, Treasury Secretary Timothy Geithner, SEC Chairman Mary Schapiro, and Michael Dunn, the acting chairman of the Commodity Futures Trading Commission, called for increased oversight of the OTC derivatives market, whose lack of regulation has been blamed for contributing to the financial meltdown. Derivatives are exotic financial instruments whose values are derived from the value of an underlying asset, index, or other item. Bear Stearns and American International Group (AIG) played heavily in the derivatives market, and when those firms began to falter, it set off a panic because so many other firms had unreported exposure to them through derivatives, the WSJ explains. Over-the-counter derivative trades are generally negotiated over the phone, often between a pair of firms, and the way they are used by some of the nation's largest institutions has up till now gone largely unchecked.

Bloomberg highlights that Schapiro's plan is to adopt an electronic trading system for the transactions. Schapiro said regulators would look to the "Trace" model for guidance. Trace is a bond-price reporting system, created in part by Schapiro in 2002, that allows Internet users to see corporate bond trading data. When the system went live in February 2005, it reduced banks' bid-ask price, or the difference in prices banks charged to buy and sell bonds, to four basis points down from seven, translating into a cumulatively large swipe at banks' profits from credit trading. So what does this all mean? It means that regulators think derivatives are overpriced and that if they increase transparency, the market will naturally right it. Simply put, "The plan to move some trades onto exchanges and electronic trading platforms could reduce profits for investment banks, which currently take fees for facilitating the trade," the WSJ says.

The Journal tops its front page with Intel (INTC) getting slapped with a record fine of $1.45 billion by European regulators, who also are calling for "changes in the way the U.S. company sells the microprocessors at the heart of most of the world's PCs." Regulators accused Intel of sweetening deals if their customers agreed to sell products using only Intel's processors and of delaying products that used chips made by Intel's rival, Advanced Micro Devices (AMD). Regulators also said that Intel paid a retailer to keep only Intel chips in stock. Intel says it will appeal the decision. The fine is the largest assessed in Europe for a case involving monopoly abuse. "The decision ... underscored the European Union's willingness to challenge the business practices of dominant U.S. technology companies like Intel, Microsoft (MFST) and Google (GOOG)," the Journal writes. The NYT, on the other hand, says the fine will have little impact on Intel's position, calling it "a few minutes in the penalty box."  

Reuters and Bloomberg lead their sites with documents made public yesterday under the Freedom of Information Act that show that former Treasury Secretary Henry Paulson told nine of the largest banks in October to hand over preferred shares at the height of the banking crisis, or else. Reuters says, "[T]he CEOs wrote by hand the names of their institution and multi-billion dollar amounts of 'preferred shares' to be issued to the government." The documents also include an e-mail detailing a "public relations effort," on behalf of the Bush administration, "to tamp down public concerns about nationalizing the banks." The CEOs in attendance were Vikram Pandit of Citigroup (C), Jamie Dimon of JPMorgan Chase (JPM), Richard Kovacevich of Wells Fargo (WFC), John Thain of Merrill Lynch (AMO), John Mack of Morgan Stanley (MS), Lloyd Blankfein of Goldman Sachs (GS), Robert Kelly of Bank of New York Mellon Corp. (BK), and Ronald Logue of State Street Bank (STT). According to the documents released by Judicial Watch, Treasury Secretary Tim Geithner, FDIC Chair Sheila Bair, and Fed Chairman Ben Bernanke co-hosted the October meeting with Paulson.

The WSJ has the scoop on potential securities fraud charges former CEO of Countrywide Angelo Mozilo is facing. Insiders tell the paper the SEC sent a "Wells notice" to Mozilo several weeks ago letting him know he could be charged for insider trading and alleged failure to report material information. Charges are not definite as Mozilo's lawyers "could still persuade the SEC's commissioners that there isn't sufficient evidence to bring a case." Mozilo sold $130 million of Countrywide stock in the first half of 2007, just before Countrywide crashed. Mozilo had an executive sales plan that allowed him to sell only a certain amount of shares each year, but he changed the rules in 2006 to accelerate the plan. In 2006, Mozilo sold $60 million in stock. His lawyers assure that the sales were proper and the potential charges have "no fair basis." Countrywide has been blamed for contributing to the housing collapse by extending loans to unqualified buyers and ratcheting up mortgage payments somewhat unexpectedly under floating-rate loans.

Finally, in a lighter piece on the front page of the NYT's business section, Craigslist will shut down its erotic services ads next Wednesday, a category that has put the Web's largest classified advertising site under fire for "fostering prostitution and other illegal activities." Replacing it is a category called "adult services," which will be reviewed by Craigslist employees for violations of the site's guidelines. The decision comes following a spate of violent crimes perpetrated by people who made contact on the site.