Fam ... you're the moron.
STOCKGATE TODAY
An online newspaper reporting the issues of Securities Fraud
Utah Legislature Exposes Wall Street Double Standards – May 26, 2006
David Patch
Everybody that reads these columns must own a credit card; have a mortgage payment, or a car payment. Everybody owes a bank something at some point in life.
Now for all those who fall into this category how many have had the experience of missing a payment on that loan? We all have at one time or another.
Earlier this week the Utah state legislature passed a bill that essentially treats the late delivery of a stock security into the same category as the consumer making a late payment on a lending account. The Utah legislature assigned penalties and interests for being late with the delivery and settlement of a stock transaction.
The result of such reaction was a clear and decisive uproar.
According to the Associated Press, Howard Headlee, president of the Utah Bankers Association threatened that brokerages were considering taking their business out of Utah. The AP also quoted Tony Taggert, an officer for Morgan Stanley - which operates an industrial bank in Utah and employs almost 5,000 with Discover Card operations here - that if the governor of Utah signed the bill a lawsuit would be filed on behalf of the Securities Industry Association.
So what’s all the uproar about? Securities trading and stock settlement!
The Utah legislature passed a bill that introduced fines of $10,000/day or the total value of a trade whichever is lower, as well as assess a 12% interest penalty, on trades that fail to settle within 5 days after the normal settlement period. Trades that a were purchased and paid for in full but trades where the seller failed to meet the standard 3-day settlement period on delivery plus an additional 5 days of allowable delays thereafter.
The reason for this bill is based on a growing concern that Wall Street is creating excessive unregistered securities in the name of the business issuers in order to appease wealthy clients that want to sell the security short where shares are not presently available to borrow and settle as required. The sales result in what the industry calls a “fail to deliver” and when the fails exceed certain thresholds the SEC has claimed the added leverage of dilution can be used to manipulate the value of a security.
Typically this issue of a fail would be handled between the buy-side and sell-side brokerage firms representing their clients where the buy-side would force the sell-side to make good on delivery. Unfortunately, with the growth of the hedge fund industry and the political lobbying of the federal reserve, Wall Street has allowed these funds to create “market liquidity” by selling what otherwise does not exist. Since every major brokerage firm and prime brokerage is involved, the markets have become a place of forgiveness to the seller and a detriment to the buy-side investor.
The Utah bill allows the investor to fight back and regain what they purchased or impose a fee on the firm in the same manner a late fee is imposed on the consumer when a late payment is made.
Again according to the AP, “brokers and the clearinghouse managed by the Depository Trust and Clearing Corp. say stock IOUs are essential to maintain market trading. They dispute that unsettled trades - called "failures-to-deliver" - are more than a tiny aberration in the market, or that all of them are short sales.” What I don’t understand is that an IOU requires both parties to agree to the terms of an IOU and in this case the buyer is hidden from the fact an IOU has replaced delivery.
To put this stock trading principle into a layman’s analogy consider this:
Lets say you purchase merchandise using your Discover card. I will appease Mr. Taggert here.
At the end of the month a bill arrives stating you owe $500.00. If you pay it in full there will be no interest on the charges applied. The reason there is no interest is because Discover took a percentage of this $500 off the merchant who accepted your card as guaranteed payment.
When the Discover bill arrives it indicates that a payment is due on June 1. But as June 1st approaches you find you do not have the cash to pay off the bill. Instead June 1st comes and goes with no payment made.
Discover, and Mr. Taggert’s Office, will begin to impose their penalties on you starting June 2. Those penalties will include interest accrual on the $500.00, a late-payment assessment of $25 - $35.00, and the potential that the 12% interest you had on the card was now bumped to $19% because you are no longer a consumer with a good rating.
That is how Discover operates. It works for them. The late fee is an instant 5% - 7% bonus to the company revenues and the 1% monthly interest accrual is higher than the banks rate to borrow. Profits everywhere.
What Mr. Taggert requires when it comes to securities transactions is for the brokerage firm to effectively miss the June 1st delivery date, also miss a June 8th delivery date, and see no penalties imposed on the firm. The reason they missed the date, it was not economically advantageous to make good on payment at that time.
So, back to our late credit card payment.
How do you think Mr. Taggert would respond if you called him up and stated that you missed your June 1st payment and probably would not make good on any payments for a couple more months. In the mean time, you wanted Discover to extend this as an IOU with no penalties or fees? You did not want any accrual of interest, no accrual of late charges, and if at all possible a lower interest rate not a higher one.
I will guarantee you Mr. Taggert would give you a courteous “your nuts pay the bill or suffer the consequences.”
Wall Street is threatening the state of Utah because they state has stood firm and called the firms nuts. Wall Street wants the buyer to pay a commission for services and yet receive nothing and the state of Utah said no on behalf of the people.
Wall Street wants the consumer to pay up front and have no legal recourse to seek the interests off their monies while waiting for the merchandise to be delivered once extended beyond the due date. Wall Street is threatening because this law would restrict the illegal ill-gotten gains they have reaped over these past decades. Revenues that line the pockets of the upper and middle level executives that benefit from the higher revenues generated by the business and the departments.
As for those IOU’s that are essential to the market trading? Congress actually thinks otherwise.
Congress mandated that all trades settle promptly for the safety and protection of the investing public. They did so under Section 17A of the Exchange Act of 1934. The phrase “promptly” was later identified into law as being 3 business days and was done so at a time when the 3-days allowed for paper handlers to shuttle the paper certificates back and forth between firms.
Today we use supercomputers to move shares and the 3-day allotment by law has more margin than a yardstick has when used to measure the thickness of hair.
The double standards of Wall Street and the banks are unmistakable. Wall Street is threatening to take their business out of the state of Utah merely because the state of Utah stepped up to the table and decided it was time to finally protect the businesses and the people who have been for decades cheated by the system.
I think I will send a message to Mr. Taggert – I am going to rid myself of the Discover Card I hold and ask that they forgive my payments until the time suits me to pay off the debt. Let him sue me. I will simply ask the judge to consider Mr. Taggert’s comments regarding the state of Utah bill. Anybody else want to join me? Maybe we can all send the cut up cards directly to Mr. Taggert with a friendly note.
For more on this issue please visit the Host site at www.investigatethesec.com .
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