Another investment fraud comes to light, RBS sets dubious record

Another day, another investment fraud for newly energized regulators to sink their teeth into. Paul Greenwood and Stephen Walsh were arrested by the FBI yesterday and will face criminal charges. High profile victims include Carnegie Mellon University, The University of Pittsburgh, and the Iowa Public Employees Retirement System. So, the initial perceptions are looking correct, that Madoff was, if not the tip of the iceberg, the glacier that was poking above the surface. So what is going on here? Were these "money managers" simply taking advantage of years of lax oversight coupled with investor hunger to be part of the sexy alternative investment universe? The one thing that seems to be certain is that the laissez faire regulatory environment for hedge funds will come crashing down soon. Many of these "proprietary models" (Enhanced Stock Indexing, split-strike conversion, etc.) have proven to be little more than hot air used to hide behind a cloak of secrecy offered in large part by QIB and AI rules. Prepare for change.

News links:

• RBS appears to be on the brink of Nationalization as it announced a £24B net loss for 2008. The UK government has agreed to inject up to £25.5B into the poster-child for troubled banks. And news that the Scottish behemoth could close its leveraged finance buisness as part of the pressure to refocus on UK retail and commercial customers.
  
• The EU has laid out its guidelines for toxic banks. European countries have been told to watch the total cost of bailouts and focus on banks of "systemic importance".
• Bloomberg's Jonathan Weil writes that it isn't easy getting a good estimate of what a bank's assets are worth. He cites recent disclosure by Regions and Huntington that dispute the value of loans on their books.
• Geithner laid out details of the bank stress test. The doomsday scenario includes a jobless rate above 10% and another 25% drop in home prices. Once inconceivable, those guidelines don't appear to so remote today...Click here for the Bank Stress Test FAQ.
  
• The Treasury has put out a white paper on its new Capital Assistance Program (CAP).
• Peter Wallison has some advice for Geithner on pricing troubled assets.
• Gary Gensler, Pres. Obama's choice to head the CFTC promised to act forcefully as a regulator in confirmation hearings.
  

Stress Test will Empower Regulators

In the aftermath of Geithner's layout of the bank rescue plan, federal banking regulators are descending upon the 18 biggest US banks with a set of new more stringent criteria with which to stress test the banks for long term health. NYT's Eric Dash wonders if regulators could become the new arbiters of American finance. The new scrutiny may go a long way toward determining which banks succeed long term, and which wind up being nationalized or allowed to fail. And regulation is sure to be a hot topic at the upcoming G-7 meetings in Rome. The Financial Stability Forum will likely propose new global standards on bank capital rules and for regulating off-exchange markets.

More news:

• The HBOS whistleblower saga continues. Read the full text of the Moore memo here.
• Speaking of whistleblowing, WSJ's Aaron Lucchetti wonders why Wall Street is reluctant to blow the whistle on the likes of Madoff.
  
• Bank CEO testimony on Capitol Hill had its moments. Evan Newmark thinks the CEOs showed their sales chops at least. It looks like Congress needs a lesson in the shadow banking system to understand who is not lending. Bloomberg's Caroline Baum imagines the tables being turned and CEO's questioning Barney Frank.
  
• Keep an eye on RBS as a model for the future of banks with big government ownership. If the the UK wants the balance sheet reduced, where do you think it's going to come from? Not the domestic market...
• At least one firm thinks investment grade debt looks attractive.
• Shareholders rise up and the Fortis deal is voted down.

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