Broker Dealer on Verge of Collapse from CDO Markdown
Indie B-D warns reps of dire finances By Bruce Kelly
June 21, 2007
Hammered by exposure to a risky type of mortgage-backed security, Brookstreet Securities Corp. of Irvine, Calif., yesterday told its 500 or so affiliated reps and advisers that "disaster" had struck, and that the firm could close if it doesn't come up with at least $5 million. And in an unsigned e-mail note to its advisers, the firm blamed its clearing firm, National Financial Services, and too many accounts on margin for its poor fortune.
"Today, the pricing system used by National Financial has reduced values in all Collateralized Mortgage Obligation," the e-mail said.
"Many of those accounts were on margin and suffered horrendous markdowns and unrealized as well as realized losses."
National Financial and the regulators expect Brookstreet to pay for realized liquidated losses and take a capital charge for unrealized (mark) to market losses. "
The e-mail continued, "It would take a capital infusion of at least $5,000,000 to keep the company in compliance with no additional guarantee that additional markdowns will no be forthcoming."
Brookstreet Securities is a mid-sized, independent-contractor broker-dealer, and in 2006 generated about $70 million in gross revenue, according to one industry observer who asked not to be named.
According to NASD records, the Brooks Family Trust owns more than 75% of the firm, with Stanley Brooks the trustee.
Although the message was unsigned, it contained a personal message to each adviser, potentially from Mr. Brooks.
"I have told many of you that you are always in danger of not being paid on your last check when working for any broker-dealer. I will try to get enough money from our account at NFS to complete our upcoming payrolls."
The note concluded with a plea: "All our family net worth is in the firm, please give me time to present a new plan."
Mr. Brooks did not immediately return a phone call on Thursday afternoon to comment.
Fidelity Investment, which owns National Financial, "can't comment specifically about Brookstreet's claims, but we are not responsible," a company spokesman said.
"National Financial has clear margin agreements in place and uses reputable firms to price securities held in brokerage accounts," the spokesman said.
full articlecdo, hedge fund, broker dealer, securities, mark down, structured derivatives, margin call, shut downLabels: broker dealer, CDO, hedge fund, margin call, mark down, securities, shut down, structured derivatives
Hedge fund issues could cause economy to slow
Hedge fund issues could cause economy to slowWhile hedge fund failures are typically seen as a Wall Street problem, economists are forecasting that recent hedge fund meltdowns could impact Main Street and may even slow the U.S. economy. Turmoil in credit markets could push up borrowing costs for businesses and consumers and cause a ripple effect.
Hedge fund woes could hit Main StreetUpheaval in credit markets could hit consumer, business borrowing - and slow the economy; risk premiums already rising.
By Chris Isidore, CNNMoney.com senior writer
June 21 2007: 3:21 PM EDT
NEW YORK (CNNMoney.com) --
When Bear Stearns's hedge funds melted down this week because of too big a bet on subprime mortgages, it may have seemed like a Wall Street problem.
But numerous economists said the latest turmoil in the nation's credit markets could spill over to Main Street as well, raising borrowing costs for consumers and businesses alike - and possibly putting the brakes on the surprisingly resilient U.S. economy.
Subprime mortgages, made to home buyers with less than top credit ratings, have been skidding since early this year as delinquencies and foreclosure rates soared. Now problems with those mortgage loans have sparked a big headache for Bear Stearns (Charts, Fortune 500) and the Wall Street firms that lent it money to invest in subprime mortgages, such as Merrill Lynch (Charts, Fortune 500), JPMorgan Chase (Charts, Fortune 500) and Citigroup (Charts, Fortune 500).
But the problems threatening the credit markets could mean far more than just billions in possible losses for those firms. It could push rates higher for corporate debt, which has been relatively cheap even for companies with poor credit ratings.
Even if those companies don't fall behind in their debt payments the way many subprime borrowers have on their mortgages, the investors making money available for those riskier loans are now demanding a much higher premium than they had until just recently.
Deadly ripples threaten subprime funds That could choke off the supply of relatively cheap money that has kept the U.S. economy humming in recent years, putting a dent in everything from business investment to consumer spending.
"That's clearly high on my list of things to worry about," said David Wyss, chief economist at credit-rating agency Standard & Poor's. "I think it's healthy that pricing for risk changes. I think it's too loose now. But the transition could be painful. It depends on how fast it happens."
Wyss doesn't believe that the rise in borrowing costs for most companies will plunge the U.S. economy into recession - and many economists agree with him. They said there's enough underlying strength in the economy to keep it growing. But it will mean slow growth in the second half of this year rather than more normal "trend" growth of 3 percent a year or greater, said John Silvia, chief economist at Wachovia.
"I would think that that as you reprice risk, it will have a negative impact on economic growth going forward," said Silvia. "It will extend the workout in the housing market. And at the margin, they [higher rates] will crimp consumers and their spending."
Others see an even more drastic correction. Peter Schiff, president of Euro Pacific Capital, a brokerage firm specializing in overseas investments, said he had already been expecting a recession in late 2007. Now he believes the recession will come sooner, and hit harder, because of the problems with the Bear Stearns hedge funds.
"This is just another graveyard they can whistle by," he said, referring to Wall Street firms. "Eventually they're going to be overwhelmed. Interest rates are going to rise across the spectrum, and spreads are going to widen considerably."
That widening of the spreads - the difference between what it costs top borrowers and those deemed more risky - has already started. The spread between corporate debt that is not investment grade, popularly known as junk bonds, and a basket of U.S. government bonds was 2.89 percentage points on Thursday, according to Wyss, up from a record low of 2.65 percentage points on May 25.
Wyss said the spread had gotten too narrow and that a correction was likely even without the Bear Stearns problems. A more typical spread is close to four percentage points, and it was as high as 3.85 percentage points as recently as last September.
But he said an event in the credit market such as this week's meltdown typically sends spreads soaring. He noted the rise of roughly one percentage point in just two months in 2005 from a then record low in March following General Motors (Charts, Fortune 500) and Ford Motor (Charts, Fortune 500) debt being cut to junk bond status for the first time.
Full articlehedge funds, economics, capital markets, interest rates, bond yields, valuations, CDO, credit derivatives, derivatives, pooled securitiesLabels: bond yields, capital markets, CDO, credit derivatives, derivatives, economics, hedge funds, interest rates, pooled securities, valuations
Universities scoop up risky subprime debt from Bear Stearns Hedge Fund
Universities scoop up risky subprime debtUniversity endowments were among the most eager buyers of risky mortgage-backed securities being offloaded by Wall Street this week. "There's an opportunity out there to buy these loans at a discount," said Lou Morrell, vice president for investments and treasurer at Wake Forest University. Meanwhile, Bear Stearns continued to scramble to save two hedge funds hit hard by the subprime fallout, saying Thursday it took on $3.2 billion in loans to stop creditors from seizing assets of one of its money-losing hedge funds.
Bear Stearns Plans $3.2 Billion Hedge Fund Bailout (Update2)
By Jody Shenn and Yalman Onaran
June 22 (Bloomberg) --
Bear Stearns Cos. is proposing a $3.2 billion bailout of a money-losing hedge fund, the biggest rescue since 1998, to forestall creditors from seizing assets, people with knowledge of the proposal said.
The firm told lenders to the High-Grade Structured Credit Strategies Fund yesterday that it would assume their loans, said the people, who declined to be named because the plan is confidential. The New York-based firm made the offer after creditors including Merrill Lynch & Co., JPMorgan Chase & Co. and Lehman Brothers Holdings Inc. put some of their collateral up for sale to investors.
Bear Stearns increased efforts to salvage the fund, one of two that made bad bets on collateralized-debt obligations, as concern about a possible collapse sent stocks and bonds of financial companies lower. An agreement with creditors would prevent a fire sale of the collateral, while increasing the risk to Bear Stearns, the second-biggest underwriter of mortgage bonds.
``Bear needs to put this behind it as soon as possible,'' said Peter Goldman, who helps manage $600 million at Chicago Asset Management, including shares of Bear Stearns. ``The firm might take on some of the risk of the fund they didn't have before, but they're a bond shop and they wouldn't take on risk they shouldn't.''
The Bear Stearns fund lost about 10 percent of its value this year, while the related fund, the 10-month old High-Grade Structured Credit Strategies Enhanced Leverage Fund, lost about 20 percent, according to people familiar with the matter. Both funds are run by Ralph Cioffi, 51, a senior managing director.
Fastest-Growing
The funds speculated in highly-rated CDOs -- securities backed by bonds, loans, derivatives and other CDOs -- that were hurt in March and April as defaults on subprime mortgages to people with poor or limited credit histories increased. The fund also lost on opposite bets against home-loan bonds, which backed many of its CDOs.
Bear Stearns spokeswoman Elizabeth Ventura declined to comment. Lehman spokesman Randy Whitestone also declined to comment. Adam Castellani, a spokesman for JPMorgan couldn't immediately be reached when called after hours.
Investors from hedge funds to pension funds and foreign banks have snapped up CDOs as a new way to invest in debt, making it the fastest-growing market and pushing the amount outstanding to more than $1 trillion.
CDOs trade infrequently and holders rarely have comparable sales to use when valuing the securities on their books. Forced sales may have required investors to write down those values, potentially causing billions of dollars of losses.
Largest Since LTCM``The problem is not what we see happening, but what we don't see,'' said Joseph Mason, associate professor of finance at Drexel University in Philadelphia and co-author of an 84-page study this year on the CDO market. ``We don't know the price of these assets. We don't know which banks are exposed to this sector. These conditions are the classic conditions for financial crises across history.''
The bailout of the fund would be the largest since Long-Term Capital Management LP, which received $3.5 billion from 14 lenders in 1998. The Greenwich, Connecticut-based fund, run by John Meriwether, lost $4.6 billion.
In the case of Long-Term Capital, lenders agreed to take equity stakes in the fund after New York Federal Reserve President William McDonough called the heads of the firms together. They then sold assets over time to limit the impact of its collapse.
Bear Stearns's proposal doesn't involve taking equity. Instead, the firm would become a lender to the fund, its loan secured by the assets of the fund.
Bundling SecuritiesBankers and money managers bundle securities into a CDO, dividing it into pieces with credit ratings as high as AAA. The riskiest parts have no rating because they are first in line for any losses. Investors in this so-called equity portion expect to generate returns of more than 10 percent.
The first CDOs were created at now-defunct Drexel Burnham Lambert Inc. in 1987. Sales reached $503 billion in 2006, a fivefold increase in three years. More than half of those issued last year contained mortgages made to people with poor credit, little loan history, or high debt, according to Moody's Investors Service.
CDOs may have lost as much as $25 billion because of subprime defaults, Lehman Brothers analysts estimated in April.
Bear Stearns shares rose for the first time in four days yesterday after Merrill decided against selling all its collateral. The stock dropped $1.35, or 0.9 percent, to $144.46 at 10:58 a.m. in New York Stock Exchange composite trading.
Risk PerceptionsThe perceived risk of owning corporate bonds was little changed today after reaching the highest since September earlier this week. Contracts based on $10 million of debt in the CDX North America Crossover Index was quoted at about $169,000, after rising as high as $179,000 yesterday, according to Deutsche Bank AG.
The Bear Stearns funds had borrowed $9 billion and made bets of more than $11 billion, one of the people familiar with the situation said. The creditors include Merrill, Lehman, JPMorgan, Goldman Sachs Group Inc., Citigroup Inc. and Cantor Fitzgerald LP, all in New York. Bank of America Corp., based in Charlotte, North Carolina, Barclays Plc in London and Frankfurt-based Deutsche Bank AG were the other lenders.
As the funds faltered, Merrill sought to protect itself by seizing the assets that were used as collateral for its loans. The firm was followed by JPMorgan, which offered some securities for sale before withdrawing its plan. Lehman put some securities up for sale, according to a person with knowledge of the situation.
The second fund had less money from investors though was more leveraged, meaning it had borrowed more relative to its assets. Talks with creditors to that fund are also underway, one person said.
To contact the reporter on this story: Jody Shenn in New York at
jshenn@bloomberg.net ; Yalman Onaran in New York at
yonaran@bloomberg.net .
video full articlehedge fund, bailout, high grade, CDO, collateralized debt obligations, university endowment, investment managers, mortgage backed securities, credit default swapsLabels: bailout, CDO, collateralized debt obligations, credit default swaps, hedge fund, high grade, investment managers, mortgage backed securities, university endowment
PHLX Exchange Traded Options
PHLX Exchange Traded OptionsPHLX's new World Currency Options (SM) and PBOT's World Currency Futures (SM) are easy to understand, easy to trade, easy to manage and are specially designed to work for individual investors. With small-sized trading units and settlements in U.S. dollars, along with fully electronic order entry and execution, they might just meet your trading needs. For more information, contact the PHLX directly at
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derivatives, FX, electronic derivatives exchange, PHLXLabels: derivatives, electronic derivatives exchange, FX
Hedge fund future bleak with Merrill sell-off
Hedge fund future bleak with Merrill sell-offMerrill Lynch's planned auction of about $800 million of bonds held by a money-losing Bear Stearns hedge fund could signal the end of a Bear Stearns effort to save the fund. The 10-month-old fun run by Bear Stearns senior managing director Ralph Cioffi has lost 20% this year and is under increasing pressure from creditors, including Merrill. Bear Stearns has attributed the falloff of the fund and a sister fund to the slump in the U.S. housing market.
Some Lenders Dislike Plan to Save Bear Stearns FundBy JULIE CRESWELL and VIKAS BAJAJ
An effort to save a troubled hedge fund at Bear Stearns hit a major hurdle yesterday when Merrill Lynch signaled that it would move forward with plans to auction $850 million in subprime securities that had been held as collateral.
While negotiations are continuing and the auction could be averted, the move signaled that some lenders in the High Grade Structured Credit Strategies Enhanced Leverage fund are not happy with some terms of the Bear Stearns bailout plan.
Executives at the bank have been scrambling to shore up the fund since three lenders — Merrill, Citigroup and JPMorgan Chase — asked the bank to put up more capital. The executives had offered to inject $1.5 billion in new loans into the fund, and a consortium of other banks, including Citigroup and Barclays, would infuse $500 million in new capital.
In return, the Wall Street banks and brokerage firms that had provided nearly $6 billion to the hedge fund would have had their own exposure reduced but would have had to agree not to demand more cash or collateral from the fund for a year, according to people briefed on the plan who were not authorized to speak for attribution.
If Merrill moves forward with an auction, it could make it much more difficult for Bear Stearns and the longtime portfolio manager of the fund, Ralph Cioffi, who has spent the last few days scrambling to try to bring in new money, to save the 10-month-old fund. If other lenders decide to follow Merrill’s lead and seize and sell assets, it could lead to the dissolution of the hedge fund.
Late yesterday, some people briefed on the plan said that one option might be for Bear Stearns to buy out Merrill’s stake. Representatives at Bear Stearns and Merrill declined to comment.
But if the assets — securities and bonds backed by subprime mortgages that can be difficult to value — are sold at prices well below where they are currently valued, the reverberations across Wall Street would be strong. Not only would Merrill be forced to post losses on its holdings, but other banks, hedge funds and investors owning similar securities would have to mark down the value of those holdings to new, lower prices.
“If we end up seeing these assets sold at significantly distressed prices, it will likely cause other funds to have to re-evaluate how effective and fair the values that they have been carrying these securities have been.” said Josh Rosner, a managing director at Graham Fisher, an investment research firm in New York.
The potential for a large ripple effect across the financial markets has been one reason many of the other lenders, even those unhappy with the terms of the bailout plan, stayed at the negotiating table with Bear Stearns, according to people briefed on the talks.
Started just last year, the Bear Stearns hedge fund was hit by a combination of bad bets on bonds backed by subprime mortgages as well as high levels of leverage. Investors originally put $600 million into the fund and another $6 billion was borrowed from the Wall Street banks.
Through the end of April, the fund had lost about 23 percent, prompting investors to try to redeem their investments. In May, the fund froze redemptions and soon faced margin calls from its banks.
While Bear Stearns has little exposure to the fate of the fund — the company and individual executives invested just $40 million in it — its stock nonetheless declined 2.2 percent, to $146.79. in the last two days.
Investors are probably concerned about how the outcome could affect the larger Bear Stearns business of underwriting and trading bonds backed by mortgages.
Full articleVideohedge funds, mortgage backed securities, CDO, CDS, credit derivatives, mortgage derivativesLabels: CDO, CDS, credit derivatives, hedge funds, mortgage backed securities, mortgage derivatives
USFE - US Futures Exchange to Offer Credit Derivatives
U.S. FUTURES EXCHANGE TO OFFER CREDIT DERIVATIVE FUTURES ON AGENCY DEBT
CHICAGO (June 4, 2007) —
U.S. Futures Exchange (USFE) announced today that it will list the first credit derivative futures on Federal Agency debentures, beginning with a government tranche of the CDX™ index including credit default swaps on Fannie Mae and Freddie Mac.
The new product allows for the creation of synthetic Agency notes as well as spread trades against corporate and sovereign debt. USFE currently expects to list the new contracts in the fourth quarter of 2007.
"Default swaps from both Fannie Mae and Freddie Mac are included in the tens of trillions of dollars referenced to the CDX™ family of indexes," said Satish Nandapurkar, CEO of USFE. "Yet, there has never been a distinct 'government' tranche to represent the highest quality credit risk. USFE is pleased to provide fixed income investors with a new, on-exchange opportunity to hedge risk in this area."
USFE collaborated on the design of Agency credit default swap futures with David Boberski, Head of Interest Rate Strategy at Bear, Stearns & Co. Inc., a global leader in futures clearing and execution.
"Agencies are the largest issuers of corporate debt and they deserve a prominent place in credit derivative trading," said Mr. Boberski. "Agency credit default swap futures are a rare example of a product that is relevant to both credit and interest rate traders. While USFE continues the tradition of offering 'government' risk on an exchange, creating the mechanics to match the over-the-counter market is a first for the futures industry and highlights the continued convergence of these markets.
USFE offers a primer on the new product by Mr. Boberski at
www.usfe.com/index_news.html.
derivatives, online trading, electronic exchange, CDS, CDX, ABS, ABX, credit default swapsLabels: abs, ABX, CDS, CDX, credit default swaps, derivatives, electronic exchange, online trading
Research days are numbered. (Part 1)
Research days are numbered. (Part 1)
Research is a major cost center. It used to be coupled with marketing IB services. Yet the Research/IB relationship has been de-coupled. Mid-tier firms will find it difficult to sustain full coverage research teams. You’ll see the major firms enhance their research capabilities, while other firms sell-off. The true research team may wind up at the ratings houses (Moodys, S&P, D&B, Fitch) and market news/data companies (Bloomberg, Reuters/Thompson).
Prudential closes stock-research departmentPrudential Financial ended a 25-year run with involvement in the Wall Street securities business this week when it said it would shutter its well-known stock-research department. The insurance giant attributed the move to bigger rivals and lower stock-trading commissions.
Prudential closes research operationsBy Darla Mercado
June 6, 2007
Prudential Financial today announced that it would close its equity research and trading business business, Prudential Equity Group.The group will drop coverage of all the companies it covers and shut down offices across the globe causing some 420 employees to lose their jobs.
Prudential’s latest move marks its exit from the securities industry.
The insurance giant made its Wall Street debut in 1981, upon acquiring retail brokerage Bache Halsey Stuart Shields and forming Prudential-Bache Securities, according to Reuters.
Prudential had been losing ground, unable to keep up in the research and trading businesses, a Prudential spokeswoman told Reuters.
Just this March, Prudential lost analyst Michael Mayo and his research team to Deutsche Bank. Prudential started trimming costs in its trading business in 2003 with the sale of its retail brokerage and investment banking units to Wachovia, forming Wachovia Securities.
full articleequity research, research, IB, downsizing, hedge funds, independent research, company-funded researchLabels: company-funded research, downsizing, equity research, hedge funds, IB, independent research, research
CBOE prepares to list, trade credit derivatives
CBOE prepares to list, trade credit derivativesThe world of electronic derivatives trading continues to expand. First Eurex, now CME, CBOE and CBOT. Everyone wants to get into Credit Derivatives. I think some buy side participants may see these contracts as cost effective alternatives to OTC Credit Default Swaps. Yet it will take time to build market acceptance.
On June 19, the Chicago Board Options Exchange will launch credit-default options on a handful of companies including Ford, Lear, General Motors, Standard Pacific and Hovnanian Enterprises. "We are very pleased to receive US Securities and Exchange Commission approval for these products which we first proposed last June," said William Brodsky, chairman and chief executive officer of CBOE. "Investors can now take advantage of the synergies between options prices, volatility and credit risk, hedging all three on one electronic platform."
CBOE latest to add credit derivatives
Shanny Basar
08 Jun 2007
The Chicago Board Options Exchange has become the second US market this week to receive regulatory approval to list and trade credit derivatives.
The CBOE is going to launch credit default options on five individual companies on June 19 - General Motors, Ford, Lear, Hovnanian Enterprises and Standard Pacific - with Jane Street Specialists as the designated primary market maker.
William Brodsky, chairman and chief executive of CBOE, said: “We are very pleased to receive US Securities and Exchange Commission approval for these products which we first proposed last June. Investors can now take advantage of the synergies between options prices, volatility and credit risk, hedging all three on one electronic platform.”
Regulatory approval for CBOE’s credit default baskets is expected soon.
This week the Chicago Mercantile Exchange received regulatory approval for its Credit Index Event contract which is due to start trading on June 18 based on an index of 32 investment grade entities.
Last week the US Futures Exchange, which was formed last year when hedge fund Man Group invested in the former Eurex US, said it expects to offer contracts in the fourth quarter which are based on credit default swaps on Fannie Mae and Freddie Mac, the US government-backed agencies and the Chicago Board of Trade said it planned to launch credit futures on June 25.
David Boberski, head of interest rate strategy at Bear Stearns, said in a report: “The new CBOT contract offers a smart combination of design choices and is the most promising structure to date for an exchange to tackle corporate bond credit indices.”
full CBOE article
http://www.financialnews-us.com/?page=ushome&contentid=2347986664CBOT launches into credit derivatives
Shanny Basar
31 May 2007
The Chicago Board of Trade is launching its first product in the fast growing world of credit derivatives with an investment grade index futures contract for credit default swaps.
Credit default swaps are over-the-counter derivative contracts that allow buyers to hedge against potential credit losses, while sellers assume credit risk in exchange for payment. Market participants include banks, hedge funds and other institutional investors.
Bob Ray, senior vice-president for business development at CBOT, said: “The growth rate in the over-the-counter credit default swap market has been stunning but that brings heightened risk and the CBOT is an expert in helping price discovery and risk management. We wanted to create a product that would best emulate the trading and pricing in the OTC market.”
The new CBOT CDR Liquid 50 North American Investment Grade Index for futures contracts is scheduled to begin trading on June 25.
Gene Mueller, managing director for research & development at CBOT, said approximately a third of credit default swap trade volumes relate to index trading and two thirds is investment grade.
The new product is based on the CDR Liquid 50 NAIG Index developed and maintained by Credit Derivatives Research, an independent research provider. It includes 50 North American investment grade reference entities and is reconstituted every three months to ensure it includes the most liquid entities from the OTC market.
Credit Market Analysis, a data provider used by many buyside firms, will provide pricing information for all the underlying component issues within the CDR Liquid 50 NAIG index.
full CBOT article
http://www.financialnews-us.com/?contentid=2447933037CBOT, CBOE, EUREX, CME, derivatives products, electronic trading, credit derivativesLabels: CBOE, CBOT, CME, credit derivatives, derivatives products, electronic trading, EUREX
Pennsylvania promotes itself as Wall Street West
Pennsylvania promotes itself as Wall Street WestPennsylvania officials say a corner of their state 100 miles from Manhattan -- and outside of a theoretical nuclear blast zone -- is the perfect location to base backup Wall Street operations in the event of a disaster. Pennsylvania Gov. Edward G. Rendell was in New York on Thursday announcing plans to build a $24 million fiber-optic network connection between New York and the nine-county region in northeast Pennsylvania being promoted as Wall Street West. Meanwhile, New York officials have been wooing Wall Street firms to build backup facilities in their state.
Pennsylvania Tries to Sell Itself as Backup for Wall Street During a DisasterBy PATRICK McGEEHAN
June 8, 2007
Hoping to capitalize on fears of the chaos another terrorist attack might cause in New York’s financial industry, Pennsylvania officials are promoting a corner of their state as Wall Street West.
They maintain that since the region is about 100 miles west of Manhattan, it is outside New York City’s theoretical nuclear blast zone. It is ideally situated, they say, to be a safe retreat from the metropolis, but close enough to be linked directly to the computers that run the banking and trading systems.
“We think we’re uniquely positioned,” said Catherine A. Bolton, project director of the Wall Street West consortium, whose goal is to lure financial companies based in New York to put backup facilities in a nine-county region in northeast Pennsylvania. “There are places in New Jersey, but they’re not outside the blast zone.”
Yesterday, Gov. Edward G. Rendell of Pennsylvania was in New York announcing plans to build a critical connection: a $24 million network of fiber optic cables to carry data from Manhattan to the Poconos. Among the missing links, though, is any sign of serious interest from firms in the real Wall Street area.
So far, none of the big banks, investment banks or insurance companies based in the city have made commitments to putting data backup centers in that part of Pennsylvania.
Instead, they have been spreading out within the metropolitan area to give themselves the flexibility to react to crises ranging from power failures to natural disasters and terrorism.
A few months ago, Goldman Sachs, the big investment bank, took over the lease on office space in Greenwich, Conn., which had housed a hedge fund that shut down. Goldman officials see that space, which is just 25 miles north of Manhattan, as a potential backup trading floor if their headquarters near Wall Street is damaged or becomes disconnected.
Since the Sept. 11 attack, financial companies have given priority to developing backup systems and disaster-recovery plans. In the immediate aftermath, federal regulators and elected officials issued some bold pronouncements about separating primary and backup systems.
Richard A. Grasso, the former chairman of the New York Stock Exchange, used the phrase “nuclear distance” in describing where the exchange was considering putting its secondary trading floor. Banking regulators discussed the need to have the backup sites outside a “blast zone” with a radius of 50 miles or more.
Those statements confounded Wall Street executives because backup centers could not reliably capture trading data instantaneously — known as synchronous data storage — if they were much more than 100 miles away. They eventually persuaded the regulators to restrain their rhetoric.
In May 2003, federal banking regulators clarified their security recommendations, leaving much of the judgment to company officials. They did not specify a distance but said backup facilities where financial firms set up computers to copy information on all their trading and banking transactions could stay “within the current range limit of synchronous data storage technology.”
A point emphasized by the advocates of the Wall Street West region is that it sits just inside that 100-mile limit. But first, there has to be a high-speed data link to Manhattan.
Mr. Rendell announced yesterday that the consortium had chosen Level 3 Communications to build the fiber optic network that would complete the connection.
“We’re now ready to go,” Mr. Rendell said. “We have everything in line.”
So far, the project has received a $15 million grant from the federal Department of Labor to train local workers for the jobs that Wall Street West hopes to attract. Mr. Rendell said he thought the project could get $4 million to $5 million more from Washington. But he said the public investment would not go beyond about $25 million unless the financial industry embraced the idea.
Level 3 has agreed to spend $8 million toward the cost of building the local loops of wires and splice them into the existing networks running westward from New York City, said Raouf Abdel, president of the business markets group at Level 3 in Broomfield, Colo. Public coffers would pay the balance of the bill.
Mr. Abdel said that the entire network could be built within 18 months and that Wall Street firms could be operating data centers in the area by early 2009. But first, Level 3 executives and Pennsylvania officials must persuade some companies to be pioneers in the Poconos.
Level 3 does not plan to start building the network until it has signed up customers who, as a group, will pay it at least $625,000 every three months to provide telecommunications service, Mr. Abdel said. No contracts have been signed yet, but, he said, “We are seeing interest.”
There may be places in New York, New Jersey and Connecticut that are suitable alternatives for Wall Street’s backup sites, but most of them are considerably more costly than northeast Pennsylvania, Mr. Abdel said.
“There is a need for large data center space measured in tens of thousands of square feet, and cheap real estate helps,” he said.
Mr. Rendell admitted that developing Wall Street West “is a little bit of a chicken and egg.”
Without the critical infrastructure, big financial companies will not seriously consider making the move. On the other hand, Mr. Rendell said, Pennsylvania is reluctant to spend too much money building up an area to appeal to a specific industry until it knows that there will be a payoff.
“If no one decides to come, we won’t build it,” Mr. Rendell said. “The sites that are under preparation, those are easily transferable to other uses.”
New York State officials, who are trying to lure the same financial companies to set up data centers upstate, said the benefits of Wall Street West might have been overstated.
“The infrastructure is not the total answer,” said Dan Gunderson, who is the chief economic development official for upstate New York. “The infrastructure can be found in many different locations.”
But Mr. Gunderson, who formerly was an economic development official in Pennsylvania, gave his competitors credit for trying. “I think they’re serious about selling the product that they’re trying to develop,” he said.
full articlefull service data center, backup, disaster recovery, PA, back office, operations centers
Labels: back office, backup, disaster recovery, full service data center, PA
Hedge funds start to resemble major markets
Hedge funds start to resemble major marketsWith their low correlations to major stock and bond markets, hedge funds are increasingly looking like independent markets of their own. Major investors see hedge funds as an insulated investment vehicle that protects assets when more traditional markets tank. Douglas C. Wurth, global head of alternative investments at JPMorgan Private Bank, said $1 billion a month was flowing into hedge funds on JPMorgan's platform.
As Money Pours in, Hedge Funds Come to Look More Like the MarketsBy JENNY ANDERSON
“We are somewhere between the third and fifth inning in the growth of assets invested in alternative strategies,” said Todd Builione, a managing partner at Highbridge Capital Management, a $15.7 billion hedge fund that is majority owned by JPMorgan Chase.
Indeed. According to Douglas C. Wurth, global head of alternative investments at JPMorgan Private Bank, $1 billion a month is flowing into hedge funds on JPMorgan’s platform, where wealth managers are now recommending that very rich individuals ($25 million or more) and institutions put 35 percent of their portfolios in alternatives, and 20 percent of that into hedge funds.
Mr. Wurth and Mr. Builione were both speaking on a panel with other senior executives from the private bank at a briefing in New York. It was clear that alternatives continue to be the rage for a number of reasons, including the low correlations that hedge funds have historically had with major equity and bond markets. In other words, when those markets tank, hedge funds, in general, do not.
Then there’s Ray Dalio.
Mr. Dalio, the founder of Bridgewater Associates, a hedge fund with about $30 billion under assets, has some different thoughts on his industry, including some tough questions on why hedge fund returns look so much like stock market returns when they are not supposed to be correlated.
In a private research letter sent out this month, he and a colleague examined the correlation of hedge fund returns to the returns of certain market indexes.
In general, hedge funds returns should not replicate stock market returns. If they did, investors would be smarter to buy index funds and not pay the steep fees of hedge funds. Because hedge funds can hedge their bets, borrow to increase their bets, tread where others fear to tread and seek out nontraditional assets, they should generate excess returns (alpha), not just reflect market returns (beta).
According to Mr. Dalio’s analysis, over the last 24 months, hedge funds were 60 percent correlated to the Standard & Poor’s 500-stock index, 67 percent correlated to the Morgan Stanley Capital International EAFE (for Europe, Australia and the Far East) index of foreign shares, and 87 percent correlated to emerging market equities (unhedged). They were 41 percent correlated to the Goldman Sachs Commodity Index, 52 percent correlated to high-yield, or junk, bonds, and 42 percent correlated to mortgage-backed securities.
The letter also parsed the correlations by strategy, which is a more precise way to think about hedge funds, since different types of funds take different kinds of risks. Short-biased hedge funds have a negative 70 percent correlation to the S.& P. index, while equity long-short, the description applied to what most people think of as a hedge fund strategy (betting that some stocks might go up and others might fall, usually with leverage) had a huge correlation of 84 percent.
Then Mr. Dalio looked at data back to 1994, which showed that historical correlations were in the range of 49 to 54 percent; high, but not as high. So as equity markets have done well, hedge funds have done well — not necessarily because of their genius but because they have the wind of the stock markets at their back and because a lot of them use leverage to magnify their bets.
(Mr. Dalio did not return calls for comment.)
In a period when volatility is low and credit spreads are tight, it should be difficult for hedge funds to make a lot of money. But many funds appear to be taking the easy way out.
Still, no one cares about correlations, or anything else really, until the markets head down. But a lot of investors like Bridgewater as a part of a diversified group of hedge funds because Mr. Dalio has a contrarian view, and if and when the markets tank, he should — and he had better — trounce his more correlated peers.
And Mr. Dalio clearly has more than his powers of prognostication on the line: Bridgewater returned a meager 3.4 percent last year.
Many people in asset management think the whole correlation thing is overblown: of course hedge funds will take advantage of strong markets to make money. The key is that when the markets turn, these managers can do something about it. The question is whether they are smart enough to know to do it.
Maybe they are. But investors would be smart to try to understand how exposed they might be to the markets when they think they are well protected against them. (Private equity firms, another popular place to dump money these days, are buying highly leveraged large-cap companies.)
Of course, understanding returns may be hard. Mr. Wurth of JPMorgan expressed concern about aspects of hedge fund investing, notably the lack of transparency, which makes it harder to try to monitor trading by fund managers and the lack of influence a single client might have on a big fund. Which is why JPMorgan suggests clients limit themselves to only 35 percent in alternative investments, even though many want their portfolios to look more like those of foundations and endowments, which can have as much as 60 percent of their assets in alternatives.
“You do things that foundations don’t do,” Mr. Wurth joked. “You die and you pay taxes. So don’t get ahead of yourself.”
full articlehedge funds, asset valuation, asset correlation, portfolio managementLabels: asset correlation, asset valuation, hedge funds, portfolio management
Research days are numbered. (Part 2)
Research days are numbered. (Part 2)
Research is a major cost center. It used to be coupled with marketing IB services. Yet the Research/IB relationship has been de-coupled. Mid-tier firms will find it difficult to sustain full coverage research teams. You’ll see the major firms enhance their research capabilities, while other firms sell-off. The true research team may wind up at the ratings houses (Moodys, S&P, D&B, Fitch) and market news/data companies (Bloomberg, Reuters/Thompson).
End of Prudential's research arm illustrates trendsPrudential Financial's decision to close its equity-research arm this week illustrates the latest trends in research, including less funding for research settlement and a poaching of top researchers by hedge funds. Additionally, the Securities and Exchange Commission has put an emphasis on buy-side research in a series of rulings, which has also put pressure on sell-side research firms like Prudential.
Equity Research: What's Next?Prudential's purge is the latest change in the industry as research-settlement funding dries up and hedge funds poach top analysts.
When Ben Rose started his own stock research firm, Battle Road Research, back in 2001, he wanted to examine companies in a different way. Instead of starting with sit-downs with corporate execs, he would start by talking to customers, suppliers, and industry experts, people whose unbiased reviews cut through the typical press releases and industry show pitches. Rose calls his method "doing [what] analysts were paid to do in the good old days."
Battle Road is one of hundreds of independent research shops that have sprung up in recent years, with a variety of methods and areas of focus. "No one has figured out the secret sauce to conducting equity research," Rose said. "There are different approaches, all of which have validity in the marketplace."
Analysts Move to Buy-Side Firms
But finding ways to make money from providing all this research is getting more difficult. This was underscored on June 6 when Prudential Financial (PRU) closed down its equity research operations, Prudential Equity Group, and laid off more than 400 employees, including 33 senior analysts.
Few in the industry think Prudential's analysts will have trouble getting new work. Demand for analysts is strong, but the landscape has shifted. More research dollars are flowing away from firms such as Battle Road or Prudential, so-called "sell side" firms that sell their research to others. Instead, "buy side" firms such as hedge funds and other money managers are hiring in-house research staffs, paying top dollar to keep those investing insights all to themselves.
Much of the work done by Battle Road's tiny staff goes out to its clients through something called "soft dollars." Money managers pay higher trading fees, and in exchange, trading firms provide their clients with research by firms such as Battle Road. Last year, the Securities & Exchange Commission moved to restrict the use of soft dollars, and last week SEC Chairman Christopher Cox said he may lobby Congress to ban the practice altogether. "This witch's brew of hidden fees, conflicts of interest, and complexity of application is at odds with the investor's best interest," Cox said.
Fallout from 2003 SettlementSoft dollars' supporters say no one is being deceived. The practice rewards the best research, and spreads it to a wider audience, proponents say. "The SEC has systematically undermined the business model and payment system for research," says Scott Cleland of the research firm Precursor.
Cleland used to be an independent analyst, and he proudly describes pointing out problems at WorldCom before others realized anything was wrong. However, he quit at the end of 2005 to do research for industry instead, saying the economic model for independent research just wasn't working. He's particularly critical of the 2003 global research analyst settlement, which was a result of analyst scandals in which banking deals tainted top firms' research. The deal, with the biggest Wall Street firms, separated investment banking from research operations, ending a key way those firms justified research costs.
The agreement also meant that big brokers would pay $450 million toward giving their clients independent research. The settlement, while well-intentioned, ended up giving lots of research away for free, Cleland said, setting "the market price for independent research at zero."
Money from the research settlement dries up in mid-2009, and no one knows whether big brokers will continue offering the extra research alongside their own.
New Business ModelsWhile funding dries up for traditional sell-side research firms, resources and talent migrate to the buy side, the many money managers, hedge funds, and private equity firms beefing up their internal research operations, said Jeff Diermeier, president and chief executive of the CFA Institute. Analysts, along with business-school professors and administrators, say there's a perception that sell-side research, once a place where top analysts made top dollar, is not where the rewards are.
All the uncertainty is driving the research industry to come up with new business models. Some firms farm themselves out to money managers for specific research projects. Others sell research directly to investors through subscriptions. Some big firms are restricting wider access to their top researchers, using their insights for in-house trading.
"There's still demand for innovative research," said John Eade, president of Argus Research. "There's less and less demand for traditional sell-side research." Firms must come up with innovative methods or new ways to exploit research insights. For example, "few people need another e-mail report coming to them," but many investors will pay for time on the phone with a top analyst, Eade said.
Yet it's an open question how much sell-side research could survive without soft dollars. It could hurt smaller firms, Diermeier said, but using hard dollars should result in a better, more efficient allocation of research money.
Company-Funded ResearchHow much would investors pay directly for research, and would it be enough to make up for the loss of soft-dollar funds? "There is a fear in the industry that firms [won't] pay for research," Rose said. That may sound unlikely, but many point to the fixed-income market, where corporations, not potential investors, pay Standard & Poor's and Moody's to evaluate debt. Could that happen to equities?
Actually, that business model is already being tested as a way to spur coverage of smaller publicly traded companies.
Instead of covering every firm, research firms all seem to chase stocks with higher trading volume. The result? "Investors are not getting exposed to companies that are early in their growth cycle," said Karin McKinnell, president of the Independent Research Network. The lack of exposure means investors miss opportunities and small companies end up with higher capital costs.
Many smaller publicly traded firms have lost coverage as research budgets shrink. About a quarter of all public companies are not covered by a sell-side analyst. A total of 43% have two or fewer analysts covering their stock, according to data collected by IRN.
Middle Man Could Aid ObjectivityThe Independent Research Network, a joint venture of Reuters and NASDAQ (NDAQ), places itself as a middle man, enabling companies to hire research firms to cover them. The National Research Exchange has a similar business plan. Some are suspicious of any research funded by the companies being researched. McKinnell said IRN provides "multiple levels of protection," including a code of ethics, an oversight board, and two- to three-year contracts for all research coverage.
Nobody is sure where all this is leading equity research. But independent, sell-side firms say they provide a valuable service to markets. They spread information, helping markets work efficiently, and they're a key ally to investors. "Our views are aligned with investors," Eade said. "Our business interests are the same."
full articleresearch, market trends, down-sizing, hedge funds, equity researchLabels: company-funded research, down-sizing, equity research, hedge funds, market trends, research
Ways to Leverage Existing Applications to Improve Business Processes
Ways to Leverage Existing Applications to Improve Business ProcessesWith processes serving as the backbone of SOA-based composite applications, orchestrating those services has become a fundamental requirement of Business Process Management.Attend this informative eSeminar and hear from Connie Moore, Vice President, Research Director for Forrester, on how SOA (Service Oriented Architecture) is being used in the real-world and gain insight on the most appropriate ways to leverage this powerful technology. In this eSeminar, you will learn:
- How processes serve as the central-nervous system for SOA
- How to identify BPM technologies that maximize SOA capabilities
- What latest technologies are available for rapid SOA deployment and real-time agility in a dynamic environment.
- What you can do to reduce custom programming effort while achieving faster deployment
This eSeminar is ideal for IT teams that are looking for ways to leverage existing applications to improve business processes, speed development time, and discover and adjust dynamic processes where IT provides a supporting role to manage infrastructure . Ultimately, it's about improving the bottom line.
Register now, and bring your SOA and BPM questions as we'll have an interactive Q&A session following the presentation. Don't miss this chance to find out how BPM can alleviate your SOA burden.
Featured Speakers:
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Chan Preston, VP of Professional Services - Ultimus
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Connie Moore, Vice President, Research Director - Forrester Research Inc
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Michael Krieger, VP, Market Experts Group - Ziff Davis Media
View this presentationIT, technology, SOA, BPM, SDLC, development strategy, rapid prototypingLabels: BPM, development strategy, IT, rapid prototyping, SDLC, SOA, technology
Mobile WiMax Gets Rolling
Mobile WiMax Gets RollingCable operators, who have long been the leaders in high-bandwidth networking, are reacting as traffic spikes and their networks show signs of maxing out.
Cable Prepares for Bandwidth CrisisThe cable industry has long held the advantage over other delivery platforms because of its surfeit of bandwidth. But the emergence of HDTV and other factors is
threatening to overload cable systems. At a conference, approaches discussed included splitting fiber nodes in half, digital video delivery, channel bonding based on the emerging third version of the Data Over Cable Service Interface Specification,
expanding the radio frequency to 860 MHz or 1 GHz, boosting modulation power, using out-of-band overlays, employing Motion Picture Experts Group 4 transmission, and utilization of FTTH architectures. Research says approaches such as
rate shaping and switched digital video are less expensive but don't provide much extra capacity, while others — such as fiber-to-the-home/passive optical network (PON) — are bandwidth-rich but "outrageously expensive."
The cable industry has long held the advantage over other delivery platforms because of its surfeit of bandwidth. The emergence of high-definition television (HDTV) and other factors, many of which are convergent in nature, is threatening to overload cable systems. Comcast, the nation's biggest operator, is testing a new system called switched digital video. Cablevision, the fifth largest operator, has also joined the fun by rolling out the platform in its New York City region. In most cable systems, all programming is sent to all customers; the subscriber chooses which programming to watch. In a switched digital approach, only the programming requested by the subscriber is transmitted, saving a tremendous amount of bandwidth. Two vendors of these systems, BroadLogic and BigBand Networks, are mentioned.
Current headlines:-
Cable Operators Confront Bandwidth Shortfall :: Red Herring
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Big Bandwidth Problems, Many Possible Solutions for Cable Ops :: Cable Digital News
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SDV Offers 33 Percent Bandwidth Gain :: BroadcastNewsroom.com
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Bandwidth Increases Must Be Carefully Considered :: ABI Research
More articles on the
cable and telecom industry.
cable, telecom, broadband, digital technology, bandwidth, WiMax, mobile internetLabels: bandwidth, broadband, cable, digital technology, mobile internet, telecom, WiMax
Outrunning the Regulators
Outrunning the Regulatorsby Joni Bessler, Debra Banning, and Roman Regelman
San Francisco, February 5, 2007 --
In banking, as in other heavily regulated industries such as utilities and health care, keeping abreast of federal regulatory requirements is of paramount importance. To avoid an endless cycle of reacting to new regulations, banks must anticipate the regulatory fallout from problems such as identify theft, and implement solutions that address existing and longer-term security issues. Leaders should consider decentralized security structures to enable a faster response to new rules. Making customers aware of new security measures is also vital and can help mitigate risk.
Read the full Resilience Report:Staying ahead of security rules can create competitive advantages.The password to your bank account is about to be invalidated,” reads the e-mail. “To prevent this, please click on the following link and enter all your security information.”
The hapless individual who follows instructions, of course, risks giving away access to one or more bank accounts to cyberthieves. And as such devious practices become more sophisticated, regulators tend to get nervous. In fact, that anxiety has led the Federal Financial Institutions Examination Council (FFIEC) to add another layer of rules to those governing the banking industry, already among the most regulated business sectors in the United States. Under the new requirements drafted by the FFIEC, which was created in 1979 to establish uniform principles in federal bodies’ oversight of the industry, financial institutions must put more stringent controls on their electronic security by the end of 2006. Specifically, they must examine the ways in which they communicate electronically with customers, whether those interactions are on Web sites or interactive phone systems; they must determine what security threats exist on those systems, establish a process for assessing future risk, and formally educate their customers about security risks.
Banks don’t have much more time to meet the FFIEC’s demands and, unfortunately, many will make the minimum effort necessary to comply with the requirements, sigh in relief, and consider the task finished — thus leaving themselves unprepared for the FFIEC’s next set of guidelines.
This attitude does not just open the door to future noncompliance. It sets in place a debilitating cycle of increasing vulnerability. Given the constantly evolving state of security in financial services, banks that take a desultory approach to security are positioning themselves as the weakest members of the herd, and thus the most vulnerable to sophisticated “phishing” and “pharming” schemes, in which attackers gain access to customers’ accounts and personal data through e-mail fraud or Web traffic redirection. The FBI estimates that every incident of a Trojan virus attack costs banks at least $38,000 in revenue loss and employee hours — and that figure doesn’t take into account the harm to a company’s reputation and loss of customer confidence, which can be more damaging than the actual attack.
Companies in heavily regulated industries, a group that includes pharmaceuticals, health care, and utilities, often act as though the regulations that besiege them are irritating trivialities. However, new requirements can offer companies an opportunity to escape the cycle. For instance, instead of maintaining an ad hoc approach to foiling invasions and complying with regulations, banks should craft an overall public-facing security strategy. Although it can be difficult to persuade senior management to invest in long-range plans, there’s no better time to do it than when they are in the shadow of an imminent regulatory deadline — especially one that is disrupting the entire organization as the company marshals its resources to deal with it.
For example, in aiming to go beyond regulatory compliance and achieve security excellence, banks can institute a mechanism for self-analysis and self-improvement that allows them to anticipate their future security needs. In doing so, they will meet their current burden of compliance, lessen the impact of any future regulatory guidance, reduce their risk exposure, and address customers’ concerns about the security of online banking.
Instituting such a robust risk-mitigation program involves three elements. The first is to determine the most appropriate technical solution, which can be the biggest hurdle for many companies: They may not know how many Web sites they operate, security across the systems may be inconsistent, and key applications and services may reside on poorly secured systems. Therefore, banks, for example, should assess their current level of risk exposure and determine risk-mitigation strategies that will balance compliance, business objectives, and customer satisfaction. In implementing technical solutions, banks must avoid overly complex approaches, which may have higher-than-expected direct and indirect costs.
The second element is an effective organizational structure to manage the initiative. A common roadblock to implementing new security standards is a decentralized company, which can lead to inconsistent approaches to IT security across the enterprise, along with incomplete monitoring and accountability. However, piecemeal fixes will not work. Grafting a centralized security program onto a decentralized organization often results in the corporate equivalent of organ rejection.
How might banks address this issue? They can create a hybrid centralized–decentralized model, in which critical compliance activities and governance oversight are centrally managed, while less critical functions remain with the business units. Alternatively, banks can construct enforcement mechanisms that shift the burden of compliance to the heads of the business units, rather than keep it centralized at corporate headquarters. Regardless of the specific solution, banks can manage risk exposure and regulatory compliance in a uniform fashion only if they have the requisite organizational structures in place.
The final element of a robust risk-mitigation program, customer awareness, can be a key component of a company’s defense against fraud and identity theft. A well-educated bank customer can more easily spot phony come-ons, like phishing e-mails, and avoid being deceived. In fact, many banks are finding that educated consumers are their front line of defense in reporting phishing and other fraud attempts. One basic but effective measure is to advise customers to always type the bank’s Web address into their Internet browser rather than click on a link in an e-mail, because the e-mail may be fraudulent.
Furthermore, making customers aware of enhanced online security is a key differentiator in the marketplace. In a 2005 survey by Deutsche Bank Research, “security offering” was far and away the most important feature to prospective online banking customers, with 87 percent calling it their top priority. A well-publicized security program could prove a significant lure to new customers in the highly competitive banking environment.
Any highly regulated industry will face similar vicious cycles of its own and should be thinking about approaches for leaping ahead of regulatory requirements. The common thread is that simply responding to regulatory guidance will never be enough. Anticipatory thinking is the only way to avoid being caught in the middle of an endless series of provocation and regulation.
IT, security, customer service, training, security risk management, spam, technology, risk analysis, risk assessmentLabels: customer service, IT, risk analysis, risk assessment, security, security risk management, spam, technology, training
The Dos and Don'ts of Business Process Management: Getting the Most from BPM
The Dos and Don'ts of Business Process Management: Getting the Most from BPMBusiness Process Management (BPM) is one of the hottest topics in information technology management today. However, successfully implementing BPM can be a complex process, especially when it comes to technology selection and technical implementation. We invite you to join us for this live, interactive, online event covering the essential dos and don'ts of BPM. You'll learn about:
Choosing a technology
- The pros and cons of embedded solutions
- What makes BPM different from other applications/solution approaches
- Understanding the human side of BPM
Successful implementation
- Project methodology
- Team composition & responsibilities
- Integration considerations
- ROI expectations
Keeping pace with business
- Dealing with exceptions
- Managing change
The presentation will be grounded in the real world experiences of Zale Corporation's Solutions Architect, Bob Harris, who has deployed 154 automated business processes over the last four years. During the presentation you'll be able to ask questions and receive prompt replies.Featured SpeakersBob Harris, Solutions Architect - Zale Corporation Chan Preston, VP of Professional Services - Ultimus Frank Derfler, VP, Market Experts Group - Ziff Davis Media
View the presentation.BPM, business process management, business process outsourcing, bpo,Labels: BPM, bpo, business process management, business process outsourcing
IT Security Breaches: A Discussion on Research & Trends
Security Breaches: A Discussion on Research & TrendsUntil now, most businesses have focused their security attention on external attackers. But a quick glance at recent headlines shows that the threat from internal sources is just as serious. Given the significant legal and financial consequences of data security breaches - unwanted media attention, brand damage, stock price drops, hefty fines, lawsuits and customer loss - it's clear that IT leaders must address both external and internal threats in order to protect both their employees and their customers. Please join Trent Henry, Senior Analyst with the Burton Group for a presentation that will highlight his research and analysis of the compliance and control market, including:
- Assessment of leak prevention drivers and market status
- Different architectural approaches to mitigate these security breaches
- Technologies available to mitigate threats
Following Trent, Paul Pilotte, Senior Product Manager at Vericept, will introduce you to the Vericept Data Loss Prevention solution suite and help you understand how its comprehensive technology can help you meet your security and compliance mandates. Following the presentations, both Trent and Paul will answer your questions in the live Q&A session.
Featured Speakers:
Trent Henry, Sr. Analyst, Burton Group
Paul Pilotte, Senior Product Manager - Vericept Corporation
Cameron Crotty, Editor, Online Events - Ziff Davis Media
Sponsored by Vericept
View the presentation.IT technology, IT security, IT risk management, information systems, data management
Labels: data management, information systems, IT risk management, IT security, IT technology
IT Careers: The 40-Hour Work-Week Era Is Ending
Gartner: The 40-Hour Work-Week Era Is EndingBy Deborah Perelman,
eWEEKIn what the I.T. consultancy calls the emergence of the "Digital Free-Agency," individuals will be expected to blend professional and personal computing requirements in an integrated environment. The effect of this practice, as well as new job descriptions, will change the workplace as I.T. knows it.
By 2015, there will be more workers who interact with technology, but they'll be working a whole lot less hours each week, finds a Gartner research report released on May 30.
Gartner argues that three of the four traditional pillars of work—the living wage, long-term relationships with loyal employers, and government- or company-provided pensions—have already gone the way of the dinosaurs, leaving only the 40-hour workweek.
But this, too, is not long for the employment economy, the report said. Societal views on primary wage-earner and caregiver roles, as well as on retirement, are in the midst of changing, taking with them the de facto 40-hour work week. Individuals are already reconsidering its pervasive influence, the report argues, and the dialogue is becoming increasingly political.
Those most affected are at the helm. Retiring Baby Boomers, working-age mothers and Generation X workers are seeking a more fulfilling work/life balance, and the traditional workplace structure is holding them back. The report said that no longer will the workplace be dominated by single bread-winners who expect to retire at the end of their working life, and that businesses need to reckon with this trend.
"When people in these demographics have marketable skills, employers will find it difficult to ignore their requests for more flexibility," said Brian Prentice, research director of emerging trends and technologies at Gartner, in a statement.
"The additional pressures of an aging population and skills shortages will lead to the adoption of digital free agency and flexible work structures as social, political and business necessities."
The effect of these changes will be felt throughout the employment life cycle. Organizations will be forced to redefine existing roles as well as craft new ones based on what can be realistically achieved in half the traditional workweek.
The report suggests that rather than adopt a draconian measure of cutting in half the working hours of all employees, employers that create 20-hour job descriptions will be in the best place to attract and retain the most qualified workers.
"The 20-hour-per-week job description is a relatively simple way of addressing a growing problem without radically restructuring well-established management models," said Prentic.
Digital free agents as change agentsYet, the decline of the standard 40-hour workweek will not occur in a bubble, but at the same time as a consumerization trend increases the roles that IT plays in people's personal lives.
"It will be very hard to draw a distinction between the personal and work computing environment. The shift in power away from the organization, and in particular, the IT department, will be even more significant with these people," said Prentice.
In what Gartner calls the emergence of the "Digital Free-Agency," individuals will be expecting to blend professional and personal computing requirements in an integrated environment. The report said that the effect of this user-driven practice coupled with new 20-hour job descriptions will change the workplace as IT knows it.
"As IT becomes woven into the fabric of people's lives and traditional work-home boundaries are rendered obsolete, digital free agency will emerge," said Prentice.
Report: The supply of IT pros is down, but the demand is up. Click here to read more. Though this trend is only now in the early stages, Gartner argues that sharp CIOs will see digital free agency as a business-relevant trigger and link it to farsighted business benefits.
"Gartner is asking the CIO to consider a long-term planning scenario that prepares for the 20-hour job description and the rise of digital free agency. That consideration needs to happen now," said Prentice.
The report states that smart CIOs will not wait to address two imminent trends: the need to control the computing environment on one hand, while providing increased user autonomy on the other. Doing so will put IT in the business drivers' seat.
"Ultimately, by preparing for digital free agency, the IT department will be able to position itself as a proactive enabler of true business change," said Prentice.
full articleIT, technology, staffing, HR, careers, IT management
Labels: careers, hr, IT, IT management, staffing, technology
Jobs: Oracle DBA, .Net Developers
New job openings we have for permanent hires.
- Oracle DBA Midtown up to 130k top tier media company
- .Net/Oracle Dev. Must have transactional systems exp Springfield,NJ Multiple position 80-100k + bonus
- .Net high profile client facing financial midtown up to 115k + bonus
If you know anyone who would be qualified and interested let me know and I'll email you the job descriptions.
For more information check our our web site at www.conquestassociates.com
Melanie, Recruiter
melanie@conquestassociates.com
jobs, technology, financial services, oracle, dba, java, .net
Labels: .Net, dba, financial services, JAVA, jobs, oracle, technology
Fed pressured to raise rates
Fed pressured to raise ratesEven with inflation at the top of the Federal Reserve's comfort zone, options on Federal Fund futures at the Chicago Board of Trade show a 41% chance the Fed will lift its target rate for overnight loans between banks from the current 5.25% to 5.5%. Options data compiled by Bloomberg show that the chance of a rate cut has fallen from 83% to 29% since the start of May.
Fed Faces Pressure to Raise Rates, Options Show (Update1)
By Daniel Kruger
June 4 (Bloomberg) -- In the options market where the savviest investors take apart conventional wisdom, the Federal Reserve is facing growing pressure to consider raising interest rates as soon as December.
Options on Federal Fund futures at the Chicago Board of Trade indicate a 41 percent chance the central bank will lift its target rate for overnight loans between banks to 5.5 percent from the current 5.25 percent, according to data compiled by Bloomberg. A month ago, they showed no expectations for an increase.
While the economy expanded at the slowest pace in more than four years in the first quarter, inflation remains at the top of the Fed's comfort zone, business activity has rebounded, the jobless rate is near the lowest in six years and stock indexes are setting record highs. Just three months ago, options traders speculated the weakest housing market in 16 years would force the central bank to cut interest rates to 4.5 percent by January.
``The economy is in better shape than people give it credit for,'' said Jamie Jackson, who oversees government debt trading at RiverSource Investments in Minneapolis, which manages $100 billion of bonds. ``People exaggerated the pass-through effects of the housing weakness. If the Fed were to do something by year- end it would be a tightening.''
The chance of at least one cut in the overnight lending rate between banks has fallen to 29 percent from 83 percent since the start of May, options prices show.
`Not Satisfied'
Federal Reserve policy makers ``have started to tell us in pretty consistent language they're not satisfied at being at the upper band'' of their inflation target, said Stan Jonas, who trades interest-rate options in New York at Axiom Management Partners LLC. ``One-third of the people think the next move is going to be a tightening.''
Options more accurately reflect changes in monetary policy than futures contracts, the most widely used barometer, because they include the widest array of wagers, according studies by the Federal Reserve Bank of Cleveland in 2005 and the Federal Reserve Bank of St. Louis in 2006.
The Cleveland Fed paper has influenced the study of monetary policy expectations and follows a ``perfectly sound procedure,'' said James Hamilton, an economics professor at the University of California, San Diego.
The CBOT first listed the options in 2003 and began offering contracts in July that allow bets on the Fed's target rate. The so-called binary options pay $1,000 if an investor bets correctly on the Fed's interest-rate decision at regularly scheduled meetings. Investors get nothing if they bet wrong.
Preferred MeasureTreasury yields climbed last week to the highest since August. The yield on the benchmark Treasury note due in May 2017 rose 9 basis points, or 0.09 percentage point, to 4.95 percent. The yield fell 1 basis point today to 4.94 percent.
Treasuries returned 1.1 percent so far this year, compared with a 1.5 percent loss last year, according to indexes compiled by Merrill Lynch & Co.
Personal spending on items excluding food and energy, the Fed's preferred inflation measure, rose 2 percent in April, at the top of the central bank's preferred 1 percent to 2 percent range. It had been above 2 percent the previous 12 months.
Central bankers reiterated their forecast for faster growth and said ``downside risks'' to the economy have ``diminished slightly,'' according to minutes of the May 9 Federal Open Market Committee meeting released last week.
``Economic growth will pick up as we move through the year,'' Federal Reserve Governor Randall Kroszner said at a June 1 conference in Athens. ``The risks to the inflation outlook are primarily to the upside.''
Merrill, Goldman, UBS
UBS AG, among the biggest bond bulls this year, changed its forecast on June 1 for the Fed to begin cutting rates in October from August. UBS, along with Merrill Lynch & Co., Goldman Sachs Group Inc., had been predicting a housing-led recession would result in at least three rate cuts this year. Merrill and Goldman are based in New York and UBS is in Zurich.
New home sales rose 16 percent in April to an annualized rate of 981,000, according a Commerce Department report released May 24. Analysts attributed the increase to developers reducing prices of unsold houses. The average selling price dropped 10 percent, the report said.
Gains in stocks that pushed the Standard & Poor's 500 index to a record 1535.56 on May 30 discouraged the Fed from cutting rates, said David Rosenberg, chief economist for Merrill in New York. Rosenberg predicted at the beginning of January that rates would fall to 4.25 percent this year. He declined to specify when the Fed will cut rates in an interview May 30.
`Bat an Eyelash'
``We came off of virtual stagnation in the first quarter and the Fed didn't bat an eyelash,'' Rosenberg said.
Economists at Barclays Capital Inc., JPMorgan Chase Inc. and Bear Stearns Cos. have been predicting higher rates since the Fed left its target unchanged last August. They forecast at least one increase this year and another by the first quarter of 2008. Barclays is based in London, while JPMorgan and Bear Stearns are in New York.
``We'll see a pick-up in the growth rate of the economy that will make the Fed a little less confident with the rate of inflation,'' said Conrad DeQuadros, an economist at Bear Stearns.
The U.S. economy grew at a 0.6 percent annual rate last quarter, the Commerce Department said May 31. The pace will increase to 2.2 percent this quarter, according to the mean forecast of 65 analysts surveyed May 9 by Bloomberg News. ``If housing can just behave itself and get back some stability there is a risk they could go to 5.5 percent,'' said George Fischer, who manages $17 billion in fixed-income assets at Boston-based Fidelity Investments, the world's largest mutual fund company.
Building the CaseThe economy added 157,000 jobs in May, while the unemployment rate remained at 4.5 percent, the Labor Department reported on June 1. The jobless rate dropped to 4.4 percent in March, the lowest since October and matching a five-year low.
Business activity rose last month, according to the National Association of Purchasing Management-Chicago's business barometer. The measure increased to 61.7 in May, higher than economists forecast, from 52.9 the prior month. Readings greater than 50 signal expansion.
``The case is building more and more'' for Fed rate increases, said Richard Schlanger, who manages $4 billion in fixed income at Pioneer Asset Management in Boston. ``We are definitely seeing more and more people moving away from the Goldman and Merrill argument that the Fed is going to cut multiple times.''
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Full articleFED, US Federal Reserve, interest rates, inflation, economy, economic growth
Labels: economic growth, economy, FED, inflation, interest rates, US Federal Reserve
Banks look to asset-backed securities for revenue boost
Banks look to asset-backed securitiesThe business of turning mortgages and other debt into complex bondlike products has increasingly become a favored tool for investment banks to generate profits. Globally, investment banks reported $30 billion in revenue from asset-backed securities in 2006.
Investment banks are increasingly reliant on the business of turning mortgages and other kinds of debt into complex bond-like products for a significant share of their profits, according to JPMorgan research to be published Monday. Banks globally saw revenues of almost $30bn from asset-backed securities business in 2006, which analysts at JPMorgan estimate is as big as the revenues generated by equity derivatives or cash equities trading. In Europe, Deutsche Bank and Credit Suisse, two of the largest in the field, rely on ABS activity for about 10 per cent of group pre-tax profits, the research will say.
Investment banks are increasingly reliant on the business of turning mortgages and other kinds of debt into complex bond-like products to generate a significant share of their profits, according to research to be published Monday.
Banks globally saw revenues of almost $30bn from asset-backed securities business in 2006, which analysts at JPMorgan estimate is as big as the revenues generated by equity derivatives or cash equities trading.
In Europe, Deutsche Bank and Credit Suisse, two of the largest in the field, rely on ABS activity for about 10 per cent of group pre-tax profits, the analysts will say.
Securitisation is the process of turning financial assets into saleable securities and encompasses everything from the mortgage-backed securities that help fund ordinary home loans to the complex structured bonds known as collateralised debt obligations.
Industry growth has been spurred by investor demand for higher-yielding assets and the desire among banks to offload more of their lending risk into the capital markets.
Kian Abouhossein, analyst at JPMorgan, says issuance volumes in these markets has grown more than six-fold from about $500bn in 2000 to more than $3,000bn last year, about 77 per cent of which was from the US. Mr Abouhossein estimates US banks earned revenues of about $19.9bn from this business while their European peers gained about $7.5bn.
"This has become a big market and is significant for the banks. We would argue that it is at least as big as the equity derivatives or cash equities businesses, which have attracted a lot of attention as stand-alone businesses," he says.
The research is mainly focused on European banks and estimates that four of the top 10 institutions saw revenues of more than $1bn from their ABS businesses. Deutsche Bank is the clear leader, generating more than $2bn and earning pre-tax profits from that of more than $1bn, which is almost 11 per cent of group profits.
"The biggest banks have a cost-income ratio from their ABS business of 50-55 per cent, which is much better than the average for investment banking of about 70 per cent," Mr Abouhossein says.
The second biggest player in Europe is Royal Bank of Scotland, with ABS revenues of $1.7bn and made more than 4 per cent of group profits from the business.
abs, cds, asset backed securities, credit default swaps, derivatives, revenue, risk managmentLabels: abs, asset backed securities, CDS, credit default swaps, derivatives, revenue, risk managment
Goldman works on half of global buyouts
Goldman works on almost half of private-equity dealsSo far this year, Goldman Sachs has been involved in almost 50% of private-equity deals worldwide. The industry is on pace for a record year, with $483 billion worth of deals having been announced by the end of May. That's more than twice as much as last year at this time.
Goldman works on half of global buyoutsJames Mawson
04 Jun 2007
Goldman Sachs has worked on nearly half of all private equity deals around the world so far in 2007, in what is turning out to be a record year for the industry.
The combined value of buyouts in the first five months of this year has climbed to nearly $500bn (€372bn), according to data provider Dealogic, and Goldman has worked as an adviser or finance arranger on 50 deals worth a combined $226.5bn.
Goldman pushed JP Morgan and Citi into second and third place respectively, but was boosted by the firm advising its in-house private equity arm’s $87.7bn of deals. Based on an assumed 1% to 2% advisory and debt arrangement fee, Goldman Sachs could have earned $4bn in the first five months, if all announced deals are completed.
By the end of May, private equity firms had announced $483bn of deals, more than double the total by the same stage of 2006 and nearly 30 times the value a decade before.
A third of the year’s deals were announced last month, Dealogic said, including Goldman Sachs and TPG Capital’s agreed $25bn take-private of US telecoms company Alltel. However, Kohlberg Kravis Roberts has taken the top spot for financial sponsors having agreed $123bn of deals.
KKR’s global buyout total was nearly the same size as the entire value of announced deals in Europe, according to Dealogic, which was $734bn.
goldman sachs, private equity, investment banking, global marketsLabels: global markets, goldman sachs, investment banking, private equity
Nasdaq's launch of trading system for unregistered securities
SIFMA aims to block Nasdaq's launch of trading systemSIFMA has sent a letter to the Securities and Exchange Commission asking to have the launch of Nasdaq's new system for trading in unregistered stocks blocked. The powerful lobbying group says the system, called Portal, may dissuade some brokers from trading in unlisted firms.
Top Wall Street lobby group moves to block Nasdaq
Luke Jeffs
01 Jun 2007
A powerful lobby group representing Nasdaq’s top clients has moved to block a plan by the US equity exchange to launch a new system for trading in private companies.
The Securities Industry and Financial Markets Association, which represents Wall Street’s top institutions, has sent a letter to the Securities and Exchange Commission asking the US regulator to block Nasdaq’s proposed system for trading in unregistered stocks. The system is called Portal.
SIFMA has claimed the Nasdaq system, which plans to display quotes for unlisted shares after its launch in the third quarter, may discourage brokers from trading in unlisted companies.
The Association has said there are number of areas, such as trade reporting and the nature of subscriber agreements with Portal participants, that need to be clarified.
Robert Greifeld, the chief executive of Nasdaq, announced his proposal to upgrade its system for trading in privately held companies at a SIFMA conference in New York last month.
John Jacobs, executive vice-president and chief marketing officer at Nasdaq, said: “Portal is an open system which can be used by any firm so there will be no need for banks to set up their own proprietary systems.”
The exchange has 50 participants lined up to use the new system.
According to Nasdaq, $162bn (€120.5bn) was raised through private placements last year compared with $154bn from public offerings on the New York Stock Exchange, American Stock Exchange and Nasdaq combined.
Goldman Sachs launched a rival system last month, called Goldman Sachs Tradable Unregistered Equity market. GSTrUE can be used for deals which have been led by the bank.
Deutsche Bank analysts said in a report: “We view Goldman’s development of its own private offerings market as both a positive and negative for Nasdaq. The obvious negative is competition from a very smart and well capitalised competitor. The positive, in our view, is validation that the market does offer strong potential.”
The SEC allows stock to be sold to qualified US institutional buyers, without conforming to the registration and disclosure requirements for fully marketed public offerings.
SIFMA was formed last year when the Securities Industry Association and the Bond Market Association merged.144a, unregistered stock, dark pools, private trading systems, NASDAQ, portal
Labels: 144a, dark pools, NASDAQ, portal, private trading systems, unregistered stock
Mortgage industry tries to block credit-repair schemes
Mortgage industry tries to block credit-repair schemesFederal regulators and lenders are reviewing a growing practice that allows borrowers with low credit scores to pay money to piggyback on accounts with good scores. Fair Isaac Corp., developer of the FICO score, said it would change its credit-scoring system by the end of the year to end the loophole.
Lenders move to stop credit repair schemesShaky borrowers pay cash to piggyback on acounts with good scores.
Only a low credit score stood between Alipio Estruch and a mortgage to buy a $449,000 Spanish-style house in Weston, Fla., a few miles west of Fort Lauderdale.
Instead of spending several years repairing his credit rating, which he said was marred by two forgotten cell phone bills and identity theft, the 37-year-old real estate agent paid $1,800 to an Internet-based company to bump up his score almost overnight.
The result was a happy ending for Estruch, but the growing practice is sending shivers through the mortgage industry. Federal regulators are also reviewing the practice. And after being contacted by The Associated Press for this story, Fair Isaac Corp., the developer of the widely used FICO score, said it will change its credit scoring system beginning later this year in a way it contends will end this little-known but potentially high-impact mortgage loan loophole.
Instantcreditbuilders.com, or ICB, helped Estruch boost his score by arranging for him to be added as an authorized user on several credit cards of people with stellar credit who were paid to allow this coattailing. Parents also use this practice when they add their children to their credit cards to help them build solid credit.
The pitch to those who are essentially renting their credit history for pay is seductive: You don’t need to worry about users of this service receiving duplicate copies of your credit cards, account numbers or any of your personal information. It’s essentially free money, they are told.
Brian Kinney, 44, a retired Army officer in Glendale, Calif., pulls in more than $2,500 a month by lending out 19 credit card spots on two old Citibank cards with strong payment histories. Kinney, whose FICO score is above 800 on the scale of 300 to 850, quit his job working at a Farmers Insurance agency and uses the ICB income to tide him over until he starts his own insurance agency.
Buying a better score
Lenders are worried, however, that they’re taking on greater default risks by unknowingly offering lower interest rates than they otherwise would to applicants who artificially boost their credit scores. Their trade group has complained to the Federal Trade Commission and is talking with the credit reporting bureaus in case the practice becomes more widespread.
Estruch paid $1,800 in December for three credit card spots, and by January, his FICO score jumped from 550 to 715. In mid-March, he closed on his four-bedroom beige stucco house after obtaining a 30-year fixed-rate mortgage from a unit of American Home Mortgage Investment Corp. It carried a 7.5 percent interest rate and required no down payment.
"Everything now is score driven. I had a great mortgage history, but I got hurt because of my credit score," said Estruch, who also works as a mortgage broker, had bought and sold two houses previously, and currently owns another home in New York. Estruch said he’s current on his mortgage payments.
Companies like Largo, Fla.-based ICB are sprouting on the Internet with little overhead and no-frills marketing. They post ads on community Web sites like Craigslist and have sponsored links on Google and Yahoo. Competitors of ICB have even reached out to mortgage brokers, lenders and real estate agents, flooding their e-mail with advertisements.
Jason LaBossiere, who founded ICB a year and a half ago, said his company receives 100 to 150 new leads daily — a number that has been growing — and those inquiries lead to 10 to 20 new clients a week.
ICB charges $900 for the first credit card account, with a discount for additional ones. The cardholder allowing the piggybacking on his or her credit history can receive $100 to $150 per slot, depending on the age and credit limit of each card. ICB pockets the rest.
The effect on a credit score can vary depending on what else is in a client’s report. But one borrowed credit card account can increase a score between 30 and 45 points, two between 60 and 90 points, and five between 150 and 205 points, according to ICB. That’s because the computer program that calculates scores is essentially tricked into believing the credit renter has a better repayment history when it sees the added accounts, and that helps lift the credit score.
Once the credit card company files an updated report to credit bureaus — leading to a higher FICO score — the credit renter is removed from the account of the person allowing the piggybacking. However, the credit card’s payment history remains on the authorized user’s credit report forever, and lenders have no way of knowing how the credit borrower is related to the cardholder.
High scores bring lower ratesA higher credit score can save a consumer an enormous amount of money because it usually means a lower mortgage interest rate. It also can mean the difference between qualifying for a loan or not, as in Estruch’s case.
According to Fair Isaac, lenders would probably demand about a 9.8 percent interest rate on a $300,000, 30-year fixed mortgage for an applicant with a credit score between 500 and 579. That would translate into a $2,585 monthly payment for principal and interest.
But a borrower with a score between 760 and 850 seeking the same loan would qualify for about a 6 percent rate that would cost just $1,796 a month for principal and interest. That savings of $789 each month would total $284,040 over 30 years.
Kinney, the retired Army officer in California, said those borrowing his good credit history don’t get his personal information, full credit card number or credit card expiration dates. Any sensitive data is handled through ICB, and Kinney adds the users himself by calling his credit card company. ICB also destroys any duplicate cards that are issued to the credit renter, according to its contract.
Instead of being worried about risks he may be assuming, Kinney said borrowers are the ones vulnerable to scammers posing as do-gooders. Those seeking a credit hike give the cardholder their names and Social Security numbers, which, in the wrong hands, could lead to identity theft. Kinney said he also receives credit card offers in the mail for the credit borrowers on his accounts, opening up another possibility for fraud, but he throws them away.
"I know the whole thing sounds kind of odd and not very legitimate, but it is for now," Kinney said. "I don’t know how long before someone will decide it’s illegal. But I’m not counting on this for the long-term."
Ginny Ferguson, a mortgage broker in Pleasanton, Calif., and a credit expert for the National Association of Mortgage Brokers, considers the practice mortgage fraud, and the trade organization is about to release a policy statement against it.
"These companies are encouraging consumers to commit fraud. On a standard home loan, there’s a clause that says the consumer is not omitting pertinent facts that could impact his or her ability to repay the loan," Ferguson said.
ICB’s LaBossiere said he sees his business as a second chance for the consumer who has had little financial education to make good decisions.
"People who are our clients are spending an incredible amount of money to get their finances back in order," he said. "They’ve learned through a school of pain that it’s such an important aspect of regaining control of their lives again."
So far, federal authorities have yet to make a ruling on the practice. "What I’ve gathered from attorneys here is that it appears to be legal" technically, said FTC spokesman Frank Dorman. "However, the agency is not saying that it is legal."
Lenders, who depend on credit scores to assess a person’s ability to pay back a loan, are closely watching the practice’s growth. It also comes at a time when the industry is reeling from the a soaring default rate on subprime mortgages, home loans for people with bad credit. As a result, they’ve tightened lending standards, but the credit-renting practice threatens to undermine their efforts to reduce exposure to risky borrowers.
Score system under revisionNinety percent of the largest U.S. banks base their loan decisions on FICO scores, which currently includes authorized user accounts. However, after discussions with lenders and industry officials, Fair Isaac said it intends to announce this week that all future versions of its FICO score methodology will no longer consider authorized user accounts, said Tom Quinn, Fair Isaac’s vice president of scoring solutions.
The next version is slated to roll out in September to one of the three main credit reporting agencies — Equifax Inc., Experian Information Solutions Inc. or TransUnion LLC — with the other two agencies receiving the new version some time in 2008.
The change won’t be a quick-fix for lenders trying to weed out credit renters. Corey Carlisle, senior director of government affairs for the Mortgage Bankers Association, said it takes time for lenders to transition from one scoring system to another.
"All lenders have their own guidelines and parameters on how to use and incorporate the FICO score. It would take time to understand what’s in a new credit score," Carlisle said.
Quinn also noted that some lenders generate their own scores using authorized user accounts in their calculations, so the practice may not be easily negated.
"It’s an industrywide issue and there are other scores out there," he said. This is a phenomenon that impacts more than just FICO scores."
Other consumers besides credit renters stand to lose with the change, namely those for whom authorized user accounts were designed: college students on their parents’ cards and spouses with little to no credit of their own.
But there’s no way to distinguish these from the latest crop of strangers trying to augment their scores. Lenders who want to find out more information about others on credit card accounts are hindered by the Fair Credit Reporting Act and privacy laws.
"As with any decision, there’s a trade-off," Quinn said. "The many honest consumers who learn good credit skills with the help from a family member, that feature will be removed. But the challenge for us is maintaining the integrity of the FICO score."
mortgages, credit repair, ICB, mortgage fraud
Labels: credit repair, ICB, mortgage fraud, mortgages
