Senate Bill Would Bring Hedge Funds under SEC Scrutiny

The Hedge Fund Transparency Act of 2009, a Senate bill introduced on January 29, may mark the beginning of the end of the “shadow banking system” which has been blamed for aggravating the subprime mortgage crisis and ultimately contributing to the global recession.

“A major cause of the current crisis is a lack of transparency,” said Senator Charles E. Grassley (R-Iowa) who co-sponsored the new bill with Senator Carl M. Levin (D-Mich.). “The wizards on Wall Street figured out a million clever ways to avoid the transparency sought by the securities regulations adopted during the 1930s,” he added.

The Hedge Fund Transparency Act would require hedge funds to file an annual disclosure form with the U.S. Securities and Exchange Commission(SEC), comply with the agency’s record-keeping requirements and cooperate with its investigations … a requirement Grassley and Levin said is necessary to protect investors and the U.S. financial system. (The $100,000 question—whether the SEC is capable of taking on this additional regulatory responsibility—has yet to be answered.)

Bloomberg reports that hedge funds lost $600 billion in 2008 — more than any year previously — and may shed as much as $450 billion in assets this year.

Last November, four hedge-fund managers—George Soros of Soros Fund Management; John Paulson of Paulson & Co.; Philip Falcone of Harbinger Capital Partners; and James Simons of Renaissance Technologies—testified before Congress that some form of federal oversight was appropriate.

A Global Crisis of Confidence in US Financial Markets

There’s a comprehensive and fascinating article in the January 3 issue of The New York Times that should be must-reading for all public relations (PR) and investor relations (IR) consultants who serve financial services companies, including private equity firms and commercial and investment banks. “The End of the Financial World as We Know It,” by Michael Lewis and David Einhorn, begins with a provocative statement: “Americans enter the New Year in a strange new role: financial lunatics. “

As proof of their thesis, authors cite “the strange story of Harry Markopolos,” a former investment officer who tried, for nine long years, starting in 1999, to explain to the SEC that Bernie Madoff, the man who engineered the biggest global Ponzi scheme ever, couldn’t be anything other than a fraud. In response, the SEC undertook a slapdash investigation of Madoff and pronounced him free of fraud.

The Madoff scandal is just one example of a systemic problem … and it’s not just a matter of insufficient oversight of the financial services industry.

According to Clusterstock, many of Madoff’s investors were well aware that his returns were impossibly good, so he had to be cheating. However, they never considered the possibility of a Ponzi scheme. They thought that the scam involved insider trading … and that’s precisely why they chose to invest with Madoff!

In many cases, the Wall Street swindler’s investors willfully chose to become complicit in their own defrauding by ignoring the old adage that “if it sounds too good to be true, it probably is. “

Finally … Some Good PR in the Banking Sector

Talk about bad public relations! Only 21% of affluent consumers are confident in U.S. banks, according to a recent Gallup survey — the lowest level of consumer confidence in banks in three decades.

The growing financial crisis is taking its toll on everyone. According to a recent Wall Street Journal piece by Robin Sidel, 7.3 million American homeowners will default on their mortgages between 2008 and 2010, about triple the usual rate. Some 4.3 million of those will lose their homes.

The essence of good crisis management is doing the right thing and doing it quickly. Chase did precisely that when it announced its aggressive plan to modify the terms of $70 billion in mortgages for as many as 400,000 borrowers who are — or may soon be — behind on their payments, by moving them into loans with lower interest rates, smaller principal amounts or other more-affordable terms.

Said Charlie Scharf, CEO of Retail Financial Services at Chase: “It doesn't make sense for us to wait [to address the problem]. … We've heard loud and clear and are listening to what some of the thought leaders around the country are saying.”

John Taylor, chief executive of the National Community Reinvestment Coalition, called Chase’s announcement “a gutsy move.” We couldn’t agree more. Not only is Chase doing the right thing, it’s demonstrating and increasing the pressure on other lenders to help take some part of the burden off distressed borrowers. It’s a terrific example of proactive public relations and crisis management.

Thought Leadership in Action

Thought leadership is an important strategy in the tool box of virtually all PR practitioners, whether they work within a corporation, or as a consultant in a public relations firm. At Makovsky + Company, we define “thought leadership” as “building and promoting the expertise and/or image of an individual regarding the issues, trends or personal qualities that key constituents are most concerned about.”

At this point in time, the issues, trends and personal qualities that most concern the American public are 1) the current financial crisis and 2) the personal qualities of the candidates for president and vice president of the United States.

If you’re a senior corporate executive, you probably want to steer away from commenting on the presidential race. (Whatever you have to say automatically runs the risk of alienating half your constituency.) But you can certainly address the upheaval in the credit markets.

Procter & Gamble Co. Chairman-CEO A.G. Lafley did precisely that, when he urged congressional passage of a financial rescue plan in his op-ed — “How [the] Financial Crisis Affects You, and Why You Should Sound Off” — which ran in the October 1 issue of the Cincinnati Enquirer.

Lafley notes that “consumers are feeling the credit crunch very directly” and some P&G suppliers are “hampered by the inability to get the capital they need to run their businesses.” He calls on Washington to come up with a proposal that Americans can support and urges folks on Main Street “to let our legislators know that it’s impacting them.”

This is thought leadership at its best. It serves to underscore the fact that consumer understanding is one of Lafley’s — and, by extension, Procter & Gamble’s — core strengths.

“Bailout”: A Failure to Communicate … Accurately

Words matter. That’s especially true for public relations professionals in industries subject to regulatory oversight, such as investment banking, financial services and insurance.

The legislation that was originally introduced under the title “Troubled Asset Relief Program” and evolved into the “Emergency Economic Stabilization Act of 2008” was more popularly referred to by the average citizen — and quite a few legislators — as the “Wall Street Bailout.”

According to Wikipedia, “bailout” is a term used to describe a situation in which “a bankrupt or nearly bankrupt entity, such as a corporation or a bank, is given a fresh injection of liquidity, in order to meet its short term obligations.” Please note: a “bailout” would not be available to a consumer swamped by debt. And that may be at the crux of the overwhelmingly adverse reaction of American citizens to the initial proposals for averting the financial crisis.

In an article entitled “Main Street's Rage at the Financial Crisis,” BusinessWeek quotes Carol Madura, a waitress in her 50s, on the topic: “I brought up my kids to work hard and save money. Now what? The rich are getting bailouts. … The government just keeps taking our money and giving it to people who don't deserve it. We should be worried about those who are really struggling.”

If you’re involved in financial services public relations, insurance PR or investment banking PR, I’m sure you’ll agree that “bailout” is an altogether inadequate way to describe a proposed solution to a complex economic problem that threatens the financial well-being of all Americans.

Investment Banking: PR Hits the Skids at Lehman Brothers

Talk about bad investment banking public relations: Lehman Brothers was caught red-handed, having plagiarized parts of a Sanford Bernstein report on virtualization technology, according to Wall Street Journal reporter Susanne Craig. Known for its research excellence, Bernstein is headquartered in New York.

A research report produced earlier this year by a Lehman analyst — who has since moved on to greener pastures — contained passages that were surprisingly similar to several notes written earlier by Bernstein analyst Toni Sacconaghi.

In a letter sent last week to its clients, Lehman acknowledged the plagiarism. “The material was not sourced to Bernstein and was used without the firm's permission,” Lehman wrote. “We sincerely apologize to Bernstein, the authors of the reports, and our clients for this incident.”

The apology was accepted, but this was a crisis that should never have happened.

Because Mr. Sacconaghi is an extremely well-regarded analyst, whose work is closely followed and widely quoted, it was almost inevitable that this misappropriation of intellectual property would be uncovered. What makes this an especially unfortunate PR issue for the investment banking sector is the fact that this scandal comes at a time when Wall Street firms are trying to rebuild the public confidence in the credibility of their research departments.