Tag Archives: hedge funds

US judge gives fraud lawyer 20 years in prison

in.reuters.com

US judge gives fraud lawyer 20 years in prison

NEW YORK – july 14 – Marc Dreier, a high-profile New York lawyer who admitted to a $400 million investment fund fraud that unraveled at the same time as Bernard Madoff’s huge swindle, was sentenced to 20 years imprisonment on Monday.

Dreier’s sentencing proceeding in Manhattan federal court was punctuated with discussion and comparison to the multibillion-dollar Madoff fraud after the government had asked for a 145 year sentence for Dreier. Madoff, 71, was sentenced to 150 years in prison last month for a fraud of as much as $65 billion with thousands of investors swindled.

“When you turn to the facts of the crime that Mr Dreier committed, one must still be appalled,” U.S. District Judge Jed Rakoff said. “It is a huge fraud by any standard, other than the Madoff standard.”

Even though the better-known Madoff’s fraud was much larger than Dreier’s scheme, U.S. prosecutors had requested the same effective life term for the Harvard and Yale educated lawyer as they did for the once-respected financier.

Madoff’s sentence was the stiffest handed down for big-time white collar crime compared with scandals of recent years involving executives of WorldCom, Enron and Adelphia, Refco and the Bayou hedge fund who received sentences between 12 years and 25 years.

Dreier, who once headed a 250-member law firm Dreier LLP on New York’s exclusive Park Avenue, was arrested last December on charges of swindling hedge funds and investment funds in a four-year-long scheme that unraveled in the financial crisis.

The gray-haired Dreier, dressed in a dark business suit, stood in court and made his own statement before the judge handed him a 20-year prison sentence. He acknowledged that he had disgraced his former colleagues and the legal profession.

“I am sorry, deeply sorry for the harm, the sadness that I have caused so many people,” Dreier said. “An apology doesn’t fix anything, doesn’t give anyone’s money back and doesn’t give anyone their job back.”

He was indicted in January and pleaded guilty in May to charges including securities fraud, conspiracy, wire fraud and money laundering.

The indictment indicated investors were owed about $400 million after the lawyer purported to sell promissory notes on behalf of a New York developer and a pension fund in Canada.

U.S. prosecutors are seeking about $700 million in forfeiture from Dreier, who had lived a lavish lifestyle owning several homes, boats and a valuable art collection.

The case is USA v Dreier 09-00085 in U.S. District Court for the Southern District of New York (Manhattan)

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Macroprudential policy Risky business

 THE new big hope of central banks is called macroprudential policy. During the boom, central banks used the fairly blunt instrument of interest rates as their main weapon. But since inflationary pressures were low, thanks to the deflationary shock stemming from China and eastern Europe, rates were kept low. This led to a splurge of asset-backed lending. Meanwhile, banks found easy ways to exploit the rules of the Basle accords – designed to ensure the system was well-capitalised. As a result, when mortgage-backed securities started to plunge in value in 2007, the banks were much less robust than was previously thought.

The Bank of England has set up a financial policy committee, which is just starting the arduous task of sorting out which principles it should follow and which policy buttons it can push. In a paper out today, it sets out its options. It starts by discussing the potential flaws in financial markets such as

incentive distortions which can, for example, arise from contracts that reward short-term performance excessively

informational distortions such as those linked to buyers doubting the quality of assets (adverse selection) or less than fully rational processing of information

co-ordination problems, where collective action, for example to step away from lending in a boom, may be in the interests of individual banks but there is no way to co-ordinate on this outcome

As the paper points out (and as Hyman Minsky famously noticed) there is a tendency for banks to get overexposed to risk in the upswing of a credit cycle. After all, it is the banks that are driving the cycle. As they become more confident about lending against assets, more funds are available to investors/speculators and asset prices rise, increasing the confidence of all involved. As a proportion of GDP, commercial lending to real estate doubled between 2002 and 2008. In the UK banking system, leverage (as measured by total assets to shareholders’ claims) increased from 20:1 to 50:1 within a decade. Both measures ought to have caused alarm but nothing was done.

There is little new in this, as the paper recognizes. Credit cycles have nearly always been marked by lending against property. But property is an illiquid market and prices fall very sharply when the balance of supply and demand shifts, often wiping out of all of a bank’s collateral. Meanwhile, the duration of bank funding was steadily falling, from an average maturity of 10 years in the early 1980s to four years by 2008 (the US followed a similar trajectory). This left the banks very vulnerable to a run on liquidity.

The FPC says the authorities have, in principle, three types of measure to deal with these risks.

those that affect the balance sheets of financial institutions

those that affect the terms and conditions of loans and other financial transactions

those that influence market structures

For example, balance sheet measures include maximum leverage ratios and liquidity buffers; the second group includes caps on loan-to-value ratios and minimum margins; the third includes requirements for disclosure to reduce uncertainty about the market exposure of individual banks, but also the use of central counterparties to clear trades.

The paper then conducts an excellent and clear-eyed assessment of the pros and cons of these measures, without coming to any definite conclusion (the paper is part of a consultation process). What is clear is that the authorities cannot rely on just one or two measures, esepcially given the proved willingness of banks to game the system. Of course, the authorities cannot prevent all future financial crises, but they can still be a lot more alert than they were in the early 2000s. The paper shows the FPC is making a good start.

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