Electronic Investor: Clearing Firm Rattles Investors
Penson Worldwide, a clearing firm for many big online brokers, revealed it owns illiquid bonds tied to a director. Don't panic, but keep a close watch, Barron's advises.
i traded their stocks. The problem i have is that i can never figure out their book value, i mean tangible book value. They will have huge lawsuit problem. They were hiding something for a long time, they knew they did something wrong.
What the real problem is trust: the other shoe is going to drop? maybe not. But that is always wall street's worry. $42 million is not a big deal when real estate is collateral. potential $20 write off. They shall be ok. But why hide? the bond, and the underlying business is not profitable maybe for years. why hide. ? that is the problem for them, the trust problem.
And, they keep giving all their customers crazy margin calls. Because they are scared of risk and i know a lot of their customers are leaving because of that. that is why they can't make money for so long.
Even though the write-up does not proffer any opinion, it got this statement wrong: "However, Penson CEO Phil Pendergraft said later at an investor conference that the company could have a "material" loss after writing down the loan. He said he still expects Penson to post a profit this year." The "Material" was in the 10-Q. The CEO did not say that at UBS, rather, he said that PNSN was not expecting any loss from the collateral. Assuming there is a loss, it would have "NO IMPACT" which means immaterial. He even used a reference of a $20 million write-down to buttress his point. In another release PNSN made on May 12, 2011, the CEO said "“We believe the activity of the Company’s stock related to the Retama related collateral is unwarranted. We hope this news release will aid in putting this issue to rest. Penson Worldwide remains strongly financed, with ample excess regulatory capital and a solid business, and none of this affects or involves any correspondents or their customers. We continue to move ahead with our 2011 plan, which calls for reducing quarterly losses and generating a small profit (excluding first quarter non-operating items) for the year.”
Educate Thyself and take advantage:
1. Listen to a replay of the UBS presentation
2. Read PNSN release: http://247wallst.com/2011/05/12/penson-clarifies-situation-after-unusual-activity-pnsn/
3. Here's where "Material" came from: "There are a number of factors potentially affecting the value of the Project and the Nonaccrual Receivables related thereto including potential legislation in the Texas Legislature that could expand gambling privileges at the Project. Should such legislation be enacted there should be a positive impact on the value of the Project and therefore upon the collateral underlying related Nonaccrual Receivables. However, should such legislation not be enacted, depending on other factors potentially impacting the Project and related Nonaccrual Receivables, it is possible that the value of the collateral associated with the Project and related Nonaccrual Receivables might be impaired, resulting in a write down of a portion of these receivables that could be material in amount."
Never mind, I found it...
Clearing Firm Rattles Investors
By THERESA W. CAREY | MORE ARTICLES BY AUTHOR
Penson, which clears trades for many online brokers, reveals it holds illiquid bonds tied to a former director. Investors needn't panic, but they should closely monitor the company's response. A recent research note from Sandler O'Neill analyst Richard Repetto set traders' and investors' nerves on edge when he detailed clearing-outfit Penson Worldwide's revelation that it held $42.6 million of possibly illiquid bonds issued by a horse-racing-track operator linked to a Penson director. Much ink and many pixels have been spilled discussing what the company's extremely belated regulatory disclosure means. The immediate effect was clear: Within days, the company's stock-market value was nearly halved, to about $3.12 a share. And the director resigned.
The news prompted us to look again at our annual review of online brokers ("Making the Right Connection," March 14). Quite a few of them clear their trades through Penson (ticker: PNSN). The firm specializes in clearing derivatives transactions, so it was no surprise to see options heavy-hitters like eOption, OptionsHouse, thinkorswim, TradeKing and tradeMonster on its customer list. (Thinkorswim has not yet been completely folded into the TD Ameritrade clearing operation; its separate customer base still clears its transactions at Penson.) Also on the client list: A.B. Watley, ChoiceTrade, Cobra Trading, Lightspeed Trading, MB Trading, SogoTrade, SpeedTrader, TradingBlock and Zecco.
We also got lots of e-mails from readers asking, in essence, "What will happen to my money if Penson collapses?" One wrote that he was closing an account at a firm that cleared through Penson, and thanked me for the table in our annual review that gave him ideas on where to transfer assets (see "Barron's 2011 Online Broker Review: How the Brokers Stack Up").
Penson has maintained that the bond position won't have any meaningful effect. In an e-mail via Penson's public-relations office, Vice Chairman Daniel P. Son explained that the "situation occurred as a result of an expansion of our disclosure in our most recent Form 10-Q about certain receivables where the collateral had reduced liquidity. Unfortunately, we believe, investors misunderstood some of the information." Son said that Penson will recover those receivables without a loss, but even if a loss did happen, there would be no impact on the firm's ability to clear trades, since the funds involved are separate from Penson's regulatory capital. However, Penson CEO Phil Pendergraft said later at an investor conference that the company could have a "material" loss after writing down the loan. He said he still expects Penson to post a profit this year.
SHOULD YOU WORRY IF YOUR broker clears through Penson? You should watch how Penson responds to this mess, but there's no need to move money based on its current financial position. It takes a near-perfect storm, including a major market drop and a lot of trading on margin, to force a clearing operation out of business. We witnessed a failure in mid-2008, when North American Clearing went under, tangling trades for its brokerage clients and their customers for a month. That doesn't seem to be the case here.
Even if the illiquid investment bled into Penson's regulatory capital, there is insurance through the Securities Investor Protection Corp. (SIPC), a federally mandated entity funded by broker-dealers, that covers up to $500,000 of stocks, options and bonds per account. Futures contracts, commodities and currencies are among the assets ineligible for coverage. Most brokers carry additional insurance, called excess SIPC coverage, that insures assets above the $500,000 ceiling. Check out the SIPC Website (www.sipc.org) to learn more.