CASE STUDY #1 : Lehman Brothers - Segregation Fail
Lehman Brothers collapsed due, in part, to unprecedented sub-prime losses. They managed to mask their financial woes for a while with repurchase agreements temporarily removing these risk securities. One of the subsidiaries, Lehman Brothers International Europe (LBIE), regulated by the FSA was required to segregate client funds under FSA's client assets rules (CASS rules), making their funds identifiable. However, in this case, it was found that LBIE hadn't done this for all clients’ funds. Once the client funds were held in the general account of LBIE they were no longer identifiable & clients would only have a claim against the firm as an unsecured creditor. When LBIE failed there wasn't enough money in the ring fenced account to cover the deposits they had taken. So it would seem having companies segregate client funds isn't 100% infallible. This example would have played out in Full Tilts case, when it came out that they had continued to credit player’s deposits without actually being able to collect the money
CASE STUDY #2 : Equitable Life - Regulation Fail
Equitable life is a UK life insurance company which got into trouble when they offered large guaranteed pension payments without financially backing them in the event of a market downturn. After trying to reduce the value of policy payments when that financial downturn arrived, the House of Lords refused to allow the cuts ruling them illegal. Facing having to pay back the additional money estimated at £1bn-1.5bn the company closed to new business. Parts of the firm were sold off to cover the costs & pensioners had to fight for compensation through the ombudsmen as a result of poor regulation, but an estimated 30,000 died before getting anything. This example shows that although a product & company is fully regulated, the actions of an incompetent board of directors & management team have caused several losses resulting in financial hardship for many thousands of people.
CASE STUDY #3 : Kaupthing Singer-Friedlander (IOM) - Cross Country Fail
The next case study I want to consider is the Isle of Mann subsidiary of the Icelandic bank which went into administration during the credit crunch. Another example of a victim of the credit crunch, this one started in Iceland with the collapse of Heritable and Landsbanki banks located in Iceland.
All foreign subsidiaries of KSF were given a guarantee of 100% on depositor funds by the parent bank. After the collapse of the Icelandic banks, the Icelandic authorities disclosed to the British government that they had no intention of covering those guarantees. As a result, depositors began withdrawing funds as quick as possible. Days later the UK government declared Iceland to be in default & the FSA put Kaupthing Singer (UK) in administration.
Contrary to normal practice, much of the Isle of Mann subsidiaries funds were tied up in KS(UK) & while the UK government committed to covering 100% of UK mainland deposits, no such agreement existed for IOM depositors. They were left to claim compensation, but what made the situation worse was much of the clients money was held via a life company offshore bond for tax efficiency. The problem with this is under the depositor’s compensation scheme, £50,000 is the maximum amount guaranteed to be paid back, but this was per institution of which each institution had hundreds of clients who had invested hundreds of thousands of pounds. Rather than each client getting an already paltry sum of £50,000, this had to be shared out between all clients, resulting in only a few thousand. Again, another example of regulation failing, but this time regulation failing in another country had detrimental effects in other fully regulated countries.
It's quite easy to come to the conclusion that regulation or segregation of client funds will solve the problem. These issues do need to be addressed but it's not the underlying issue, it's trusting the management is running the company properly. All of which continued to accept & distribute player funds after UIGEA came into effect.
All three companies have the same quality of management regardless of payout status of US player’s funds. Granted PokerStars have paid players money back, but they still committed bank fraud as did Full Tilt & UB, players should have know about the UIGEA, how it was illegal to transfer funds & they also knew the FBI wasn't about to leave this issue alone. The NETELLER seizure should have been a red light, but the overall reward of online poker were too enticing.
Hindsight has shown us regulation is desperately needed in the online poker industry, but so is transparency & a due dilligence procedure for players to follow when deciding where to play.
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