“It’s a hard sell for the banks, yes, but you’re the supervisor,” Shelby responded impatiently. “You’re also the central bank, so you have not just a little bit of power, but a lot of power.”

That’s the Quote of the Day.

Another one bites the dust

Another week, another hedge-fund collapse.

New York’s billion-dollar Focus Capital lost about 80 percent of its value and had to liquidate its assets to satisfy its lenders, the FT reports on its Companies & Markets cover. Last week, a Peloton Partners fund collapsed, wiping out nearly $2 billion in holdings.

It’s about to get worse:

Several other funds specialising in credit are close to crisis, according to investors and consultants, while a few smaller funds have had assets seized by banks or required rescues by investors or allies…

Many other hedge funds investing in illiquid assets, mostly in the credit markets, have suspended redemptions by investors to avoid forced sales. But concerns remain that withdrawals by investors from certain sectors could force more to shut.

The bust illustrates the outsize effects hedge funds, which are heavily levered (laden with debt), have on markets. Last week, when Peloton failed, it pushed the prices of the top-quality mortgage securities markets in which it had invested to new records. Focus Capital’s liquidation unloaded big stakes in two companies whose stocks plunged more than 30 percent apiece.

Bid-rigging probe

The WSJ says on its Money & Investing cover that the SEC is considering charging nearly thirty people and several firms with bid-rigging in the management of municipal bond proceeds that haven’t yet been spent by the cities and states on things like roads and schools.

The paper says the feds are investigating whether the companies, including UBS and Bank of America, colluded to rig bids to manage the money, something that may have resulted in higher fees for cities and states.

It looks like the problems come in part from—guess what?—a failure in regulation and oversight.

After a series of scandals in the 1960s, Congress created the Municipal Securities Rulemaking Board.

The MSRB, however, lacks enforcement authority. The SEC and the Financial Industry Regulatory Authority, Wall Street’s self-regulator, instead are charged with inspecting and reviewing the market through brokerage firms.

But the three firms whose offices were raided weren’t subject to federal oversight, inspections or examinations.

Stupid insurance tricks

The Journal has an important page-one feature on a test called the Fake Bad Scale that’s being used to sniff out fakers in personal-injury lawsuits.

Use of the scale surged last year after publishers of one of the world’s most venerable personality tests, the Minnesota Multiphasic Personality Inventory, endorsed the Fake Bad Scale and made it an official subset of the MMPI. According to a survey by St. Louis University, the Fake Bad Scale has been used by 75% of neuropsychologists, who regularly appear in court as expert witnesses.

But now some psychologists say the test is branding as liars too many people who have genuine symptoms. Some say it discriminates against women, too. In May, an American Psychological Association panel said there appeared to be a lack of good research supporting the test…

“Virtually everyone is a malingerer according to this scale,” says a leading critic, James Butcher, a retired University of Minnesota psychologist who has published research faulting the Fake Bad Scale. “This is great for insurance companies, but not great for people.”

Some judges are now barring it from being used as evidence. The psychologist who created the scale, unsurprisingly, defends its efficacy and makes most of his money testifying for defendants in personal-injury lawsuits.

Additional bad news

In economic news, the NYT says bankruptcies surged 28 percent last month from a year ago. It was the busiest month for bankruptcies since Congress overhauled the law three years ago.

“This number of bankruptcies may be under-representative of the true financial distress consumers are feeling because of the steps Congress has taken,” said Jack Williams, a scholar in residence at the American Bankruptcy Institute and a professor at Georgia State University.

Unsurprisingly, home-bust states California and Florida were in the top three for bankruptcy increases.

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