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FTR #741 Bail, Bail, the Gang’s All Here

Financial Windfall for Buffett

Dave Emory’s entire lifetime of work is available on a flash drive that can be obtained here. (The flash drive includes the anti-fascist books available on this site.)

Listen:
MP3 One Segment


NB: This Flash stream contains both FTRs 740 and 741 in sequence. Each is a 30-minute broadcast.

Introduction: Recent disclosures concerning the Federal Reserve’s actions during the financial meltdown have revealed the extent to which foreign lending institutions were the beneficiaries of the Fed’s services.

Two of those institutions, Depfa and Dexia, appear to have required the Fed’s assistance partially in order to mask a gambit through which municipal bonds, were fraudulently manipulated, imperiling the financial integrity of American cities.

A great Bloomberg article follows up on the disclosure that the two banks were the largest recipients of Fed “assistance” during the 2007-2008 period of Fed emergency lending.  The article notes that the use of the Fed’s  “discount window” by foreign banks is a 97-year old secret that was only disclosed because the Fed was forced by congress to reveal the details of the emergency lending.

The program also discusses how Dexia and Depfa were major players in the US municipal bond market… Dexia was also one of the indicted players in a massive muni bid-rigging scandal.  Dexia’s presence in this market also happened to jump six-fold in the year preceding the crisis, so it looks like they may have been banking on a bailout (like a lot of the big winners of the crisis were).

Money to Burn

The revelations concerning the Fed’s actions are of special concern because Deutsche Bank chief Josef Ackermann has warned that the hedge funds may prove “too big to fail” and that that will lead to a bailout of those institutions as well. Note that Deutsche Bank was the recipient of Fed funds and that the U.S. government is suing Deutsche Bank for a billion dollars over their role in the subprime crisis.

Warren Buffett has echoed the sentiment that more big bailouts may be on the way for firms “too big to fail.”

Program Highlights Include: Warnings that the Obama administration’s provisions to shore up the financial industry are inadequate to prevent another meltdown; the drying up of short-term lending for European banks; European banks have a great deal of red ink on their banks; the fact that junk bond yields are at an all-time low; the lending of money to the failed Wachovia Bank (focal point of FTR #740).

1. Recent disclosures concerning the Federal Reserve’s actions during the financial meltdown have revealed the extent to which foreign lending institutions were the beneficiaries of the Fed’s services.

NB: Italicized and bold-faced excerpts are Mr. Emory’s.

IN August 2007, as world financial markets were seizing up, domestic and foreign banks began lining up for cash from the Federal Reserve Bank of New York.

That Aug. 20, Commerzbank of Germany borrowed $350 million at the Fed’s discount window. Two days later, Citigroup, JPMorgan Chase, Bank of America and the Wachovia Corporation each received $500 million. As collateral for all these loans, the banks put up a total of $213 billion in asset-backed securities, commercial loans and residential mortgages, including second liens.

Thus began the bank run that set off the financial crisis of 2008. But unlike other bank runs, this one was invisible to most Americans.

Until last week, that is, when the Fed pulled back the curtain. Responding to a court ruling, it made public thousands of pages of confidential lending documents from the crisis.

The data dump arose from a lawsuit initiated by Mark Pittman, a reporter at Bloomberg News, who died in November 2009. Upon receiving his request for details on the central bank’s lending, the Fed argued that the public had no right to know. The courts disagreed.

The Fed documents, like much of the information about the crisis that has been pried out of reluctant government agencies, reveal what was going on behind the scenes as the financial storm gathered. For instance, they show how dire the banking crisis was becoming during the summer of 2007. Washington policy makers, meanwhile, were saying that the subprime crisis would subside with little impact on the broad economy and that world markets were highly liquid.

For example, on July 23, 2007, Henry M. Paulson Jr., the Treasury secretary at the time, said the housing slump appeared to be “at or near the bottom.” Two days later, Timothy F. Geithner, then the president of the New York Fed, declared in a speech before the Forum on Global Leadership in Washington: “Financial markets outside the United States are now deeper and more liquid than they used to be, making it easier for companies to raise capital domestically at reasonable cost.”

Within about a month’s time, however, foreign banks began thronging to the Fed’s discount window — its mechanism for short-term lending to banks. Over four days in late August and early September, foreign institutions, through their New York branches, received a total of almost $1.7 billion in Fed loans.

As the global run progressed, banks increased their borrowings, the documents show. For example, on Sept. 12, 2007, Citibank drove up to the New York Fed’s window. It extracted $3.375 billion of cash in exchange for $23 billion worth of assets, including commercial mortgage-backed securities, residential mortgages and commercial loans.

THAT transaction seemed to get the Fed’s attention. At 1:30 that afternoon, Mr. Geithner spent half an hour on the phone with Gary L. Crittenden, Citi’s chief financial officer at the time, Mr. Geithner’s calendar shows. A few weeks later, Citigroup announced that it was writing off $5.9 billion in the third quarter, causing its profit to drop 60 percent from a year earlier — and that was only the beginning.

Perhaps the biggest revelation in the Fed documents is the extent to which the central bank was willing to lend to foreign institutions. On Nov. 8, 2007, Deutsche Bank took out a $2.4 billion overnight loan secured by $4 billion in collateral. And on Dec. 5, 2007, Calyon of France borrowed $2 billion, providing $16 billion in collateral.

When the crisis was full-on in 2008, foreign institutions became even bigger beneficiaries of the Fed’s credit programs. On Nov. 4 of that year, the Fed extended $133 billion through various facilities. Two foreign institutions — the German-Irish bank Depfa and Dexia Credit of Belgium — received 39 percent of the money that day.

“The striking thing was the large amount of borrowing that the New York Fed accepted during the crisis from European banks that had only a minimal presence in the U.S. and arguably posed no threat to the U.S. payment system,” said Walker F. Todd, a research fellow at the American Institute for Economic Research and a former assistant general counsel and research officer at the Federal Reserve Bank of Cleveland. Such a thing would never have occurred 20 years ago, he added.

All of the discount-window borrowings extended to institutions during the debacle have been repaid. But the precedent was set: The Fed was the financial backstop to the world.

Since 2000 or so, the mind-set at the Fed in New York and Washington has been that the central bank must step in when there is a global crisis, Mr. Todd said, even if it appears to exceed its mandate. . . .

“The Bank Run We Knew So Little About” by Gretchen Morgenson; The New York Times; 4/2/2011.

2. Depfa and Dexia appear to have required the Fed’s assistance in order to mask a gambit through which municipal bonds were fraudulently manipulated, imperiling the financial integrity of American cities.

A great Bloomberg article reports on the recent disclosure that the two banks were the largest recipients of Fed “assistance” during the 2007-2008 period of Fed emergency lending.  The article notes that the use of the Fed’s  “discount window” by foreign banks is a 97-year old secret that was only disclosed because the Fed was forced by congress to reveal the details of the emergency lending.

The article also discusses how Dexia and Depfa wee major players in the US muni market… Dexia was also one of the indicted players in a massive muni bid-rigging scandal  Dexia’s presence in this market also happened to jump six-fold in the year preceding the crisis, so it looks like they may have been banking on a bailout (like a lot of the big winners of the crisis were).

A European bank that got the most Federal Reserve discount window help during the financial crisis received a total of about $300 billion in loans, guarantees and cash infusions from governments and central banks. It also owned subsidiaries implicated in bid-rigging that prosecutors say defrauded U.S. taxpayers.

Details of Fed lending released last week show that Dexia SA, based in Brussels and Paris, borrowed as much as $37 billion, with an average daily loan amount of $12.3 billion in the 18 months after Lehman Brothers Holdings Inc. collapsed in September 2008. The House subcommittee that oversees the Fed plans hearings on the central bank’s discount window lending to offshore financial institutions next month.

By lending to Dexia, the Fed kept money flowing into local government projects throughout the U.S. as well as the money market funds that invested in them. Dexia guaranteed bonds issued by entities as varied as the Texas State Veterans Land Board in Austin and the Los Angeles County Metropolitan Transportation Authority.

“If Dexia went bankrupt, it could have been a catastrophe for municipal finance and money funds,” said Matt Fabian, a Concord, Massachusetts-based senior analyst and managing director at Municipal Markets Advisors, an independent research company. “The market has extensive exposure to foreign banks.”

Overseas banks accounted for about 70 percent of discount window loans when borrowing reached its peak of $113.7 billion in October 2008, according to the Fed’s data. The discount window, established in 1914, is known as the lender of last resort.

By law, most U.S. branches of foreign banks have access to the discount window, said David Skidmore, a spokesman for the American central bank. “They are important providers of credit to U.S. businesses and households, and discount window lending during the financial crisis helped support their continued lending in the United States,” he said.

The Fed has kept discount window borrowers secret for 97 years. Last week’s disclosures were court-mandated after legal victories by Bloomberg LP, the parent of Bloomberg News, and News Corp.’s Fox News Network LLC.

Depfa Bank Plc, a German-owned bank based in Dublin, was another insurer of municipal bonds in the U.S. Depfa’s discount window borrowing peaked at $28.5 billion in November 2008.

Dexia, which borrowed $37 billion from the discount window in January 2009, said its loans from central banks peaked at 122 billion euros ($165 billion) in October 2008. That month, it also obtained up to 150 billion euros ($202 billion) in debt guarantees from France, Belgium and Luxembourg, of which it tapped a maximum of about 96 billion euros ($130 billion) in May 2009. The countries and existing shareholders provided Dexia about 6 billion euros ($8.4 billion) in capital.

Dexia stopped issuing guaranteed debt in June 2010, said Alexandre Joly, a member of the bank’s management board and head of strategy, portfolios and market activities.

“It’s apples and oranges to mix central bank loans, debt guarantees and capital infusions to come up with a big headline number,” Joly said in a phone interview from Brussels. “It’s not accurate and it can be damaging to Dexia.”

The bank availed itself of other Fed lending programs too. Its total borrowings from the U.S. central bank’s Commercial Paper Funding Facility ranked third among users of the emergency program created to support the market for short-term debt issued by banks and corporations. Dexia used the program 42 times for a total of $53.5 billion, according to data the Fed released in December.

Dexia also tapped the Term Auction Facility, the lending mechanism the Fed established in December 2007 to augment the discount window. Dexia received 24 TAF loans totaling $105.2 billion, the largest of which was $16.7 billion on Jan. 17, 2008, Fed data show. The lender used TAF about twice a month from December 2007 to September 2008, then once in August 2009 and once more in November 2009. The interest rates it paid ranged from 4.65 percent in December 2007 to 0.25 percent for the two loans in 2009.

The Fed loans have been repaid, said Ulrike Pommee, a Brussels-based Dexia spokeswoman. The bank used the Fed’s emergency lending facilities to finance U.S. assets only, Pommee said in an e-mail statement.

“We have always been very transparent in our communications about the wear and tear on us in the market during the crisis,” Pommee said.

In 2008, Dexia was hit with buyback provisions in municipal bonds, Pommee said. The bank was one of the biggest backstops of the bonds, providing letters of credit or so-called standby purchase agreements — guarantees to buy the bonds if investors wanted out. Dexia’s so-called credit enhancement made it possible for money market funds to buy the bonds.

Dexia provided $14.7 billion in standby agreements and letters of credit in North and South America, excluding Mexico, in the first half of 2008, a six-fold increase over the same period a year earlier, the bank said in its first-half 2008 report.

“This growth was the direct result of a dwindling number of market participants able to offer such financial products combined with the urgent needs of issuers to restructure their debt,” Dexia said.

Over most of the last decade, thousands of cities, counties, hospitals and universities issued long-term floating- rate bonds and paired them with interest-rate swaps to try to protect against higher borrowing costs. The strategy, which relied on banks such as Dexia to guarantee a market for the variable-rate notes, collapsed when investment firms and bond insurers lost their top-credit ratings.

Interest-rate swaps are derivatives, or contracts whose values are derived from assets including stocks, bonds, currencies and commodities, or from events such as changes in interest rates or the weather. Swaps are private contracts and the market for them isn’t regulated.

Redemptions sapped Dexia so much that the bank was “two days from bankruptcy,” Pommee said, citing the French ministry for the economy.

Interest-rate swaps have cost U.S. taxpayers billions. The Denver public school system is borrowing $800 million this week to escape a wrong-way bet on rates. A Dexia unit that had provided a standby purchase agreement on the school district’s swap declined to renew its credit protection this month. The cities of Detroit and Pittsburgh also have restructured debt after Dexia decided not to renew its insurance.

Dexia’s lifeline from U.S. taxpayers came as federal officials were investigating allegations that the bank’s subsidiaries colluded with others to defraud state and local governments.

Two former Dexia units were among more than a dozen financial firms that conspired to pay below-market interest rates to U.S. state and local governments on so-called guaranteed investment contracts, or GICs, according to documents filed in a U.S. Justice Department criminal antitrust case.

Municipalities buy GICs with money raised by selling bonds, allowing them to earn a return until the funds are needed for schools, roads and other public works.

An employee of Financial Security Assurance Holdings Ltd., one of the Dexia subsidiaries, agreed to pay kickbacks ranging from $4,500 to $475,000 to a Los Angeles investment broker called CDR Financial Products Inc. in exchange for rigging bids, according to people familiar with the case and public records.

CDR employees fed information on competitors’ bids to FSA, allowing the firm to win deals at a lower interest rate than it would have paid, according to a federal indictment, public records and the people.

Steven Goldberg, a former FSA banker, was indicted in July on fraud and conspiracy charges. He has pleaded not guilty. FSA, which hasn’t been indicted, is facing a lawsuit from the U.S. Securities and Exchange Commission. While Dexia sold the bond insurance unit of FSA, it remained exposed to legal risks because it kept another division of the company, its Financial Products segment, Dexia said in its third-quarter 2010 report.

Joly said Dexia’s funding from the European Central Bank remains at 17 billion euros today. Its borrowing from the Fed “was a temporary situation and now they’re trading just fine,” said Nat Singer of Swap Financial Group LLC in South Orange, New Jersey.

“Fed’s Biggest Foreign-Bank Bailout Kept U.S. Munis on Track” by Bob Ivry; Bloomberg Business Week; 4/6/2011.

3. Deutsche Bank chief Josef Ackermann has predicted that the hedge funds may prove “too big to fail” and that that will lead to a bailout of those institutions as well. Note that Deutsche Bank was the recipient of Fed funds and that the U.S. government is suing Deutsche Bank for a billion dollars over their role in the subprime crisis.

Deutsche Bank AG Chief Executive Officer Josef Ackermann said unregulated financial companies such as hedge funds may pose a systemic risk to the economy if oversight isn’t increased.

“You have an unregulated area which becomes — as a consequence of all the regulatory changes — more and more important,” Ackermann, 62, said in an interview at the World Economic Forum in Davos, Switzerland. “You may one day wake up and realize that the systemic challenges are so big that you will have to bail out or at least help support the unregulated sector.”

Ackermann’s warning echoes comments made by former U.S. Treasury Secretary Lawrence Summers, who said this week in Davos that regulators haven’t paid enough attention to problems that could emerge in “a large, less healthy buccaneer sector.” Hedge funds have dodged the brunt of new global banking regulation aimed at avoiding a repeat of the worst global financial crisis since the Great Depression.

“If you separate utility banks from casino banking, you will one day realize that casino banks are also counterparties to corporations but also to other banks and to asset management and to governments,” Ackermann said yesterday. “It would be somewhat naïve to assume that if you have a strong regulated sector and leave the unregulated in the open, that you will never have systemic risk.”

The biggest U.S. banks such as Bank of America Corp. and Goldman Sachs Group Inc., also facing tighter scrutiny and higher capital requirements, argue they’ll be at a competitive disadvantage if hedge funds, money managers and insurers aren’t subject to similar constraints.

Representatives for the latter have fought back in meetings with government officials, saying economic stability wouldn’t be threatened if one of their firms failed. The Alternative Investment Management Association, a London-based group that represents hedge funds, released a statement today that says it’s “inaccurate” to call the industry unregulated.

“All the major jurisdictions where hedge funds operate, whether in North America, Europe or Asia-Pacific, have rigorous regulation of the industry,” the group’s CEO, Andrew Baker, said in the statement. “This already rigorous regulation is being increased by new legislation introduced since the crisis.”

The U.S. Congress in July approved the Dodd-Frank Act, which forces hedge funds to undergo routine inspections by the Securities and Exchange Commission and requires firms that manage more than $1 billion to disclose their investments, leverage and risk profile to regulators.

European lawmakers in November approved regulations requiring hedge funds to set limits on their use of leverage and avoid pay practices that encourage risk taking.

Deutsche Bank, which is scheduled to publish fourth-quarter and full-year earnings on Feb. 3, will likely pay bonuses that are in line with other competitors in the market, Ackermann said.

When asked about considerations by Credit Suisse Group AG to pay parts of bonuses with bonds that convert into equity if the company’s capital shrinks, he said the German firm sees “too many challenges” with the so-called CoCos and is not yet planning to use them for pay.

“I think we are paying the bonus which markets require,” he said. He declined to comment on whether variable pay for 2010 will be lower or higher than the year before, saying only that compensation at Frankfurt-based Deutsche Bank, Germany’s biggest bank, complies with “all the directives and recommendations” from policymakers and regulators.

Ackermann said in December 2009 that the big German financial institutions, including Allianz SE and Commerzbank AG, agreed to impose self-discipline on pay based on recommendations by the Basel, Switzerland-based Financial Stability Board.

“Ackermann Says Bailout Risk Lurks for Hedge Funds” by Aaron Kirchfeld and Serena Saitto; bloomberg.com; 1/28/2011.

4. Warren Buffett has echoed the view that it is too late to sidestep “too big to fail.”

Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc., told the Financial Crisis Inquiry Commission that taxpayers will always be on the hook for collapses at the biggest U.S. companies.

“You will always have institutions that are too big to fail, and sometimes they will fail,” Buffett, 80, told the FCIC in a May 26 interview, according to a recording released by the panel yesterday. “We still have them now. We’ll have them after your commission report.”

The Dodd-Frank financial reform act, enacted in July, was touted by President Barack Obama as a means to ending bailouts and protecting taxpayers from firms that are “too big to fail.” Federal Reserve Chairman Ben S. Bernanke, who made more than $3 trillion of assistance available during the crisis, has said the “too-big-to-fail” issue can be eliminated only when investors believe the U.S. won’t rescue firms.

Investors were rescued in 2008 by Bernanke and then- Treasury Secretary Henry Paulson, whose relief programs cushioned declines for stockholders and bailed out bondholders at firms including American International Group Inc. Buffett, who injected $5 billion in Goldman Sachs Group Inc. at the depths of the crisis, said he was betting on the success of government intervention. . . .

“Buffett Tells FCIC It’s Powerless to Stop ‘Too Big to Fail'” by Andrew Frye; bloomberg.com; 2/10/2011.

5. The program closes by noting indications that another financial collapse may be coming:

 

Discussion

46 comments for “FTR #741 Bail, Bail, the Gang’s All Here”

  1. Posted by tony | May 24, 2011, 6:13 pm
  2. It looks like the Fed’s “discount window” is still open for business, but you don’t necessarily want to get in line:

    Can the Fed Help Save Europe’s Banks?
    By Massimo Calabresi | November 22, 2011

    The U.S. Federal Reserve has been pumping billions of dollars into the European banking system in recent weeks in an attempt to help stabilize the continent’s financial crisis. And while the effort remains small, it is likely to grow in coming days as Europe’s banks struggle to find lenders willing to help them service their dollar denominated debts.

    For months the swap lines remained idle, but last September the European Central Bank announced it would tap them to help provide dollars to banks in Europe, and it began rolling over about $500 million worth of swaps every 7 days at a little over 1% annualized interest. In mid-October the ECB increased its swaps, drawing $1.35 billion for three months, while continuing to rollover the previous $500 million. Over the following weeks it swapped another $1 billion in 1-week and three-month paper, bringing the outstanding total to $2.35 billion as of Nov. 16.

    That is a tiny amount in the multi-trillion dollar world of transatlantic money flows, and it shows that in some ways the Fed move to ensure its vast store of dollars are available to the European banks through this channel is working. “The hope is that when you put the big bazooka [of Fed dollars] on the table that you don’t have to use it,” the source says. But the uptick in swap line use shows it is becoming harder for European banks to get their hands on dollars from lenders, and suggests, as the source says, that at some point the bazooka “may have to be used.” Since the Nov. 16 report on swaps was released by the New York Fed, interbank lending in Europe has further worsened.

    The European banks are trying hard to avoid using the second measure the Fed has made available to some of them: drawing off the discount window in the U.S. Since the 2008 financial crisis, the Fed’s discount window has remained open to all U.S. banks, and to all foreign banks that have branches or agencies here. Virtually no one is currently drawing on that source—there was $4 million outstanding as of Nov. 16—because it is a sign of ultimate collapse for a bank to have to do so..

    For all the Fed’s willingness to back-stop European banks there is only so much it can do. The European banks’ problems are not primarily with their dollar-denominated debts, but with their Euro debts. They are currently drawing 500 billion Euros off the ECB in an effort to service their debts. In recent weeks, Italian and other banks have pushed the ECB to accept less reliable forms of collateral for loans they take from the ECB. The ECB in the past has accepted such collateral, down to office furniture, for countries receiving help from the IMF, but is only now loosening the restrictions for bigger countries like Italy. With the loosened requirements, the ECB has the potential capacity to lend 14 trillion Euros.

    Let’s see, we have:
    1. An unprecedented eurozone crisis denominated in euros.

    2. Interbank lending lockups and a big retrenchment in foreign investments in eurozone bank debt.

    3. A bailout fund that’s potentially 14 trillion Euros.

    and

    4. A “loosening of restrictions” for collateral swaps in the “bigger” countries (Italy, Spain, maybe France?).

    Gulp.:

    ECB funding demand surges as bank strains build

    By Marc Jones and Steve Slater

    FRANKFURT/LONDON | Tue Nov 22, 2011 11:11am EST

    (Reuters) – Euro zone banks’ demand for central funding surged to a two-year high on Tuesday, and U.S. funds cut their lending to the bloc’s banks, tightening a squeeze that looks unlikely to ease this year.

    Fast-spreading sovereign debt worries have left lending markets virtually frozen and the European Central Bank as the only available funding option for many banks.

    The ECB’s weekly, limit-free handout of funding underscored the widespread problems, with 178 banks requesting 247 billion euros, the highest amount since mid-2009.

    Just as fears about the financial health of Italy and Spain have stopped banks lending to some their peers, U.S. funds have also continued to retreat from the region, and Italian and Spanish banks have seen corporate deposits flow out to safer havens.

    U.S. money market funds, which are key providers of liquidity to banks and have been pulling back from the euro zone since May, cut their exposure to European banks by a further 9 percent in October, according to ratings agency Fitch.

    Bankers said there appeared little chance of wholesale funding markets reopening for euro zone banks this year, and the best that can be hoped is for a return to more normal conditions early in 2012.

    There are several warning signs flashing for euro zone banks’ liquidity, limiting options and raising borrowing costs, leaving the European Central Bank as the only option for many of them.

    “There won’t be a crisis of liquidity because the ECB floodgates are open. But that’s not long-term funding that banks need for sustainable planning,” the banker said.

    Financial markets have grown increasingly worried about banks’ liquidity as the failure to get to grips with Greece’s debt crisis has seen worries spread to Italy, Spain and France, raising their borrowing costs and threatening to saddle banks with losses on their sovereign debt.

    European leaders will meet next week to discuss how to unblock funding, including potentially restarting state guarantee schemes to allow banks to access longer-term funding.

    Key euro-priced bank-to-bank lending rates were steady on Tuesday, but the increase in Italian borrowing costs has lifted funding costs for banks there near to “junk” bond levels.

    U.S. money market funds have cut their European exposure to the lowest in percentage terms since Fitch started compiling its data in 2006, the ratings firm said.

    “Recent trends indicate that money funds are pursuing a range of strategies to mitigate euro zone risks, including reducing exposure levels, shortening maturities, and increasing the share of collateralized transactions in the form of repos,” said Robert Grossman, managing director of Fitch Ratings.

    Citi estimated that non-retail deposit outflows were seen in the third quarter at Italy’s Intesa (ISP.MI) and UniCredit (CRDI.MI), Spain’s BBVA (BBVA.MC) and Santander (SAN.MC) and France’s Societe Generale (SOGN.PA) and BNP Paribas (BNPP.PA).

    The money headed to banks in Germany, the Netherlands and Sweden, Lakhani said.

    Double Gulp.

    November 22, 2011 6:42 pm
    Crisis hits central and eastern Europe

    By Stefan Wagstyl and Neil Buckley in London

    Austria’s move this week to impose tight curbs on its banks’ future lending in central and eastern Europe has thrown into sharp relief the potential impact of the eurozone’s sovereign debt crisis.

    To protect its own triple A credit rating, Vienna has instructed Erste Bank, Raiffeisen Bank International and Bank Austria, a subsidiary of Italy’s UniCredit, to boost capital reserves and limit cross-border loans.

    The decision came just days after UniCredit announced a review of its extensive businesses in the region, and Germany’s Commerzbank said it would restrict new loans to Germany and Poland only. The Latvian authorities on Tuesday rescued Krajbanka, the country’s ninth biggest bank, after Lithuania’s bail-out last week of Snoras, its fifth-largest lender.

    These are the most difficult times for banking in central and eastern Europe (CEE) since the immediate aftermath of the end of communism. In the 20 years to 2008, west European lenders came to dominate the sector in most countries except Russia. With the eurozone in crisis, many lenders are pulling in their horns even more drastically than they did when the global turmoil first struck in 2008-09.

    As the charts show, cross-border credit is poised to fall rapidly – perhaps by 20 per cent according to Canada’s RBC. The biggest economies, led by Russia and Poland, might respond by accelerating the development of domestic financial resources: others will seek new foreign investors, possibly from Russia. The most vulnerable states will struggle, however, with their main external funding source reduced just as their main external source of growth, exports to western Europe, runs out of steam.

    Posted by Pterrafractyl | November 23, 2011, 7:13 am
  3. And…let’s make that a
    Triple Gulp

    Weak German debt sale is a ‘disaster’ for Europe
    By Aaron Smith @CNNMoneyMarkets November 23, 2011: 9:16 AM ET

    NEW YORK (CNNMoney) — European bond yields were on the rise Wednesday after a German bond auction flopped, undermining trust in eurozone government debt.

    “When you can’t even draw good bids on German bonds, which everyone thinks is sacrosanct, you really do have a problem,” said Kathy Jones, fixed income strategist at Charles Schwab. “It’s fairly ominous. People are simply afraid to be in European sovereign bonds.”

    Wednesday’s auction was “undersubscribed,” with Germany selling only €3.6 billion worth of German 10-year bunds. The results suggest “that Germany is not immune to increasing risk aversion in the [eurozone] sovereign debt market,” wrote Marc Chandler of Brown Brothers Harriman.

    As a result, the yield of the most secure government debt in the eurozone crept above 2%

    Tommy Molloy, chief dealer at FX Solutions, called the auction a “fricking disaster.”

    I don’t think I’ve ever seen a worse auction out of Germany,” said Molloy, who has been covering the bond market since the 1980s. “The eurozone looks like a sack of garbage right now. Even though Germany is the very best piece of paper in the eurozone, it’s still in the eurozone.”

    Posted by Pterrafractyl | November 23, 2011, 7:23 am
  4. I prefer to think of it as $7 trillion of financial manure:

    European Banks Frantically Trying To Dump $7 Trillion Of Crap Assets — But No One Will Buy Them

    Henry Blodget | Nov. 25, 2011, 7:31 AM

    The balance sheets of European banks are piled high with legacy assets — mortgages, real-estate, and other loans–that are tying up precious capital and constricting the banks’ ability to make new, more productive loans.

    This leaves the banks desperately needing to raise cash to survive.

    The first plan was to sell off the crap assets.

    But according to Gareth Gore in the International Financing Review, this plan has failed, because buyers won’t pony up the prices the banks want them to pay.

    So now that banks are moving to Plan B, says Gore, which is financial engineering.

    Specifically, the banks are packaging up bunches of crap assets, putting pretty bows on the packages, and then using the packages as “collateral” with which to obtain emergency loans from the ECB.

    In other words, it’s the pre-crisis “securitization” game all over again.

    ….

    Yikes, so $7 trillion in crap assets needs to get offloaded onto the ECB, and fast. This reminds me of the classic fairy tale “How Fred Fed the Bear”:

    Once upon a time (early March 2008), there was a Financial Alchemist named Fred. Fred had seen better days as the top alchemist in his magical forest. After all, the magical forest was starting to catch on fire. This didn’t bother Fred too much. “Forest fires are just a part of nature”, Fred would tell himself, “as natural as pyromania”. But forest fires also burn the peasants of Fred’s forest, and burnt peasants can be such a pain, especially after they find out about the pyromania.

    On this particular day Fred was visiting his pyromaniac friend Carlyle. Carlyle was upset. He explained to Fred how all of their mutual friends were asking Carlyle for the billions of acorns he borrowed from them in order to buy shoddy flame-retardant mushroom condos, but he didn’t have the acorns because the condos were burning down and now the whole forest was at risk of going up in flames (most of the flame-retardant condos were actually made with asbestos and defective fireworks in those days).

    Fred knew Carlyle’s friends ( Stearn the Bear, Goldman the vampire squid, JP the giant cockroach, etc.), and Fred knew that his friends would have a very unhappy Christmas if the forest went up in flames like this (this was in March, but it’s Christmas everyday for Fred’s friends).

    Fred’s friends didn’t actually live in the forest or care much if it burned down…as long as they were insured with credit-default swaps (forest fire-sales are the best bargains). But one of Fred’s friends, Stearn the Bear, was also one of the biggest credit-default swap sellers in the whole forest, and Carlyle was one of his biggest clients. Fred knew this meant that if Carlyle’s condos went up in smoke, Stearn the Bear’s insurance company might also burn up, along with all of his friend’s insurance contracts. All of a sudden, this forest-fire was serious!

    So Fred pulled out his bag of alchemical tricks, mumbled something about “liquidity”, and, *poof*, the Term Securities Lending Facility (TSLF) was born.

    The TSLF was the most magical subsidized pawnshop credit facility Fred’s friends had ever seen. No matter what you gave it, you got gold in return! Everything! Even mushroom condo mortgages dipped in propane! The only problem was that you would have to return that gold in 28 days and take back your lighter-fuel-scented “collateral”. But no worries, you could just exchange it all again! Indefinitely.

    “Gather around my friends”, Fred declared, “I bring you TSLF, so that Stearn the Bear can make good on his credit default swaps and we can all be happy once more. Peace can return to our fine land. Just give me a couple of weeks to set it up, ok?”. Finally, the forest fire was fun again.

    Serenity returned to the burning forest. Stearn the Bear could just march right up to the TSLF, insert a bunch of garbage, and, voila, magically turn it to gold, letting Bear pay back Carlyle for the insurance AND still make good all its existing insurance contracts with Fred’s other friends. He just had to hold on for a couple of weeks before the TSLF opened, and what could go wrong between now and then? The smoke-filled air smelled like Honey to the bear.

    But the sweet scented smoke masked a bitter sentiment. Fred’s friends wanted to use the TSLF too. Why should Stearn the Bear be the only one to get turn garbage to gold? And then it hit them: why wait for Stearn the Bear to turn his garbage assets into gold just so he can pay them back? With the TSLF now opening, why don’t they take all of those flaming assets on Stearn’s balance sheets for themselves so that on they get to trade them in for gold.

    They had to act fast, before the TSLF opened. First, just a day after Fred’s announced the creation of the TSLF, Carlyle’s creditors accelerated their margin calls on Carlyle, imploding the fund nearly over night (Don’t feel too bad for Carlyle, he had already sold most of the shares of his now-defunct critter condo fund to unsuspecting woodland public a while ago). Stearn the Bear needed cash fast, but the TSLF wasn’t open yet! The Bear felt both chased and alone. He knew his friends would be looking for him.

    “It is time Stearn”. Stearn knew that voice well. They went way back. The cockroach stepped out from behind the trees, broadsword in hand, “the quickening is upon us.”

    “Wait!” Stearn cried out. “What about Fred, and the TSLF?”.

    “Oh, I worked all this out with Fred last night,” JP replied with a wry smile, “He’s totally cool with it. How does two acorns per share sound?”

    “Two acorns? Why only two? That’s robbery

    “Because,” JP sneered with a raised sword, “there can be only one!”

    *Thwak* *Thump* *Thud*. And with a single slice of his broadsword, JP had felled the Bear, consuming all of his power and essence (Ok, it wasn’t a single blow…more of a bloody mess).

    With Stearn the Bear slain and consumed by JP, the fires magically subsided and peace returned to the forest….for about 6 months. And it was good.

    I’m not sure there’s a moral to the story…maybe something to do with credit facility implementation logistics and game theory? Either way, I’d avoid reading the sequel. The storyline is just implausible.

    Also, I wouldn’t feel especially bad for Stearn the Bear. It turns out he was kind of an asshole.

    Posted by Pterrafractyl | November 25, 2011, 7:52 pm
  5. It looks like the Dexia bailout might need a bailout:

    UPDATE 4-France, Belgium tussle over Dexia spooks markets

    Wed Nov 23, 2011 9:14am EST

    * Wrangling over share of temporary funding guarantees -reports

    * Investors spooked that 90 bln euro deal could unravel

    * Reports say Belgium wants France to take bigger burden

    By Robert-Jan Bartunek

    BRUSSELS, Nov 23 (Reuters) – Belgium is leaning on France to pay more into emergency support for failed lender Dexia, newspapers reported, spooking investors who thought a 90 billion euro ($120 billion) rescue deal only needed rubber stamping.

    The countries are wrangling about short-term funding guarantees meant to wean Dexia’s “bad bank” off emergency liquidity and allow it to re-enter financial markets, two Belgian newspapers reported.

    Belgium wanted Paris to guarantee more than had been agreed so far, because France can fund itself at a cheaper rate than our country,” Belgian daily De Tijd said, following a similar report in De Standaard.

    The newspaper did not name its sources.

    Both countries on Wednesday denied that the restructuring plan for Dexia was being renegotiated, with Belgian Finance Minister Didier Reynders saying he hoped to reach an agreement with the European Commission in the coming days.

    ….

    Posted by Pterrafractyl | November 25, 2011, 11:44 pm
  6. No Jamie, that wasn’t “Motivation” you were providing. Stop being so humble. It’s called leadership:

    Secret Fed Loans Helped Banks Net $13 Billion
    Q
    By Bob Ivry, Bradley Keoun and Phil Kuntz – Nov 27, 2011 6:01 PM CT
    Bloomberg Markets Magazine

    The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing.

    The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue.

    Saved by the bailout, bankers lobbied against government regulations, a job made easier by the Fed, which never disclosed the details of the rescue to lawmakers even as Congress doled out more money and debated new rules aimed at preventing the next collapse.

    A fresh narrative of the financial crisis of 2007 to 2009 emerges from 29,000 pages of Fed documents obtained under the Freedom of Information Act and central bank records of more than 21,000 transactions. While Fed officials say that almost all of the loans were repaid and there have been no losses, details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger.

    ‘Motivate Others’

    JPMorgan Chase & Co. CEO Jamie Dimon told shareholders in a March 26, 2010, letter that his bank used the Fed’s Term Auction Facility “at the request of the Federal Reserve to help motivate others to use the system.” He didn’t say that the New York-based bank’s total TAF borrowings were almost twice its cash holdings or that its peak borrowing of $48 billion on Feb. 26, 2009, came more than a year after the program’s creation.

    Posted by Pterrafractyl | November 28, 2011, 10:54 am
  7. Oh crap, another round of free money is on the way for the banksters. This sounds like situation requiring some serious motivational leadership (I’m looking at you Jamie). It’s called teamwork:

    Analysis: Central banks buy wiggle room, not solution

    By Michael Dolan

    LONDON | Wed Nov 30, 2011 11:01am EST

    (Reuters) – Central bank action on Wednesday to ease severe funding strains for the world’s private banks may help cushion a brewing global credit crunch but it only buys some wiggle room for governments trying to resolve the euro debt crisis and keep banks lending.

    The intervention by top central banks from the world’s richest countries — including the U.S. Federal Reserve, European Central Bank, Bank of Japan and Swiss National Bank — involved lowering the cost of emergency U.S. dollar funding for banks and expanding currency swap lines between countries.

    Although partly aimed at easing seasonal year-end financing conditions in an already stressful environment, the move was an important show of unity among the central banks.

    A BIT OF HELP

    On a technical level, the intervention makes it cheaper for non-U.S. banks to tap local central banks for dollars that have become increasingly scarce and expensive on open markets due to rising mistrust of bank balance sheet exposure to European government bonds.

    “It’s been clear for some time that funding in the dollar market has been drying up,” said Richard Batty, investment director at Standard Life Investments in Edinburgh.

    “Reducing funding costs and making more liquidity available is helpful. But the solvency issue remains.”

    So market reaction to Wednesday’s move was based on relief that someone was trying to do something about it.

    This is providing the banks with liquidity, playing the lender of the last resort for banks,” said Jan Poser, chief economist at wealth manager Sarasin.

    “It’s not the cure. Equities are driven because people think after this action there won’t be immediate bank failure and recession may be shallow.”

    So does the ECB only become the lender of last resort when it’s lending with other central banks? They really love their teamwork. It’s like we’re ALL on the same team:

    ECB’s Stark Says Euro Area Must Cut Wages to Help Exit Crisis

    Meera Louis and Mike Lee, ©2011 Bloomberg News

    Wednesday, November 30, 2011

    Nov. 30 (Bloomberg) — European Central Bank Executive Board member Juergen Stark said the only way for the region to exit its debt crisis is for governments to reduce budget deficits and embrace wage cuts and other structural changes.

    There is only one instrument left, which is adjustment in relative prices in wages, in salaries, in costs,” Stark said in remarks after a speech hosted by the Federal Reserve Bank of Dallas yesterday. “The ECB does not have the powers to support governments.”

    The ECB has resisted calls to become a lender of last resort, saying its mandate prevents the bank from propping up irresponsible government spending. Even so, Germany is pushing for governance changes at a summit next week that would tighten enforcement of budget rules, a move that might make it easier for the ECB to play a bigger part in supporting euro-area nations.

    Ouch, that’s not going to be easy convincing the masses of the necessity of wage cuts. Looks like we need some leadership:

    The Wall Street Banker Bonus Pool Is Really Looking Dismal This Year
    Julia La Roche|November 28, 2011

    Bad news, bankers.

    It looks like the bonus pool is really going to stink this year.

    Annual compensation for Wall Street bankers may plummet between 27-30% compared to last year, the Wall Street Journal reported citing a compensation survey from Option Group.

    Even more disappointing for Wall Street is bonuses, which make up a majority of bankers’ compensation, are expected to tank between 35-40%, the report said.

    To provide more context, if you’re an investment-grade-bond trader who is a managing director at a top firm you’re going to probably take home around $1.7 to $1.8 million this year, compared to $2.9 million last year, the report said.

    Only $1.8 million for top investment-grade-bond trader? That’s highway robbery! Now I know why they’re called bond “vigilantes”.

    Posted by Pterrafractyl | November 30, 2011, 9:46 am
  8. I really need to stop trashing my fellow wage earners:

    JPMorgan Chase CEO rails against ‘rich is bad’ talk
    12/07/2011

    NEW YORK (AP) – Jamie Dimon, CEO of JPMorgan Chase(JPM) is railing against bashing the rich.

    Dimon was responding Wednesday to a question at an investor conference about the hostile political environment toward banks.

    “Acting like everyone who’s been successful is bad and that everyone who is rich is bad — I just don’t get it,” said Dimon at the conference, which was organized by Goldman Sachs Group (GS).

    Dimon said he’s worked on Wall Street for much of his life and contributed his fair share.

    Most of us wage earners are paying 39.6% in taxes and add in another 12% in New York state and city taxes and we’re paying 50% of our income in taxes,” Dimon said in defense of his fellow Wall Street bankers.

    It must really hurt to make so much that it’s almost like your entire salary is taxed at the top tax rate. On top of that, those at the top have to worry about extreme wage volatility:

    JPMorgan CEO Dimon’s pay jumps to $20.8 million

    By Clare Baldwin and Jonathan Stempel

    NEW YORK | Thu Apr 7, 2011 10:57pm EDT

    (Reuters) – After piloting the No. 2 U.S. bank through the financial crisis relatively unscathed, JPMorgan Chase & Co (JPM.N) Chief Executive Officer Jamie Dimon is now being extremely well rewarded.

    Dimon’s total compensation jumped nearly 1,500 percent to $20.8 million in 2010 from $1.3 million a year earlier, based on the U.S. Securities and Exchange Commission’s compensation formula, a regulatory filing showed.

    Dimon did even better in terms of the value of money and shares actually received: his salary, bonus and stock and options from grants made largely in previous years that were actually exercised in 2010 were worth around $42 million.

    Dimon’s 2010 salary remained at $1 million. He was also awarded a $5 million bonus, nearly $8 million in stock awards and $6.2 million in option awards, according to the SEC’s compensation formula.

    His 2010 compensation also included $579,624 worth of perks, including $421,458 of “moving expenses,” $95,293 to use company aircraft and $45,730 for personal automobile use. Most of the rest went toward home security.

    Like many Americans who have had trouble selling their homes, Dimon did too. The moving expenses relate to the sale in 2010 of Dimon’s Chicago-area home, in which he had lived while heading Bank One Corp that was sold to JPMorgan in 2004.

    Dimon put the home up for sale in 2007 when his family moved to New York.

    Dimon’s total compensation in 2010 fell short of the $35.8 million he was awarded in 2008, according to the SEC formula.

    AND he had trouble selling his home? If that’s what it’s like to be ultra wealthy then count me out! It sounds more like a wealth of burdens if you ask me.

    Posted by Pterrafractyl | December 7, 2011, 2:43 pm
  9. Sometimes the headline says it all:
    Draghi: ECB to Offer Banks Unlimited Cash.

    Of course, if you read the article it isn’t actually quite that extreme. The banks don’t get free money for nothing. That would just encourage more bad behavior. Instead, they have to swap their increasingly toxic assets in exchange for the cash. You can’t have a morality play without morals to uphold.

    Posted by Pterrafractyl | December 8, 2011, 11:33 pm
  10. So according to the World Economic Forum, the world’s total financial credit supply will have to double over the next decade to support economic growth. There’s a mere 100 trillion in new credit over the next decade:

    World needs $100 trillion more credit, says World Economic Forum
    The world’s expected economic growth will have to be supported by an extra $100 trillion (£63 trillion) in credit over the next decade, according to the World Economic Forum.


    Pockets of credit grew rapidly to excess – and brought the entire financial system to the brink of collapse,” said the report, written in conjunction with consulting firm McKinsey. “Yet, credit is the lifeblood of the economy, and much more of it will be needed to sustain the recovery and enable the developing world to achieve its growth potential.”

    The global credit stock has already doubled in recent years, from $57 trillion to $109 trillion between 2000 and 2009, according to the report.

    Hmm…now how is the financial system going to generate an extra $100 trillion in credit, especially during a depression?

    Well, for starters we might call upon regulatorsthe Leveraging Fairy to keep waving her “re-hypothecation” wand, thus magically allowing multiple financial giants to pledge the same underlying assets as collateral used for leveraged bets. And if infinite shadow banking fractional reserve leveraging doesn’t do the trick, we’ll just ask the “leverage fairy” to wave her “Regulation T” wand and magically allow brokerages to secretly pledge their clients’ deposits as collateral for internal brokerage bets. Perhaps the “T” stands for “terribly tricky”?

    And once we’re leveraged up nice and good, maybe we’ll ask the Leverage Fairy to wave her “specious argument” wand. That handy little wand allows everyone to ignore the fallacy of risk elimination by counter-hedging when counter-parties can clearly fail. When that wand is waved fun things get to happen like the two top credit-default swap market makers (JP Morgan and Goldman Sachs) writing 43% of a $24 trillion credit-default swap market while only listing $1.5 billion in collateral at risk and giving no information on counter-parties because that 43% consists of counter-hedged contracts, thus neutralizing the risk according to arguments.

    That might be how we’ll find that extra $100 trillion.

    Posted by Pterrafractyl | December 12, 2011, 9:51 pm
  11. Here’s a fascinating quirk of this era of re-hypothetication-induced leveraging, where financial institutions A can make loans to institution B, and then A can take the assets it receives as collateral from B to use those assets as collateral for a new loan from institution C. And C can do the same and so on…Well, it looks like there’s a bit of a problem with this magic credit machine when the central banks step in: the central banks don’t re-hypothecate and the buck (or euro) literally stops there:

    Bonds Stop Flowing as Collateral Gets Stuck at ECB: Euro Credit
    Q
    By John Glover – Dec 21, 2011 5:32 AM CT

    The chains of loaned securities being pledged and re-pledged in the so-called wholesale money markets are growing shorter, as collateral piles up at central banks where it can’t generate additional borrowing.

    Rehypothecation is the financial alchemy that transmutes $2.45 trillion of assets into $5.8 trillion of collateral at the 14 largest securities dealers, down from a peak of $10 trillion in 2007, according to Manmohan Singh, senior financial economist at the International Monetary Fund in Washington. Once collateral is parked at the central bank, it can’t be recycled, and may become hard to find in times of need.

    At the end of last year, banks turned each dollar of securities into $2.40 of collateral, Singh says. As banks grow wary of lending to each other, those assets are being pledged instead to the European Central Bank in one-time transactions that mean the securities can’t be recommitted.

    “The system is collapsing onto the balance sheet of the most-solid member of the system, which is the central bank,” said Perry Mehrling, professor of economics at Barnard College, Colombia University in New York. “The central bank is on one side of the market only. The bonds are flowing in and they’re not flowing out again.

    Shortage of Collateral

    “There is an enormous shortage of collateral,” said Simon Gleeson, a financial-services lawyer at Clifford Chance LLP in London. “That’s because the European banks can no longer raise unsecured funds. There’s never been enough quality collateral so the only way to do it was to re-use the securities.”

    Debt Crisis

    Faced with a situation in which the lack of collateral is starving the financial system of the instruments it needs to do business, the ECB agreed to offer unlimited three-year funding against collateral in two tenders starting today.

    Banks asked to borrow 489 billion euros, the most ever in a single operation and almost double the median estimate of 293 billion euros by economists in a Bloomberg News survey. The ECB said 523 banks asked for the funds.

    The central bank also said Dec. 8 it would accept lower- rated bonds and bank loans as collateral in its own lending, and cut reserve requirements, potentially freeing up another 100 billion euros of collateral, according to JPMorgan Chase & Co. estimates.

    “Everyone wants collateral, everyone wants dollars,” said Mehrling at Barnard College. “If the central bank accepts bad collateral, then bad collateral goes out of the system. But that releases good collateral that the central bank would otherwise be demanding.”

    The 523 members of the Free Money Club want you to know that it is an exclusive club. Rabble need not apply. That is all.

    Posted by Pterrafractyl | December 21, 2011, 8:12 am
  12. There’s more on the regulation firewall that the financial industry is continuing to maintain. This time it’s about opposition to regulations capping banker bonuses:

    Bankers resist regulatory restraint on bonuses
    By Paritosh Bansal and Alexander Smith | Reuters 01/28/2012

    DAVOS, Switzerland (Reuters) – Budding bankers expecting the bumper bonuses of years gone by will have to think again, with only the top performers likely to be paid top dollar.

    Business leaders and bankers at the annual Davos forum were largely dismissive of attempts to cap or restrict compensation in the financial services industry through regulation.

    But they said a combination of public anger, tighter scrutiny from watchdogs, tougher performance measures and a structural fall in profitability in banking in the post-crisis world would curb the excesses of the past.

    “Compared to four years ago its night and day, partially because the regulators are insisting on it…and partly because the supervisory board of banks have said we have got to balance the reward of our senior team with the reward of our long-term shareholders. And part of it is the business model has changed,” a senior investment banker at a major Wall Street firm said.

    Part nationalized Royal Bank of Scotland, for example, said on Saturday that Chairman Philip Hampton would not pick up a share-based bonus, amid a backdrop of public anger over a 1 million ($1.6 million) stock bonus for its chief executive.

    Compensation consultants estimate bonuses for 2011 fell by about 30 percent in 2011, with payouts dropping across major banks such as Goldman Sachs and Morgan Stanley.

    Year-end bonuses at Barclays Plc’s investment bank are expected to be down about 30 percent this year, on average, a source familiar with the matter said on Thursday.

    “Of course bonuses are falling, so is profitability,” a senior European banker told Reuters on the sidelines of the conference on Saturday, following a meeting on the future of financial services involving top bankers and regulators.

    SHAREHOLDER SILENCE

    Several business leaders, speaking candidly during closed meetings, pointed to growing social inequality and said there was a need for more effective tax collection from the best paid.

    And while critical of regulatory efforts to cap executive remuneration, some blamed overly generous compensation packages on a lack of shareholder engagement in the issue.

    “It should be up to the boards, not the regulators. Where are the shareholders of these banks?” the head of one investment bank told Reuters. Like others who spoke about the issue, he declined to be named.

    A speaker on a panel on compensation at the World Economic Forum meeting in the Swiss Alps said: “Institutional investors are not that interested because the amount of money that is involved is totally immaterial.

    When asked for a show of hands on whether executive compensation should be regulated, nobody in the audience of nearly 100 people raised their hand.

    The investment banking head said part of the problem was that many bankers had come to believe that they alone were responsible for the profits generated in their business, rather than the role which they fulfilled.

    PAY FOR PERFORMANCE

    Howard Lutnick, chief executive of Cantor Fitzgerald LP and BGC Partners Inc, said cutbacks at bigger banks provided an opportunity for mid-tier investment banks like his to hire talented individuals. Lutnick said he planned to hire up to 500 people this year.

    “If I have a salesman who makes a sale on a very sophisticated product (and) you don’t pay (him) his fair share he won’t make the sale,” Lutnick said, adding that this level had historically been around 50 percent.

    I guess it’s nice that shrinking bonuses might make it easier for “mid-sized” financial operations to hire that vital banking “talent” away from big-bonus-paying giants. I wonder what kind of sales job Howard Lutnick had in mind when he said he was planning on hiring 500 individuals from his larger competitors? No doubt those new hires will be selling tools with enormous value for society:

    JANUARY 9, 2012

    Gambling IPO Faces Long Odds

    By ROLFE WINKLER

    Howard Lutnick wants to take his sports-gambling operation public. The odds look stacked against investors.

    Cantor Entertainment Technology, owned by Mr. Lutnick and Cantor Fitzgerald, the financial firm he runs, has made a name for itself using financial-markets technology to run the sports book for six Nevada casinos. Launching its business in 2009, it claimed a 14% share of the Nevada sports-gambling market as of September. That figure likely increased in the fourth quarter after recent contract signings.

    The race- and sports-book business drives about three-quarters of revenue and may have roughly tripled in 2011 versus 2010. Still, at perhaps $15 million last year, it isn’t a very sizable business. The company is unprofitable and burned nearly $90 million of cash from 2008 through September. Cantor Entertainment also has a mobile gambling business that represents 14% of sales, but its potential looks small since players must be on a casino’s grounds.

    ….

    In related news, Ezra Klein has a recent post on there study of whether or not “pay-for-performance” bonuses did, indeed, contribute towards risky behavior in the financial sector. It’s conclusion? Bonuses for short-term profits don’t actually incentive excessively risky behavior because the bankers were getting paid huge sums regardless of performance. Instead, it looked like the bigger the bank, the bigger the bonus and risk-taking, creating a primary incentive to just keep growing the firms assets (typically a debt/risk-based endeavor). While Ezra points out that there’s disagreement over the study’s conclusions, it’s another reminder that these “too big to fail” entities and Mitt-mentum-based economic driving forces remain a serious threat to the global economy and, increasingly, national sovereignty.

    Posted by Pterrafractyl | January 28, 2012, 7:58 pm
  13. Well, now we know what a philosophically unacceptable bailout is from the perspective of our financial overlords:

    Fannie Mae Nixed Plan to Reduce Mortgage Debt, Democrats Say
    Q
    By Lorraine Woellert – Feb 8, 2012 2:00 PM CT

    Fannie Mae (FNMA) pulled the plug on a 2010 plan to forgive borrowers’ mortgage debt because company executives were “philosophically opposed” to the idea, a former company employee told House investigators.

    In a letter today to the Federal Housing Finance Agency, House Democrats challenged a January analysis from Acting Director Edward J. DeMarco that claimed principal writedowns would raise costs and increase taxpayer losses at the government-owned company.

    “We have now become aware of new information that calls into serious question the accuracy and completeness of your response, as well as your motivation for continuing to oppose principal reduction programs even when they have the potential to save American taxpayers billions of dollars,” said the letter from representatives Elijah Cummings of Maryland and John F. Teirney of Massachusetts, Democrats on the House Committee on Oversight and Government Reform.

    In mid-2010, two weeks before its launch, senior Fannie Mae executives cancelled the program because they were “philosophically opposed to writing down principal balances,” according to the former worker, who was quoted in the letter without being identified.

    Wow, it’s almost like Freddie mac had something to gain from more foreclosures. Oh that’s right, they did.

    Posted by Pterrafractyl | February 9, 2012, 9:20 am
  14. Oops! Here’s the corrected 1st link in the above comment

    Posted by Pterrafractyl | February 9, 2012, 9:22 am
  15. Austerity:

    Draghi’s $158 Billion Free Lunch to Boost EU Bank Profits

    By Liam Vaughan and Gavin Finch – Feb 13, 2012 8:31 AM CT

    Banks are benefiting from a European Central Bank subsidy that could reach 120 billion euros ($158 billion), enough to pay every bonus at financial firms in London for the next 24 years at today’s levels.

    Royal Bank of Scotland Group Plc, BNP Paribas SA (BNP) and Societe Generale SA are among more than 500 banks that took 489 billion euros of three-year loans from the Frankfurt-based ECB at a December auction. The loans currently carry a 1 percent annual interest rate, less than a quarter of the 4.3 percent average yield on euro-denominated senior unsecured bank debt of all maturities in the past year, according to Commerzbank AG.

    With borrowing estimated to hit a record 1.2 trillion euros after a second auction later this month, banks may save 120 billion euros over three years. That could boost 2012 profit by about 10 percent for lenders in Italy and Spain, according to estimates by Morgan Stanley.

    “This is very much a free lunch,” said Arnd Schaefer, an economist at WestLB AG in Dusseldorf, Germany. “Banks can get money for just 1 percent and then lend it on for much more. That’s pretty good.”

    The ECB is flooding the banking system with cheap money in a bid to avert a credit crunch after the market for unsecured bank debt seized up last year and funding from U.S. money markets disappeared. Any bank in the region can borrow an unlimited amount, provided it pledges eligible collateral. Lenders won’t face curbs on bonuses or dividends.

    ‘Cheap Money’

    “The central bank has pumped the market with unbelievably cheap money because wholesale markets are closed,” said Richard Reid, director of research at lobby group International Centre for Financial Regulation in London and a former managing director at Citigroup Inc. “Stronger banks will inevitably profit, but that is a secondary issue for the ECB.”

    ‘Money-Making Opportunity’

    “You are certainly going to get banks that don’t need the funds profiting,” said Richard Werner, an economist at the University of Southampton, England. “It would be much cheaper to target support for the 20 or so banks that need it, but politically the central bank wants to be seen to be neutral. It is a massive money-making opportunity for those who don’t need it to play the yield curve.

    European lenders are being encouraged by policy makers to use the ECB cash to purchase domestic sovereign debt, pushing down borrowing costs for governments and reducing the risk that one or more countries in the region default.

    ‘No Stigma’

    The ECB is encouraging all banks to participate in the second auction.

    “There is no stigma whatsoever on these facilities,” ECB President Mario Draghi said in Frankfurt on Feb. 9. “The use of these proceeds is a business decision. Our primary interest is in lending to the real economy.”

    If total borrowing from the two auctions hits 1.2 trillion euros, banks will pay about 12 billion euros a year in interest at the current benchmark rate of 1 percent. The same amount borrowed in the senior unsecured bond market would cost about 52 billion euros a year, based on Commerzbank data showing a 4.3 percent average yield on such debt over the past 12 months. That represents a saving of 120 billion euros over three years.

    Bank bonuses in the City of London will be about 5.1 billion euros for 2011, according to the Centre for Economic and Business Research.

    The ECB can’t limit the loans to particular banks because that would risk violating European Union state-aid rules, said Neil Smith, an analyst at WestLB.

    If the ECB started singling out individual banks for special treatment, you could be getting into complicated competitive distortion issues,” Smith said.

    Posted by Pterrafractyl | February 13, 2012, 8:53 pm
  16. Warren Buffett has finally had enough with all the bankster bashing:

    Buffett: Banks Victimized by Evicted Homeowners
    By Andrew Frye – Feb 26, 2012 11:01 PM CT

    Warren Buffett, who controls the biggest shareholding of the No. 1 U.S. mortgage lender, said banks were victimized by some homeowners who refinanced their loans before getting evicted.

    “Large numbers of people who have ‘lost’ their house through foreclosure have actually realized a profit because they carried out refinancings earlier that gave them cash in excess of their cost,” Buffett, chairman and chief executive officer of Berkshire Hathaway Inc. (BRK/A), said Feb. 25 in his annual letter. “In these cases, the evicted homeowner was the winner, and the victim was the lender.”

    Buffett, who publicly defended Goldman Sachs Group Inc. in 2010 against accusations it misled clients, used the letter to renew his support for banks. The industry is facing criticism from Democrats including President Barack Obama, who in his January State of the Union address said bets by lenders prompted the 2008 credit freeze and “left innocent, hard-working Americans holding the bag.”

    ‘Enough With the Lambasting’

    Buffett, an ally of Obama’s, has won praise from Democratic lawmakers as the billionaire campaigned for higher taxes on the wealthy. Omaha, Nebraska-based Berkshire owns warrants to purchase $5 billion of stock in New York-based Goldman Sachs.

    “Maybe this was kind of a message to his Democratic buddies,” said David Rolfe, chief investment officer of Berkshire shareholder Wedgewood Partners Inc. “Buffett is saying, ‘We know where the egregious acts were, so enough with the lambasting of the banking system and all these bankers.’”

    Blame for the housing bubble and subsequent slump should be shared among lenders and borrowers, as well as the government, bond-rating firms and the media, Buffett has said. In his letter, read by investors around the world, Buffett praised Jamie Dimon, CEO of JPMorgan Chase & Co., and Bank of America’s Brian T. Moynihan. JPMorgan, Goldman Sachs, Wells Fargo and Bank of America have all repaid U.S. bailout funds.

    “The banking industry is back on its feet,” Buffett said.

    ‘Megalomania, Insanity’

    Buffett and Berkshire Vice Chairman Charles Munger, 88, have criticized bankers for contributing to the housing bubble. Munger, in July, blamed the real-estate boom on “megalomania, insanity and evil in, I would say, investment banking, mortgage banking.” Buffett said in October 2010 that Wall Street helps society through finance, while its bets may do harm, “like a church that’s running raffles on the weekend.”

    Charles Ortel, managing director of Newport Value Partners, said lenders failed to do sufficient underwriting because they counted on selling the mortgages to investors.

    “So nobody had any skin in the game, except we the taxpayers, as it turned out,” Ortel said. “Banks didn’t do the required credit work.”

    Wells Fargo posted record profit for the fourth quarter as mortgage financing improved, the San Francisco-based company said last month. Charlotte, North Carolina-based Bank of America has gained 42 percent this year in New York through Feb. 24 as it swung to a quarterly profit.

    Those poor poor banksters. When will the public finally leave them alone:

    Banks Win Reprieve on Home Equity Loans in Settlement: Mortgages

    Feb. 27 (Bloomberg) — Bank of America Corp., Wells Fargo & Co. and three other banks that settled a nationwide probe of foreclosure practices this month will get a bonus from the deal: protection for $308 billion of home-equity loans they hold.

    The banks that service about half the nation’s mortgages on behalf of investors will be able to share losses on their junior loans with bondholders and get credit toward the cash they pledged to spend in the settlement, said an Obama administration official involved in drafting the $25 billion agreement. Second liens would typically be wiped out before senior-mortgage investors take a loss, said Laurie Goodman, managing director at Amherst Securities Group LP in New York.

    It’s “a gift to the banks, at investors’ expense,” said Goodman, a member of the Fixed Income Analysts Society’s Hall of Fame. “A proportionate write-down of the first and second represents a reversal of normal lien priority.”

    Loss-sharing will break the logjam that occurs when banks drag their feet processing modifications on mortgages that outrank their junior liens, said the Obama official, who declined to be identified because this arrangement hasn’t been made public. Government foreclosure-prevention programs have resulted in less than 1 million modifications, a quarter of the goal the administration set three years ago. Home-equity mortgages have been a reason for that, said Arthur Wilmarth, a professor at George Washington University Law School in Washington.

    Roadblock to Modifications

    “The roadblock to getting comprehensive modifications has been the efforts of these banks, the biggest servicers, to protect their second liens,” Wilmarth said. “To only suffer losses on an equal basis as first-lien investors is a good outcome for them.

    The servicer agreement resolved state and federal probes into foreclosure abuses including robo-signing, the fraudulent endorsement of court documents. The banks have pledged $20 billion in various forms of mortgage relief, including principal reductions, plus payments of $5 billion to state and federal governments.

    The settlement has been criticized by money managers including Scott Simon at Pacific Investment Management Co., who said investors who bought mortgage-backed securities will suffer losses as banks earn credits for easing loan terms.

    “This was a relatively cheap resolution for the banks,” Simon, the mortgage head at Pimco, which runs the world’s largest bond fund, said after the settlement’s Feb. 9 announcement. “A lot of the principal reductions would have happened on their loans anyway, and they’re using other people’s money to pay for a ton of this. Pension funds, 401(k)s and mutual funds are going to pick up a lot of the load.”

    Settlement Summary

    While a summary of the settlement has been released, the details haven’t been made public. The document may be issued as soon as this week, according to the Obama official. The credits banks will get for writing down home equity loans won’t be as much as they will get for reducing the balance on primary mortgages, the official said.

    The servicers involved in the agreement are Bank of America, Wells Fargo, JPMorgan Chase & Co., Citigroup Inc. and Ally Financial Inc.

    Bank of America had $102.9 billion of home equity mortgages in the third quarter, surpassing its $84.6 billion market cap, according to the Federal Deposit Insurance Corp. Wells Fargo had $95 billion, JPMorgan had $79.7 billion, Citigroup was $27.8 billion, and Ally, the bank that sparked the state and federal investigation into foreclosure practices, had $2.2 billion.

    Tom Kelly, a spokesman for New York-based JPMorgan, Rick Simon of Bank of America, Tom Goyda of Wells Fargo, Gina Proia of Ally, and Sean Kevelighan for Citigroup declined to comment.

    Bank Performance

    Since Feb. 9, Charlotte, North Carolina-based Bank of America has declined 3.7 percent, San Francisco-based Wells Fargo has dropped 1.3 percent, Citigroup in New York fell 3.9 percent and JPMorgan gained 1.1 percent. Ally was bailed out by the government in 2008 and is pursuing an initial public offering to repay taxpayers who own the Detroit-based lender.

    About 92 percent of home equity loans are held on the balance sheets of U.S. banks, according to data compiled by Amherst. The five banks in the mortgage settlement own 42 percent of the second liens. That makes it “very likely” a servicer of a primary mortgage will hold a property’s junior loan, Goodman said in a report this month.

    “A conflict arises because the servicer has a financial incentive to service the first lien to the benefit of the second-lien holder, which may oppose the financial interest of the investor,” she wrote.

    Posted by Pterrafractyl | February 27, 2012, 10:36 am
  17. Good ol’ Goldman Sachs, where God’s Mammon’s work get done.

    Posted by Pterrafractyl | March 14, 2012, 7:06 am
  18. This is interesting…according to the Carlyle Group, their owners’ wallets qualify as “investment products” in need of expansion:

    Carlyle Owners Took $398.5 Million Payout With Debt Before IPO
    By Cristina Alesci, Miles Weiss and Devin Banerjee – Mar 12, 2012 11:00 PM CT

    Carlyle Group LP (CG), in a transaction nine months before it filed to go public, saddled itself with debt to pay owners including William Conway, Daniel D’Aniello and David Rubenstein a $398.5 million tax-deferred dividend.

    The private equity firm borrowed $500 million from Abu Dhabi’s Mubadala Development Co. in December 2010, saying it would use part of that to expand investment products. Instead, it paid out almost 80 percent of the money to existing owners, according to regulatory filings. Separately, the Washington- based firm negotiated bank credit giving it the option to distribute an additional $400 million prior to its initial public offering, lending agreements filed last month show.

    Hmmm…that kind of maneuver isn’t exactly confidence-inducing with an IPO only months away. Oh well, no doubt it will turn out as profitable as the last Carlye IPO.

    Posted by Pterrafractyl | March 14, 2012, 10:46 am
  19. In the aftermath of the Goldman Sachs executive resignation kefuffle some pundits are pointing out that the public really shouldn’t care whether or not one of the most powerful banks in the world has adopted a “screw the client” mentality because the marketplace will eventually solve the problem and avoid Goldman Sachs altogether. Atrios has a different take on the subject worth considering:

    Wednesday, March 14, 2012
    Connected

    I’m developing my exciting new theory (which isn’t really new or exciting) about why certain large firms (legal, law, consulting, pr, communications, lobbying, vampire squids), get a lot of business despite everybody knowing that they’re basically completely shady. Tithing to the right firms is just part of the cost of doing business in certain circles. At lower levels, for example, you hear tales of permits being issued a bit faster if, say, a local business employs the right construction firm. And at upper levels, well, Lanny Davis is paid for what? A company whose business model is centered on screwing their customers out of their money even as they hand that money over willingly stays in business how?
    by Atrios at 13:20

    Posted by Pterrafractyl | March 14, 2012, 1:30 pm
  20. Oh look, Deutsche Bank just discovered (a year ago) a fun little loophole that might allow foreign banks to avoid the new Frank-Dodd financial reform regulations while still fully participating in future US bailouts:

    Fortune
    European banks try to get around Dodd-Frank
    By Stephen Gandel, senior editor March 21, 2012: 7:40 PM ET

    For foreign banks, Dodd-Frank might have an escape hatch.

    FORTUNE — Foreign banks may have come up with a way to remain eligible for U.S. bailouts without having to follow some of the pesky rules that came out of the financial crisis, rules that were meant to prevent future taxpayer rescues.

    Last month, German financial giant Deutsche Bank altered the legal structure of its U.S. operations so that it’s no longer officially a “bank-holding” company. As such, Deutsche, even though it’s one of the nation’s largest banking operations with over $350 billion in assets and over 8,500 U.S. employees, may no longer be required to hold the same amount of capital as its American rivals.

    For the time being it appears Deutsche’s U.S. operations would still be subject to the Volcker rule – the part of Dodd-Frank banking reform that bars banks from making risky trades and investing in hedge funds and has been one of the most contested portions of bank reform by Wall Street – and other soon to be passed regulations. But a further legal maneuver might allow the bank to get around those as well. Worse, because Deutsche bank still has a U.S. subsidiary it will be able to borrow from the Fed when it gets into trouble, setting up a repeat of the financial crisis when the Fed was forced to extended billions of dollars in cheap loans to Deutsche and other foreign banks in order to stave off a worsening of the credit crunch.

    Getting around Dodd-Frank won’t lower the overall capital the foreign banks have to have hold. New banking rules require banks in the U.S. and Europe to hold the same amount of money to cover bad loans and other losses. But it may save Deutsche from raising the amount of capital it keeps at its U.S. subsidiary by $20 billion. Some fear that in times of financial stress foreign banks might not be able or willing to bailout their U.S. subsidiaries. Foreign regulators, worried about their local economies, might not let banks move capital overseas.

    Barr says regulators knew foreign banks would have the ability to wiggle out of some of Dodd-Frank’s rules. As a result, the legislation gives the Fed the ability to impose capital requirements on foreign banks even if they are not U.S. bank holding companies. Financial firms deemed “systemically important,” meaning their failure could cause problems for other banks, would have to hold more capital in the U.S. whether they are classified as a bank or not. Still, the capital rules aren’t automatic and would have to be approved by the Fed. Fed officials could not be reached for comment.

    Posted by Pterrafractyl | March 21, 2012, 6:34 pm
  21. The financial industry’s ‘moral hazard’-based opposition to principle reduction for underwater homeowners appears to be rooted in some, ummm, questionable priciples:

    rollingstone
    Matt Taibbi
    Another Hidden Bailout: Helping Wall Street Collect Your Rent

    POSTED: March 19, 2012 10:55 AM ET


    So congratulations, America, your quasi-governmental housing entity is about to subcontract out mass-landlording/slumlording jobs to the likes of John Paulson and Warren Buffett, so that they can add to their bottom lines collecting rent payments in the middle of a nationwide housing slump.

    As one hedge fund analyst put it to me this morning: “Help inflate the bubble, create a foreclosure crisis, buy homes in bulk, and rent them out to the same average homeowner.”

    Is this what we had in mind when we created the “ownership society” – helping billionaires collect your rent?

    Ownership Society? That is so 2005. We need to get with the times:

    ‘Ownership Society’ becomes ‘Opportunity Society’
    By Steve Benen

    Mon Apr 2, 2012 12:47 PM EDT


    The gist of the “Opportunity Society,” if the candidate’s vague remarks are any indication, is that Americans will, under a Romney administration, simply rely on an unregulated free market to solve our problems. We would have the “opportunity” to go without basic medical care, clean and air water, college aid, worker protections, safeguards against Wall Street excesses, and an adequate safety net. This will, in turn, create what Romney described as “an Opportunity Nation.”

    Sounds awesome!

    Posted by Pterrafractyl | April 11, 2012, 9:40 am
  22. According to Deutsche Bank analysts, the financial support from the ECB’s $1.3 trillion “longter-term refinancing operations” (LTRO) and the Fed’s “Operation Twist” (which was designed to lower the rate of 10-year bonds which is critial for a lot of things like mortgages and corporate borrowing) is coming to an end and the “worst is yet to come”. The last five years are even characterized as “a period of relative calm” compared to what they’re predicting. They looked in their crystal ball (i.e. the credit-default swaps derivatives market) and all signs point towards “more default”. Putting aside what a joke these derivatives market are now, the saddest thing is barring the deliberate restructuring of our financial system – one where we basically break the behemoth banks, resets the rules, reset the debt, and build a financial system that’s not designed to destroy – barring that, Deutsche Bank is probably right. As long as “austerity” is the primary tool in the ECB’s toolbox these bailouts are just buying more time and bigger bank bailouts, which is part of the point of keeping the crises going. It’s a system built to fail and then get bailed. And this system wants more bailouts. And then mass defaults. It’s hungry. When you live with monsters, you either feed the beast or get eaten

    Worst Yet to Come as Crisis Rescue Cash Ebbs, Deutsche Bank Says
    By Katie Linsell – Apr 18, 2012 3:49 AM CT

    The worst may be yet to come in the global financial crisis as the central bank spending that kept defaults low runs out, according to Deutsche Bank AG. (DBK)

    Credit-default swap prices imply that four or more European nations may suffer so-called credit events such as having to restructure their debt, strategists led by Jim Reid and Nick Burns said in a note. The Markit iTraxx SovX Western Europe Index of contracts on 15 governments including Spain and Italy jumped 26 percent in the past month as the region’s crisis flared up.

    If these implied defaults come vaguely close to being realised then the next five years of corporate and financial defaults could easily be worse than the last five relatively calm years,” the analysts in London said. “Much may eventually depend on how much money-printing can be tolerated as we are very close to being maxed out fiscally.”

    Default rates stayed in line with historical norms between 2007 and 2011 because of the “unprecedented intervention” of European and U.S. policy makers, the analysts wrote in the report yesterday. Now, credit markets are giving up the gains that followed the European Central Bank’s 1 trillion-euro ($1.3 trillion) longer-term refinancing operations and the U.S.’s Operation Twist that buoyed government bonds.

    Although defaults have been low, recoveries are falling because the public spending that kept non-payments down has failed to spur economic growth, according to the analysts.

    Posted by Pterrafractyl | April 18, 2012, 7:33 am
  23. Ahhhh….sweet sweet justice. Finally.

    Oh wait:

    Bloomberg
    SEC Staff Ends Probe of Lehman Without Finding Fraud
    By Joshua Gallu – May 24, 2012 10:30 PM CT

    U.S. Securities and Exchange Commission investigators have concluded their probe of possible financial fraud at Lehman Brothers Holdings Inc. without recommending enforcement action against the firm or its former executives, according to an excerpt of an internal agency memo.

    Lawmakers and investors have pressed the agency for more than three years to determine whether Lehman misrepresented its financial health before filing the biggest bankruptcy in U.S. history in September 2008.

    Under a heading reading “Activity in Last Four Weeks,” the undated document reads, “The staff has concluded its investigation and determined that charges will likely not be recommended.”

    SEC officials didn’t dispute the authenticity of the memo or its contents.

    Pressure on the agency to punish any wrongdoing related to Lehman’s collapse escalated after Anton Valukas, the court- appointed bankruptcy examiner, found the firm misled investors with “accounting gimmicks” that disguised its leverage.

    Posted by Pterrafractyl | May 24, 2012, 10:58 pm
  24. I just can’t believe our betters in JPMorgan’s risk oversight office missed this:

    Bloomberg
    JPMorgan CIO Swaps Pricing Said to Differ From Bank
    By Matthew Leising, Mary Childs and Shannon D. Harrington – May 31, 2012 12:27 PM CT

    The JPMorgan Chase & Co. (JPM) unit responsible for at least $2 billion in losses on credit derivatives was valuing some of its trades at prices that differed from those of its investment bank, according to people familiar with the matter.

    The discrepancy between prices used by the chief investment office and JPMorgan’s credit-swaps dealer, the biggest in the U.S., may have obscured by hundreds of millions of dollars the magnitude of the loss before it was disclosed May 10, said one of the people, who asked not to be identified because they aren’t authorized to discuss the matter.

    “I’ve never run into anything like that,” said Sanford C. Bernstein & Co.’s Brad Hintz in New York, ranked by Institutional Investor magazine as the top analyst covering brokerage firms. “That’s why you have a centralized accounting group that’s comparing marks” between different parts of the bank “to make sure you don’t have any outliers,” said the former chief financial officer of Lehman Brothers Holdings Inc.

    Oh wait, yes I can:

    Bloomberg
    JPMorgan Gave Risk Oversight to Museum Head With AIG Role
    By Dawn Kopecki and Max Abelson – May 25, 2012 6:39 PM CT

    The three directors who oversee risk at JPMorgan Chase & Co. (JPM) include a museum head who sat on American International Group Inc.’s governance committee in 2008, the grandson of a billionaire and the chief executive officer of a company that makes flight controls and work boots.

    What the risk committee of the biggest U.S. lender lacks, and what the five next largest competitors have, are directors who worked at a bank or as financial risk managers. The only member with any Wall Street experience, James Crown, hasn’t been employed in the industry for more than 25 years.

    “It seems hard to believe that this is good enough,” said Anat Admati, a professor of finance at Stanford University who studies corporate governance. “It’s a massive task to watch the risk of JPMorgan.”

    See no evil, hear no evil, do a bunch of evil…humanity’s latest awesome trend in risk management.

    Posted by Pterrafractyl | May 31, 2012, 1:05 pm
  25. Posted by Pterrafractyl | July 18, 2012, 7:52 pm
  26. I think this pretty much summarizes the last decade: Even worse than you think:

    TARP Was Even Worse Than You Think: “An Abysmal Failure,” Barofsky Says

    By Aaron Task | Daily Ticker 7/27/2012

    Most Americans have a sense TARP was a badly managed program that bailed out “fat cat” bankers at the expense of U.S. taxpayers. Well, it’s even worse than you think, according to Neil Barofsky, former special inspector general for TARP (SIGTARP).

    Officials in both the Bush and Obama administrations took the attitude “bankers know best,” Barofsky recalls. “It was somewhat shocking how much control big banks had over their own bailout [and] the overwhelming deference show by Treasury officials to the banks.”

    Much has been made about Barofsky’s criticism of Treasury Secretary Tim Geithner, who told CBS News he is “deeply offended” by how he’s portrayed in Barofsky’s book Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street.

    Posted by Pterrafractyl | July 27, 2012, 1:33 pm
  27. Well this is sure going to be a relief to the world’s poor and unemployed: The big banks got an extra four years to delay the full implementation of the new, stricter Basel III liquidity rules for international lenders. We wouldn’t want to, you know, impose too many harsh impediments to economic growth at this delicate point in the global the economy. The liquidity-cliff has been averted people! Now we can all breathe a sigh of relief and get back to business as usual.

    Posted by Pterrafractyl | January 7, 2013, 8:10 am
  28. Recommended google searches: Bill Still, Bradbury Pound, How Guernsey Beat the Bankers, IMF WP12202(Don’t trust), Victoria Grant, COMER lawsuit Bank of Canada.

    Governments are printing and lending money to banks at near zero, then borrowing back at higher interest with the taxpayers covering the difference. Why not cut out the middle man.

    Posted by Chris | January 7, 2013, 11:19 pm
  29. As we are continuing to learn from JP Morgan’s “Whale” debacle, rigging the assumptions in a banks’s internal models can be a preferred approach to dealing with (delaying) crisis. It’s sort of the “hide under a pile of coats and hope everything works out” approach to crisis management:

    Business Insider
    This Is Where JP Morgan Really Screwed Up In The Infamous ‘Whale’ Trade
    Linette Lopez | Jan. 16, 2013, 10:20 AM

    This weekend, the news broke that JP Morgan may release a massive report reviewing what caused the painful $6.2 billion loss in its London Chief Investment Office known as the London Whale trade.

    Today the 132 page review was released, along with the news that bank CEO Jamie Dimon would take a substantial pay cut as a result of his personal negligence. That buck, after all, stops with him.

    But of course, that isn’t the whole story. The full report details how (and why) traders in JP Morgan’s CIO took such a huge, risky position in Synthetic Credit Derivatives.

    Perhaps more importantly, it discloses also excruciating details on why losses from that position were never meaningfully analyzed and disclosed to senior management until it was too late.

    The story really starts at the end of 2011, as the firm was working on reducing risk weighted assets (RWA). Management was looking to the CIO to help the firm do that.

    Then in January 2012, the CIO started losing a little money (pg 28):

    In early January, the Synthetic Credit Portfolio incurred mark-to-market losses of approximately $15 million. On January 10, one of the traders informed Ms. Drew that the losses resulted from the fact that (among other things) it “ha[d] been somewhat costly to unwind” positions in the portfolio.

    So CIO head Ina Drew started looking for some flexibility in her mandate to get rid of RWA so that her division could maximize profits and losses (p&l).

    In other words, the CIO thought it would be really expensive to simply unwind their positions, so they wanted to pursue a different strategy that would allow them to hold the positions until the end of the year when management and traders alike believed the global economy would improve.

    This was the new plan (pg 29):

    On or about January 18, Ms. Drew, Mr. Wilmot, Mr. Weiland and two senior members of the Synthetic Credit Portfolio team met to further discuss the Synthetic Credit Portfolio and RWA reduction. According to a trader who had not attended the meeting, after the meeting ended, one of the Synthetic Credit Portfolio team members who had attended the meeting informed him that they had decided not to reduce the Synthetic Credit Portfolio, and that the trader’s focus in managing the Synthetic Credit Portfolio at that point should be on profits and losses. Nonetheless, RWA continued to be a matter of real concern for that individual and CIO, and he thus also sent a follow-up e-mail to the meeting participants in which he set out a number of options for achieving RWA reduction by the end of 2012. In that e-mail, he stated that the preferred approach was to select an option under which CIO would attempt to convince the Firm to modify the model that it used to calculate RWA for the Synthetic Credit Portfolio, and delay any efforts to reduce RWA through changes in positions in the Synthetic Credit Portfolio until mid-year.

    Yes, by tweaking a bank’s models, like the models that determine the assumed value of the “risk weighted assets” in a giant portfolio of derivates, many magical things can happen, like a sudden increase or decrease in the valuation of the assets and liabilities the bank holds. And since new regulations are requiring banks to increase the ratio of assets to liabilities, let’s just say there’s going to be a number of large banks that are going to have a whale of a time swimming through this model muddle:

    Bloomberg
    European Banks to Shrink as U.S. Peers Set Pace: Euro Credit
    By John Glover – Jan 17, 2013 4:07 AM CT

    European banks, including Deutsche Bank AG (DBK) and Standard Chartered Plc, have less equity relative to assets than their U.S. peers, and will have to shrink or boost capital as regulators demand reduced leverage.

    Standard Chartered holds Tier 1 capital equivalent to 7.04 percent of its adjusted assets, more than its European peers and 2 percentage points shy of Wells Fargo & Co. (WFC), the strongest U.S. bank, according to data compiled by Charlottesville, Virginia- based SNL Financial LC. Deutsche Bank AG’s ratio is 3.76 percent, based on average assets for 2011, the last full year for which figures are available for companies surveyed by SNL.

    Before the credit crisis, European regulators focused on banks’ assets weighted by risk, encouraging lenders such as UBS (UBSN) AG to load up on top-rated bonds backed by subprime mortgages, which later plummeted in value. After New York-based Lehman Brothers Holdings Inc. collapsed in 2008, U.S. authorities were faster than their European counterparts to force lenders to raise cash.

    “U.S. regulators and banks acted quicker and more effectively, and addressed the issue of leverage when they could,” said Ketish Pothalingam, a portfolio manager in London for Pacific Investment Management Co., which runs the world’s biggest bond fund. “As a result, they look a lot better now. The European banks were laggards in comparison.”

    Moving Models

    Banks assign risk weights to their assets using internal models, meaning that similar loans or securities bear different measures of risk depending on the institution that owns them. Starting this year, regulators will begin compiling figures based on common definitions, in advance of enforcing a global standard for assessing leverage.

    “A leverage ratio is a useful additional tool to risk- weighted assets as an indicator,” said Steve Hussey, a credit analyst at AllianceBernstein Ltd. in London. “There can be big differences, especially when banks are using internal models.”

    Differences in the accounting treatment of derivatives under U.S. and European accounting rules also make it tough for analysts to compare lenders.

    Risk weighting by itself isn’t an adequate measure of the riskiness of a balance sheet,” said Lakhani at Citigroup. “There’s no single measure that is, but on a combined basis it’s the outliers we are trying to catch here.”

    Christian Streckert, a spokesman at Deutsche Bank in Frankfurt, referred to an Oct. 30 presentation by Chief Financial Officer Stefan Krause that uses adjusted “target definitions.” Krause put the bank’s leverage ratio at 21 percent at the end of the third quarter, compared with SNL’s end of 2011 figure adjusted for derivatives of 3.76 percent.

    Deutsche Bank’s ratio “really isn’t that high, not under the new world order of Basel III and tougher regulation,” said Andrew Lim, an analyst at Espirito Santo Investment Bank in London. “Deutsche Bank is going to have to shrink or raise capital.”

    Posted by Pterrafractyl | January 17, 2013, 1:14 pm
  30. The CEOs of JP Morgan and Deutsche Bank may not realize what they’re saying here:

    Deutsche Bank, JP Morgan reject ringfencing units

    Published January 22, 2013

    Reuters

    KOENIGSTEIN – The chief executives of Deutsche Bank and JP Morgan have both rejected the idea of splitting off trading operations from retail operations to make banks safer.

    “You lose enormous economies of scale if you separate investment banking,” Deutsche Bank co-chief executive Anshu Jain told a panel discussion on Monday.

    “You solve a problem that does not exist and you create a lot of new ones,” he said in remarks embargoed for release on Tuesday.

    JP Morgan CEO Jamie Dimon said a vital step toward bank reform was not a legal split of investment banking from other operations but a framework where banks can be allowed to fail without contaminating the broader economy.

    “We have to make sure that a bank fails without costing billions of dollars,” Dimon said, referring to taxpayer money.

    In October, a European Union advisory group led by Bank of Finland Governor Erkki Liikanen said banks should split off both trading on their own behalf and “activities closely linked with securities and derivatives”.

    The Liikanen group said ring-fencing trading desks would make it easier for the part of the bank that holds savers’ deposits and lends to businesses to keep running even if other bits of the business collapsed.

    Jain said the Liikanen proposals could even lead to European banks being disadvantaged. “My concern is that you create an uneven playing field when you abandon universal banks in Europe alone.”

    In September, Deutsche Bank announced a new strategy based on closer integration between its investment bank, asset management and wealth management unit.

    There is one obvious solution to ensuring that ‘too-big-fail’ banks can’t take down the economy and require a bailout if they implode, but it’s kind of impossible to imagine that these two don’t realize that very obvious solution:

    Bloomberg
    Jamie Dimon Laments Too-Big-to-Fail? Give Me a Break
    By Jonathan Weil Jan 22, 2013 9:40 AM CT

    Jamie Dimon is at it again. Speaking to his bank’s clients yesterday during a panel discussion in Koenigstein, Germany, the chairman and chief executive officer of JPMorgan Chase & Co. said regulators and banks should come up with a system that lets lenders go broke without hurting the world economy.

    “We’ve got to get rid of too-big-to-fail,” Dimon said, according to a Bloomberg News article this morning. “We have to ensure big banks can be taken down without harming the public and at no cost to them.”

    Remarks such as these, coming from the head of JPMorgan, are maddening. (And Dimon has made similar comments before.) Here he is saying all the right things and making all the right moves from a public-relations standpoint. Of course we should eliminate too-big-to-fail, most of us can agree. Of course we should ensure these monster institutions can fail without harming the public.

    Yet as things stand now, there’s no way Dimon or anyone else could credibly argue that the sudden failure of JPMorgan could happen today without causing massive damage to others. If Dimon means what he says, he shouldn’t be complaining about how society at large is obliged to fix the problem. JPMorgan should be doing something about JPMorgan to make sure it’s not too-big-to-fail — like break itself up.

    Posted by Pterrafractyl | January 22, 2013, 3:42 pm
  31. It looks like Deutsche Bank has found a way out of its increasing capital requirements model muddle: muddle the models more:

    Deutsche Bank swallows $4 billion of charges for cleanup

    By Edward Taylor and Arno Schuetze

    FRANKFURT | Thu Jan 31, 2013 10:16am EST

    (Reuters) – Deutsche Bank plunged to its worst quarterly loss in four years on Thursday after it took nearly $4 billion in charges to try and draw a line under a slew of scandals and boost its balance sheet without asking shareholders for cash.

    Shares in Germany’s largest lender hit their highest level in nearly a year after it raised its capital levels closer to European peers. But with so much uncertainty surrounding future capital requirements for the industry, a rights issue, which would dilute existing investors, remains a risk, Deutsche said.

    With patchy introduction of Basel III global bank capital rules, regulators are increasingly pursuing tougher national regimes to rein in lenders, prompting fears of a regulatory arms race.

    “We saw regulators in the world come together in 2009. I am concerned this regulatory cohesion will not last,” said Jain.

    Deutsche Bank cut its risk-weighted asset (RWA) base by 55 billion euros in the fourth quarter, helping to raise its core tier one capital ratio under Basel III rules to 8 percent at the end of 2012 from under 6 percent at the end of 2011.

    RWAs are a bank’s assets, usually loans, adjusted for the likelihood of non-payment.

    Changes to Deutsche’s internal risk models helped drive the reduction in RWA, which analysts said could come back to haunt the bank if regulators harmonize the way banks estimate the riskiness of their loan books.

    “They might apply some minimum floor for RWAs, which would cost Deutsche Bank a lot … Their internal models could have to be thrown out the window,” said Espirito Santo analyst Andrew Lim, who has a “sell” recommendation on Deutsche Bank shares.

    Lim believes the bank needs between 15 billion and 20 billion euros of additional capital and warned the European Central Bank (ECB), which takes over supervision of banks across the region next year, might take a harder line on capital than the German regulator, BaFin.

    “I think they need that amount … they might not be made to raise it, they haven’t been made to raise it by BaFin. The ECB might take a much more stern stance and force them to raise equity or reduce their balance sheet,” he added.

    Deutsche Bank’s finance chief Stefan Krause however said the bank felt comfortable with the way its measured risky assets.

    Posted by Pterrafractyl | January 31, 2013, 8:52 am
  32. Because there can be only one!

    Huffington Post
    JPMorgan Chase CEO Jamie Dimon: ‘We Actually Benefit From Downturns’
    Posted: 02/26/2013 11:47 am EST | Updated: 02/27/2013 12:41 pm EST
    Mark Gongloff

    Like most soft-spined Americans, you probably have painful memories of the financial crisis and consequent recession. Perhaps you even think of those things as “bad.” Fortunately, Jamie Dimon is not like the rest of you losers.

    That is because, unlike you, Jamie Dimon is CEO of JPMorgan Friggin’ Chase, America’s greatest bank, which just so happens to snack on financial crises and recessions like so much KIND bar.

    “This bank is anti-fragile, we actually benefit from downturns,” Dimon bragged to his bank’s investors at a conference on Tuesday.

    And it is true! The bank definitely benefited from the last downturn. It got to buy Bear Stearns in a government-backed fire sale, getting itself a brokerage business on the cheap in exchange for shouldering only a few tiresome legal burdens. It also got billions of dollars in government handouts, from $25 billion in TARP funds to billions in savings from low-interest-rate borrowing programs to a permanent subsidy arising from the idea that the government will bail out the bank if it ever gets in trouble.

    That permanent subsidy amounts to about $17 billion per year, according to a recent Bloomberg View study, representing nearly all of the bank’s profits. No other bank gets such a large subsidy, according to Bloomberg’s study (although, to be fair, some find Bloomberg’s methods unsound, to quote from Jamie Dimon’s favorite movie).

    Of course, this may not have been the sort of benefit Dimon was talking about. Instead, he has repeatedly opined that his bank thrived — was in fact a “port in the storm” — during the downturn simply because it was so gigantic.

    Funny enough, JPMorgan is sometimes not at its tip-top best when things are actually looking up. For example, it managed to lose $6 billion on credit default swaps last year, at a time when markets were doing just fine. So maybe “anti-fragile” is not the best term for JPMorgan?

    Posted by Pterrafractyl | February 27, 2013, 2:19 pm
  33. Uh oh!:

    Exclusive: Deutsche Bank ‘horribly undercapitalized’ – U.S. regulator

    By Emily Stephenson and Douwe Miedema

    WASHINGTON | Fri Jun 14, 2013 6:02pm EDT

    (Reuters) – A top U.S. banking regulator called Deutsche Bank’s capital levels “horrible” and said it is the worst on a list of global banks based on one measurement of leverage ratios.

    “It’s horrible, I mean they’re horribly undercapitalized,” said Federal Deposit Insurance Corp Vice Chairman Thomas Hoenig in an interview. “They have no margin of error.”

    Hoenig, who is second-in-command at the regulator, said global capital rules, known as the Basel III accord, allow lenders to appear well-capitalized when they are not. That is because the rules allow the banks to use complicated measurements of how risky their loans are to determine the capital they must hold, he said.

    But using a tougher leverage ratio measurement – which compares a bank’s shareholder equity to its total assets without using risk-weightings – the picture for banks such as Deutsche Bank is very different, he said.

    Deutsche Bank this year is almost done raising 5 billion euros ($6.67 billion) in new debt and equity, boosting its core capital ratio to around 9.5 percent, which it says has made it one of the best-capitalized banks among its peers.

    “To say that we are undercapitalized is inaccurate because if you look at the Basel framework, we’re now one of the best capitalized banks in the world after our capital raise,” Deutsche Bank’s Chief Financial Officer Stefan Krause told Reuters in an interview, when asked about Hoenig’s comments.

    “To suggest that leverage puts us in a position to be a risk to the system is incorrect,” Krause said, calling the gauge a “misleading measure” when used on its own.

    Deutsche’s leverage ratio stood at 1.63 percent, according to Hoenig’s numbers, which are based on European IFRS accounting rules as of the end of 2012.

    Deutsche said the number now stands at 2.1 percent but that it does not look at the gauge. Using U.S. generally accepted accounting principles, the ratio stood at a much more comfortable 4.5 percent, Krause said.

    OUTSPOKEN CRITIC

    The difference is due to the way derivatives on a bank’s books are measured. Neither number directly corresponds to the Basel leverage ratio, which calculates capital in another way and sets a 3 percent minimum.

    The FDIC – which guarantees deposits at U.S. banks – stressed that Hoenig was speaking in a personal capacity and that the agency did not comment on individual banks.

    Hoenig staked out a reputation as a dissenting voice against the Federal Reserve’s loose monetary policy in the immediate aftermath of the financial crisis when he was president of the Federal Reserve Bank of Kansas City.

    He’s also an outspoken critic of the Basel III rules – introduced globally after the crisis – which he says do not do enough to reduce the size of the riskiest banks and are easy for them to game.

    Other banks with a low ratio, according to Hoenig, are UBS at 2.52 percent, Morgan Stanley at 2.55 percent, Credit Agricole at 2.72 percent and Societe Generale at 2.84 percent.

    Detailed rules for Basel III, which other U.S. politicians and regulators have questioned, are expected to come out in the United States in the next few months, well past the January deadline agreed upon internationally.

    DESCRIBES “RIDICULOUS” CHANGE

    Hoenig pointed to the gain in Deutsche Bank shares in January on the same day it posted a big quarterly loss, because it had improved its Basel III capital ratios by cutting risk-weighted assets.

    “My other example with poor Deutsche Bank is that they lose $2 billion and raise their capital ratio. It’s – I don’t want to say insane, but it’s ridiculous,” Hoenig said.

    A leverage ratio is a better method to show a firm’s ability to absorb sudden losses, Hoenig says, and he has floated a plan to raise the ratio to 10 percent. He said the 3 percent leverage hurdle under Basel was a “pretend number.”

    Opponents of using such a ratio say that it ignores the risk in a bank’s loan books, and can make a bank with only healthy borrowers look equally risky as a bank whose clients are less likely to pay back their loans.

    It also fails to take into account how easily a bank can sell its assets – so-called liquidity – or whether it is hedged against risk.

    Still, equity analysts said that while Deutsche Bank likely will meet regulatory capital requirements, its ratios look weak.

    Posted by Pterrafractyl | June 17, 2013, 10:18 am
  34. @Pterrafractyl–

    Stunning find! Will be a FFT post before long–I want to wrap up some thoughts on Baby Face Snowden and the destabilization of Obama.

    This is what so many can’t stand about Germany–as they self-righteously dictate (and I mean DICTATE) to others about their fiscal profligacy, their largest bank is badly exposed.

    A whore preaching abstinence!

    Best,

    Dave

    Posted by Dave Emory | June 17, 2013, 3:20 pm
  35. @Dave: And here’s a brand new Deutsche Bank-related scandal. Maybe. All we know at this point is that there are allegations that foreign-exchange rates are systematically being rigged by major players in the massive, unregulated daily foreign-exchange. The anonymous traders won’t say which banks are under suspicion, but what we know is that it would have to involve some very big players in this sector in order to pull it off given the size of the market. Guess which bank is the biggest:

    Bloomberg
    Traders Said to Rig Currency Rates to Profit Off Clients
    By Liam Vaughan, Gavin Finch & Ambereen Choudhury – Jun 12, 2013 1:06 PM CT

    Traders at some of the world’s biggest banks manipulated benchmark foreign-exchange rates used to set the value of trillions of dollars of investments, according to five dealers with knowledge of the practice.

    Employees have been front-running client orders and rigging WM/Reuters rates by pushing through trades before and during the 60-second windows when the benchmarks are set, said the current and former traders, who requested anonymity because the practice is controversial. Dealers colluded with counterparts to boost chances of moving the rates, said two of the people, who worked in the industry for a total of more than 20 years.

    The behavior occurred daily in the spot foreign-exchange market and has been going on for at least a decade, affecting the value of funds and derivatives, the two traders said. The Financial Conduct Authority, Britain’s markets supervisor, is considering opening a probe into potential manipulation of the rates, according to a person briefed on the matter.

    “The FX market is like the Wild West,” said James McGeehan, who spent 12 years at banks before co-founding Framingham, Massachusetts-based FX Transparency LLC, which advises companies on foreign-exchange trading, in 2009. “It’s buyer beware.”

    The $4.7-trillion-a-day currency market, the biggest in the financial system, is one of the least regulated. The inherent conflict banks face between executing client orders and profiting from their own trades is exacerbated because most currency trading takes place away from exchanges.
    Benchmark Investigations

    The WM/Reuters rates are used by fund managers to compute the day-to-day value of their holdings and by index providers such as FTSE Group and MSCI Inc. that track stocks and bonds in multiple countries. While the rates aren’t followed by most investors, even small movements can affect the value of what Morningstar Inc. (MORN) estimates is $3.6 trillion in funds including pension and savings accounts that track global indexes.

    One of Europe’s largest money managers has complained about possible manipulation to British regulators within the past 12 months, according to a person with knowledge of the matter who asked that neither he nor the firm be identified because he wasn’t authorized to speak publicly.
    FCA Review

    The FCA already is working with regulators worldwide to review the integrity of benchmarks, including those used in valuing derivatives and commodities, after three lenders were fined about $2.5 billion for rigging the London interbank offered rate, or Libor. Regulators also are investigating benchmarks for the crude-oil and swaps markets.

    “The FCA is aware of these allegations and has been speaking to the relevant parties,” Chris Hamilton, a spokesman for the agency, said of the WM/Reuters rates.

    ACI, a trade group for foreign-exchange and money-market traders, said in a statement today that it has reminded members of guidelines adopted in February, which say that dealers shouldn’t “profit or seek to profit from confidential information.” The Paris-based group has 13,000 members in more than 60 countries, according to its website.

    It may be difficult to prosecute traders for market manipulation, as spot foreign exchange, the trading of one currency with another at the current price for delivery within two days, isn’t classified as a financial instrument by regulators, said Arun Srivastava, a partner at law firm Baker & McKenzie LLP in London.

    World Markets

    The WM/Reuters rates data are collected and distributed by World Markets Co., a unit of Boston-based State Street Corp. (STT), and Thomson Reuters Corp. (TRI) Bloomberg LP, the parent company of Bloomberg News, competes with New York-based Thomson Reuters in providing news and information, as well as currency-trading systems and pricing data. Bloomberg LP also distributes the WM/Reuters rates on Bloomberg terminals.

    State Street hasn’t been alerted to any allegations of wrongdoing involving the rate, said a person with knowledge of the matter.

    “The process for capturing this information and calculating the spot fixings is automated and anonymous, and the rates are monitored for quality and accuracy,” State Street said in an e-mailed statement. The data are derived from “multiple execution venues through a streaming rather than solicitation process,” it said.

    World Markets states in the methodology posted online that it doesn’t guarantee the accuracy of its rates.
    ‘Extremely Costly’

    State Street hired London-based Freshfields Bruckhaus Deringer LLP to ensure that the rates comply with the set of draft principles for financial benchmarks published in April by global regulators following the Libor scandal, according to a person briefed on the matter.

    “We asked Freshfields to confirm our understanding that the current FCA regulation applied to only Libor at this stage,” State Street said in an e-mailed statement today.

    Nick Parker, a spokesman for Freshfields, declined to comment. Thomson Reuters referred inquiries to State Street.

    Introduced in 1994, the WM/Reuters rates provide standardized benchmarks allowing fund managers to value holdings and assess performance. The rates also are used in forwards and other contracts that require an exchange rate at settlement.

    “The price mechanism is the anchor of our entire economic system,” said Tom Kirchmaier, a fellow in the financial-markets group at the London School of Economics. “Any rigging of the price mechanism leads to a misallocation of capital and is extremely costly to society.”
    Pound, Rand

    The rates are published hourly for 160 currencies and half-hourly for 21 of them. For the 21 — major currencies from the British pound to the South African rand — the benchmarks are the median of all trades in a minute-long period starting 30 seconds before the beginning of each half-hour.

    If there aren’t enough transactions between a pair of currencies during the reference period, the rate is based on the median of traders’ orders, which are offers to sell or bids to buy. Rates for the other, less-widely traded currencies are calculated using quotes during a two-minute window.

    The benchmarks are based on actual trades or quotes, rather than the bank estimates used to calculate Libor. Still, they’re susceptible to rigging, according to the five traders, who said they had engaged in or witnessed the practice.

    Big Four

    While hundreds of firms participate in the foreign-exchange market, four banks dominate, with a combined share of more than 50 percent, according to a May survey by Euromoney Institutional Investor Plc. Deutsche Bank AG (DBK), based in Frankfurt, is No. 1, with a 15.2 percent share, followed by New York-based Citigroup Inc. (C) with 14.9 percent, London-based Barclays Plc (BARC) with 10.2 percent and Zurich-based UBS AG (UBSN) with 10.1 percent.

    The traders interviewed by Bloomberg News declined to identify which banks engaged in manipulative practices and didn’t specifically allege that any of the top four firms were involved. Spokesmen for Deutsche Bank, Citigroup, Barclays and UBS declined to comment.

    As market-makers, banks execute orders to buy and sell for clients as well as trade on their own accounts.

    Companies and asset managers typically ask banks to buy or sell currencies at a specified WM/Reuters fix later i

    ISDAfix Probe

    In attempting to rig Libor, traders at Barclays, Royal Bank of Scotland Group Plc and UBS misstated their firms’ cost of borrowing and colluded with counterparts at other banks to profit from bets on derivatives, regulators found.

    Libor is one of at least three benchmarks under investigation. The European Commission is probing companies including Royal Dutch Shell Plc, BP Plc and Platts, an oil-pricing and news agency, for potential manipulation of the $3.4 trillion-a-year crude-oil market. The firms have said they are cooperating with the probe. U.S. regulators are investigating the ISDAfix rate, the benchmark used for the swaps market.

    Sixteen of the largest banks, including Barclays, JPMorgan Chase & Co. (JPM) and Deutsche Bank (DBK), signed a voluntary code of conduct for foreign-exchange and money-market dealers in 2001 that was later included as an annex to guidelines issued by the Bank of England in November 2011.

    The BOE’s Non-Investment Products Code, which some banks use in contracts with clients, states “caution should be taken so that customers’ interests are not exploited when financial intermediaries trade for their own accounts.” It also says that “manipulative practices by banks with each other or with clients constitute unacceptable trading behavior.”

    That only goes so far, according to Saluja.

    “The thing about the code is it is a voluntary code,” the lawyer said. “It may be that compliance with that has almost been seen as optional.”

    Just to reinterate: “Sixteen of the largest banks, including Barclays, JPMorgan Chase & Co. (JPM) and Deutsche Bank (DBK), signed a voluntary code of conduct for foreign-exchange and money-market dealers in 2001 that was later included as an annex to guidelines issued by the Bank of England in November 2011“.

    Posted by Pterrafractyl | June 17, 2013, 7:03 pm
  36. And another regulatory agency looking into a massive cartel goes through the motions…

    Bloomberg
    Swiss Regulators Probing Alleged Currency Manipulation
    By Gavin Finch, Liam Vaughan & Elena Logutenkova – Oct 4, 2013 12:12 PM CT

    Swiss authorities said they’re investigating several banks for allegedly colluding to manipulate the $5.3 trillion-a-day foreign exchange market.

    The Swiss Financial Market Supervisory Authority “is coordinating closely with authorities in other countries as multiple banks around the world are potentially implicated,” it said in a statement today. Separately, the competition commission said it opened a preliminary probe on Sept. 30 after receiving allegations of collusion among banks to manipulate some foreign-exchange rates.

    The probes come after Bloomberg News reported in June that dealers at banks pooled information through instant messages and used client orders to move benchmark currency rates. Britain’s Financial Conduct Authority said that month it was reviewing the allegations. The U.S. Commodity Futures Trading Commission has also been reviewing potential violations of the law with regards to foreign currency markets, according to a person familiar with the matter who asked not to be identified.

    Authorities around the world are investigating the alleged abuse of financial benchmarks by the firms that play a central role in setting them. UBS AG (UBSN), Switzerland’s largest bank, was among four firms fined about $2.6 billion for rigging the London interbank offered rate, the benchmark for more than $300 trillion of securities worldwide.

    European regulators are reviewing allegations of collusion in crude oil and biofuels markets, while the CFTC and FCA are also probing the potential manipulation of ISDAfix, a benchmark for interest-rate swaps.
    Shares Rise

    In today’s statement, Finma didn’t identify which firms it’s investigating or give details of the scope of its probe. The Swiss competition commission said it will decide at later point on what further action to take. Vinzenz Mathys, a spokesman for Bern-based Finma, declined to comment further. UBS spokeswoman Jenna Ward and Credit Suisse Group AG (CSGN) spokesman Marc Dosch declined to comment.

    UBS closed at 18.56 francs ($21), up 0.5 percent in Zurich, while Credit Suisse gained 0.6 percent to 28.23 francs.

    Britain’s FCA today reiterated its June statement saying it has been speaking to the “relevant” parties. The regulator has separately requested information from four banks including Frankfurt-based Deutsche Bank AG (DBK) and Citigroup Inc. (C), a person with knowledge of the matter who asked not to be identified said in June. The Hong Kong Monetary Authority said in a statement today it would “closely monitor” developments.
    Barclays, Citigroup

    About four banks account for more than half of all trading in the foreign-exchange market, according to a May survey by Euromoney Institutional Investor Plc. (ERM) Deutsche Bank is No. 1 with a 15 percent share, followed by Citigroup with almost 15 percent and London-based Barclays Plc (BARC) and UBS, which each have 10 percent. Giles Croot, a spokesman for Barclays, Sebastian Howell, a spokesman for Deutsche Bank, and Jeffrey French at Citigroup all declined to comment.

    Posted by Pterrafractyl | October 4, 2013, 1:16 pm
  37. There’s really one and only one thing JPMorgan needs to apologize for over this whole “London Whale” incident: loving too much. Just because polite society will never accept man-on-money love doesn’t make it wrong

    The New York Times
    October 16, 2013, 10:25 am
    JPMorgan to Admit Wrongdoing and Pay $100 Million to Settle ‘London Whale’ Inquiry
    By BEN PROTESS and JESSICA SILVER-GREENBERG

    JPMorgan Chase has agreed to pay $100 million and make a groundbreaking admission of wrongdoing to settle an investigation into market manipulation involving the bank’s multibillion-dollar trading loss in London, a federal regulator announced on Wednesday, underscoring how far the bank was willing to go to put the blunder behind it.

    The regulator, the Commodity Futures Trading Commission, took aim at JPMorgan for trading activity that was so large and voluminous that it violated new rules under the Dodd-Frank Act, the financial regulatory overhaul passed in response to the financial crisis.

    The trading commission charged the bank with recklessly “employing a manipulative device” in the market for swaps, financial contracts that allowed the bank to bet on the health of companies like American Airlines. The bank sold “a staggering volume of these swaps in a concentrated period,” the trading commission said.

    The heart is not a “manipulative device”!

    Posted by Pterrafractyl | October 16, 2013, 12:55 pm
  38. Posted by Pterrafractyl | March 16, 2014, 6:31 pm
  39. Here’s a peak at the GOP’s plan for how to handle failing Too Big to Fail banks: First, cut the SEC’s budget and ability to oversee banks and demand that only bank shareholders and creditors are liable in future bank failures. Then transfer the budget powers new Consumer Financial Protection Bureau to congress so it can be systematically underfunded. Then, when the TBTF banks inevitably fail (because congress starves the SEC and CFPB of the funds needed for meaningful oversight ) and liabilities vastly exceed what can be extracted from the creditors and shareholders, make sure the FDIC doesn’t have the power to get the Too Big to Fail bailout money back:

    The Nation
    How Paul Ryan’s Budget Paves the Way for Another Financial Crisis
    George Zornick on April 2, 2014 – 12:28 PM ET

    Representative Paul Ryan released his budget blueprint this week, and fans of his work were no doubt pleased: it called for $5 trillion in spending cuts over the next decade, focused heavily on domestic, non-military spending. Safety net programs like Medicaid and food stamps would face savage cuts, and the Affordable Health Care Act would be repealed entirely. Meanwhile, both corporate and individual tax rates would be lowered.

    It is easy to make the case that the rich get richer and the poor get poorer under Ryan’s so-called “Path to Prosperity” plan: one needs only to look at the literally trillions cut from Medicaid and food stamps while the rich pay much less in taxes.

    But it’s important to refine that point and note that the financial sector in particular gets many special favors in the Ryan plan. After all, it is one of Ryan’s leading benefactors and he can even be spotted sipping $350 bottles of wine with industry leaders from time to time. And his budget is no doubt a path to prosperity for them.

    Moreover, in three crucial ways Ryan’s budget not only gives Wall Street more leeway to act recklessly, but makes it more likely that average Americans face the consequences.

    Cutting the Securities and Exchange Commission budget: Already, the head of the SEC is complaining that her agency’s budget is not nearly adequate to police the country’s massive financial sector. In a speech earlier this year at SEC headquarters, director Mary Jo White said, “our funding falls significantly short of the level we need to fulfill our mission to investors, companies and the markets.” The SEC has only 4,200 employees, but must regulate eighteen different stock exchanges and over 25,000 different market participants—and the agency’s responsibilities are growing thanks to new mandates from the Dodd-Frank financial reform legislation.

    Ryan has a much different take in his budget: he thinks the SEC is just too big. He doesn’t apply a dollar figure, but makes it clear the agency’s already meager budget should be substantially “streamlined.”

    “In the run-up to the financial crisis and its aftermath, the SEC repeatedly failed to fulfill any part of its mission,” his blueprint notes, ticking off a familiar list of whiffs, from the unsound nature of Bear Stearns and Lehman Brothers to the Ponzi schemes run by Allen Stanford and Bernie Madoff.

    So far, so good. But Ryan goes on: “These failures have taken place despite significant increases in funding at the SEC, which has seen its budget increase almost sixty-six percent since 2004.”

    Apparently, the extra money was the problem. “This resolution questions the premise that more funding for the SEC means better, smarter regulation. Adding reams of regulations to the books and scores of regulators to the payrolls will not provide greater transparency, consumer protection and enforcement for increasingly complex markets. Instead, the SEC should streamline and make more efficient its operations and resources.”

    In short: since the SEC failed to adequately police Wall Street at a time its budget was increasing, the magic solution would be to cut the agency’s budget, because ipso facto the agency’s performance would get better.

    This line of thinking would not be unfamiliar to those who follow Ryan’s recommendations for federal anti-poverty programs, and it’s just as wrong here as it is there. As the agency’s director herself pointed out (on several different occasions), the SEC plainly needs more resources to conduct better regulation of a huge financial sector. Ryan provides no evidence, aside from that odd logical twist, that reducing the number of SEC staffers poring over filings from hedge funds would somehow increase oversight of those outfits.

    Transferring the Consumer Financial Protection Bureau budget to Congress: Here Ryan resurrects a longstanding GOP proposal: that Congress, not the Federal Reserve, should fund the CFPB.

    As it stands now, the bureau’s budget is essentially guaranteed. It can ask the Federal Reserve for funding up to a certain cap, and that request cannot be denied. The caps are fixed percentages of the Fed’s operating expenses. This guarantees autonomy from a Congress where many members (like, say, Ryan) are elected thanks to campaign contributions from the big financial institutions the CFPB polices.

    CFPB funding would thus be transferred to Congress under the Ryan plan, and subject to annual appropriations. He doesn’t say what Congress should do with that budget once its under legislators control, but one needs only to look to his SEC budget proposals to get a sense of what would likely happen.

    Ensuring Taxpayer Bailouts of Big Banks: This is another up-is-down situation where a lot of unpacking of Ryan’s language is needed. His budget says:

    Although the proponents of Dodd-Frank went to great lengths to denounce bailouts, this law only sustains them. The Federal Deposit Insurance Corporation now has the authority to access taxpayer dollars in order to bail out the creditors of large, ‘‘systemically significant’’ financial institutions. This resolution calls for ending this regime, now enshrined into law, which paves the way for future bailouts. House Republicans put forth an enhanced bankruptcy alternative that—instead of rewarding corporate failure with taxpayer dollars—would place the responsibility for large, failing firms in the hands of the shareholders who own them, the managers who run them, and the creditors who finance them.

    Sounds good! But that would actually accomplish the exact opposite.

    Indeed, Dodd-Frank gave the FDIC the power to wind down too-big-to-fail banks, which is called “resolution authority.” In a crisis, if a failing bank is deemed too big for traditional bankruptcy, a panel of bankruptcy judges can place it in receivership under the FDIC. That FDIC in turn then makes a plan for winding down the institution safely—something Barney Frank called a “death panel” for big banks.

    Crucially, under this structure, taxpayers can’t end up paying for this wind down—Dodd-Frank explicitly forbids it. Any taxpayer money used upfront to ease the firm into bankruptcy would be recouped by a structured sale of the bank’s assets. (Note that Ryan sneakily says the FDIC has the authority to “access taxpayer dollars,” eliding the fact that in the end it has to pay them back.)

    Ryan’s alternative is to end FDIC’s resolution authority and simply “place the responsibility for large, failing firms in the hands of the shareholders who own them, the managers who run them, and the creditors who finance them.”

    That’s akin to just saying “it will all work out.” It is unlikely in the extreme that the shareholders and managers can somehow bail out a failing big bank, especially in a crisis. Inevitably, Congress and thus taxpayers would have to step in, without any of the established authority like asset sales that the FDIC now possesses.

    Ryan’s plan would lead to more taxpayer bailouts of failing big banks—and by stripping down the budgets of the agencies meant to oversee those institutions, make failure more likely in the first place. But in the meantime, his friends on Wall Street could enjoy less regulation, less oversight, and more comfort that taxpayers will someday come to the rescue.

    So, if banks aren’t going to have to pay back the bailout packages that exceed the liabilities of the shareholders and creditors under the Ryan plan, isn’t there an incentive, once banks cross a high enough leveraging threshold, for big banks to get as over leveraged as possible? After all, let’s say you had a bank that issues $10 billion in bonds and shareholder assets. If that bank implodes and liabilities exceed $10 billion, would the bond holders and shareholders have preferred that the bank had a $30 billion portfolio or a $300 billion portfolio? Wouldn’t they prefer the bigger portfolio at that point that was making money in the lead up to the meltdown? Why not if the bailout money never has to be paid back? It’s Too-Rigged-to-Not-Go-Big, isn’t it?

    Posted by Pterrafractyl | April 7, 2014, 2:09 pm
  40. Fight! Fight! Fight!

    BlackRock, Pimco sue over billions in mortgage securities losses

    By Karen Freifeld

    NEW YORK, June 18 Wed Jun 18, 2014 8:25pm EDT

    (Reuters) – Institutional investors including BlackRock Inc and Allianz SE’s Pimco on Wednesday sued six of the largest bond trustees, accusing them of failing to properly oversee more than $2 trillion in mortgage-backed securities issued in the run-up to the 2008 financial crisis.

    The lawsuits, filed in New York state court, claim the trustees breached their duties to investors by failing to force lenders and sponsors of the securities to repurchase defective loans, the suits claim.

    The investors are seeking damages for losses that exceed $250 billion and relate to over 2,200 residential mortgage-backed securities trusts issued between 2004 and 2008, according to a person familiar with the cases.

    The trustees that were sued include units of U.S. Bank , Citibank, Deutsche Bank, Wells Fargo & Co., HSBC, and Bank of New York Mellon. Representatives for the banks declined comment or did not immediately respond to requests for comment.

    The lawsuits come after a New York appeals court ruling in December that determined the six-year statute of limitations to bring breach-of-contract cases against the issuers of mortgage securities began when the transactions were executed. The ruling means that for many cases it is too late to sue.

    The lawsuits claim the trustees disregarded their duties to protect investors despite knowing that the trusts held a large number of loans that did not meet their contractual obligations.

    The trustees were aware of an “industrywide abandonment of underwriting guidelines” for the loans and “pervasive and systemic deficiencies infecting the trusts’ collateral,” as the complaint against Citibank says.

    Banks have paid billions of dollars in lawsuits and settlements since being accused of packaging shoddy mortgages into securities that helped lead to the financial crisis.

    It’s great to see the financial giants fight like this since we get to read about things like an “industrywide abandonment of underwriting guidelines” although you have to wonder what the odds are that BlackRock and Pimco weren’t, themselves, also quite aware of this “industrywide abandonment of underwriting guidelines” at the time since these two firms are, after all, industry giants. Hopefully we’ll see a “hey, you guys knew this was all crap too” defense. That could be fun.

    Posted by Pterrafractyl | June 18, 2014, 6:05 pm
  41. Not satisfied with its seemingly impenetrable wall of legal protection, JP Morgan wants a “safe harbor” for its illegal hiring practices. That’s literally what Jamie Dimon asked for in an interview:

    neweconomicperspectives.org
    Jamie Dimon: U.S. Must Create a “Safe Harbor” Where JPM’s Corruption Is Not “Punished”
    Posted on October 24, 2014 by William Black

    By William K. Black

    I want to give a hat tip to a recent Wall Street Journal article that brought to my attention two damning admissions by JPMorgan’s (JPM) CEO and Chairman of the Board, Jamie Dimon. The irony is that Dimon was lulled into making these admissions because he was basking in the perfect calm created by the confluence of Sorkin’s and CNBC’s storied sycophancy at the one place on earth where elite bankers feel most loved, honored, and protected – the annual meeting of the ultra-wealthy in Davos, Switzerland. Sorkin was the only interviewer, so Dimon faced no risk of tough questions. It may well have been this perfect setting that caused Dimon to let slip the mask and reveal two illustrative sins of elite bankers reported in the WSJ article.

    “A spokesman for J.P. Morgan declined to comment on the continuing investigations. .Mr. Dimon said in a January 2014 interview on CNBC that it has been a ‘norm of business for years’ for banks to hire [ex government officials and the] sons and daughters of companies’ [controlling officers] and to give them ‘proper jobs’ without violating the law.

    ‘But we got to figure out exactly how to create a safe harbor for that so you don’t…end up getting punished,’ he told the interviewer, according to a CNBC transcript.”

    Yes, you read that correctly. It has been a “norm of business for years” for multinational corporations to hire the “sons and daughters of companies’ [controlling officials]” and to hire “ex government officials” in order to secure the favor of those powerful officials for the banks. Dimon’s concern is that it is essential that firms should be able to continue to purchase this influence with other elites in this manner with no threat of ever “getting punished” for buying influence with such powerful foreign officials.” JPM’s priority is “to figure out exactly how to create a safe haven for that.” The elite firms’ “norm of business for years” is not an admission from Dimon’s perspective, but rather a claim of right. Anything that elite firms have done successfully for years to purchase influence with other elites (including hiring “ex government officials”) is obviously something that they have a right to continue to do – with total impunity from “getting punished.” It’s not bribery, it’s buying influence with powerful officials who run firms and government agencies and ministries.

    I promptly found the CNBC interview transcript, and it was such a classic of its genre that one can see how Dimon could let down his guard and make these admissions, or as he presented them, legitimate demands on the U.S. government to create such a “safe harbor” for U.S. multinational corporations.

    It never dawns on Sorkin during the interview that there might be something desperately wrong about Dimon’s belief that multinational corporations have the inalienable right to buy influence through their hires of “ex government officials” and “Chinese princelings” and that the duty of the U.S. government is to create a “safe harbor” for JPM’s officers so that they can be assured that they can freely buy influence with no risk of “getting punished.” Their epitome of merit-based hiring at JPM’s China operations is based on the answer to the colloquial question: “who’s your daddy?”

    Beyond the issue of hiring Chinese “princeling” to get business, if JP Morgan actually got its wish for a corrupt hiring “safe harbor” policy from US authorities you have to wonder how many non-Chinese “princelings” around the world would also benefit from such a safe harbor policy. It seems like it might be a lot.

    Posted by Pterrafractyl | October 27, 2014, 1:17 pm
  42. h gee, imagine that: in the midst of a panicky last minute attempt to thwart an government shutdown Wall Street just managed to slip in an early Christmas present for themselves: “The provision enables the big banks once again to use insured deposits and other taxpayer subsidies and guarantees to gamble in the derivatives markets—the very type of business that drove the 2008 financial crisis and the economic devastation that followed”:

    Forbes
    With Dodd-Frank Rollback, The Big Bad Banks Are Back

    Steve Denning
    12/12/2014 @ 10:46AM
    Around nine o’clock last night, the House passed a massive $1.1 trillion spending plan. This action averted a government shutdown—a good thing. Less good was the fact that the bill also contained a provision, said to be written by Citigroup, repealing a key part of the Dodd-Frank Act.

    The provision enables the big banks once again to use insured deposits and other taxpayer subsidies and guarantees to gamble in the derivatives markets—the very type of business that drove the 2008 financial crisis and the economic devastation that followed.

    The bill now goes to the Senate where it is expected to pass in the coming days. After four years of twisting arms in Congress, Wall Street had finally found the perfect moment to reshape financial regulation—less than three hours before the government was about to run out of money.

    Even Obama administration officials were forced to work late into the evening lobbying Democrats to support the bill, arguing that this bill was less bad than any deal than they would get next year when the GOP controls both chambers of Congress. The measure ultimately passed 219-206, with 57 Democrats supporting the bill.

    On the surface, the House vote was a huge legislative victory for the big banks.

    “Yet Citi may regret its big victory on Capitol Hill,” writes by Rob Blackwell in the industry-friendly American Banker. That’s because “in finally getting what they wanted, big banks also thrust themselves back into the limelight in the worst possible way, simultaneously reminding the public of their role in causing the financial crisis and in their continuing influence over the various levers of the U.S government. In one fell swoop, they undid whatever recovery to their battered reputation they’d made in the past four years and once again cast themselves as the prototypical supervillain in a comic book movie.”

    “Wall Street’s determined lobbying on Section 716 provides compelling evidence that Wall Street’s business model depends on the ability of large financial conglomerates to keep exploiting the cheap funding provided by their ‘too big to fail’ subsidies,” said Arthur Wilmarth, a professor of law at George Washington University. “Shame on Congress if it allows megabanks to continue to pursue the same business strategy that brought us the financial crisis.”

    “Making matters potentially worse,” writes Rob Blackwell, “news reports quickly surfaced that Jamie Dimon, JPMorgan Chase’s CEO, also personally lobbied lawmakers on the bill. That helped rebut arguments by some that the provision wasn’t a big deal to the big banks and that they weren’t lobbying heavily for it.”

    “On net, Wall St lost this week,” tweeted Brian Gardner, an analyst at Keefe, Bruyette & Woods.

    Wall Street vs The People

    As to why Congress is acting on behalf of the financial sector against the interests of the country as a whole, one doesn’t have to look far. “In the current election cycle, Wall Street banks and financial interests have so far reported spending more than $1.2 billion to influence decision-making in Washington, according to an updated report by Americans for Financial Reform. That works out to just under $1.8 million a day. It represents an average of about $2.3 million spent to elect or influence each of the 535 members of the Senate and House of Representatives.”

    Lest we forget why we had a financial crisis in 2008

    So let’s recap: why did we have a financial crisis just a few years ago? The history is clear:

    * In 1998, banks got the green light to gamble with the repeal of the Glass-Steagall legislation
    *Low interest rates fueled an apparent boom.
    *Asset managers sought new ways to make money in a low interest rate environment.
    *The credit rating agencies gave their blessing.
    *Fund managers didn’t do their homework and perform due diligence.
    *Derivatives were unregulated.
    *The SEC loosened capital requirements.
    *Compensation schemes encouraged gambling.
    *Wall Street became “creative.”
    *Private sector lenders fed the demand.
    *Financial gadgets milked the market with “innovative” mortgage products.
    *Commercial banks jumped in.
    *Derivatives exploded uncontrollably.
    *The boom and bust went global.
    *Fannie and Freddie jumped in late in the game to protect their profits.
    *It was primarily private lenders who relaxed standards.
    The parallels to what’s been happening in the last few years are eerie.

    Well, the author does make a valid point: This was just shockingly ‘in your face’ even by Wall Street’s standards. So who knows, maybe this will be a Pyrrhic Victory for the banksters.

    But don’t forget that Wall Street is basically the master of Pyrrhic Defeats, so you also have to wonder if the US mid term elections didn’t end up teaching Wall Street a very powerful lesson: A politically cynical and demoralized US public prefers to just stay at home rather than vote (because voting “none of the above” is apparently too much work to voice your dissatisfaction with the status quo) and when the voters don’t vote, the oligarchs win by default. In other words, base on American voting patterns, the oligarchs of the country have an incentive to be as openly awful as possible as long as the awfulness can be done in a bipartisan manner likely to demoralize Democratic-leaning voters.

    So maybe being extra ‘in your face’ awful is to the banksters’ long-term political advantage, at least long as both parties get blamed. And what better way to execute bipartisan awfulness than during a giant “Crominbus” bill that has to pass in order to prevent a government shutdown?

    And since emergency last-minute deal-making on giant spending bills is pretty much the way Congress functions now it should be horrifyingly interesting to see what kinds other surprises are hiding in the ‘crominbuses’ of the future. Or the present

    Posted by Pterrafractyl | December 12, 2014, 4:10 pm
  43. Revolving doors don’t oil themselves:

    The New Republic
    Wall Street Pays Bankers to Work in Government and It Doesn’t Want Anyone to Know

    By David Dayen
    February 4, 2015

    Citigroup is one of three Wall Street banks attempting to keep hidden their practice of paying executives multimillion-dollar awards for entering government service. In letters delivered to the Securities and Exchange Commission (SEC) over the last month, Citi, Goldman Sachs and Morgan Stanley seek exemption from a shareholder proposal, filed by the AFL-CIO labor coalition, which would force them to identify all executives eligible for these financial rewards, and the specific dollar amounts at stake. Critics argue these “golden parachutes” ensure more financial insiders in policy positions and favorable treatment toward Wall Street.

    “As shareholders of these banks, we want to know how much money we have promised to give away to senior executives if they take government jobs,” said AFL-CIO President Richard Trumka in a statement. “It’s a simple question, but the banks don’t want to answer it. What are they trying to hide?”

    The handouts recently received attention when Antonio Weiss, the former investment banker at Lazard now serving as counselor to Treasury Secretary Jack Lew, acknowledged in financial disclosures that he would be paid $21 million in unvested income and deferred compensation upon exiting the company for a job in government. Weiss withdrew from consideration to become the undersecretary for domestic finance under pressure from financial reformers, but the counselor position—which does not require congressional confirmation—probably still entitles him to the $21 million. The terms of the award are part of a Lazard employee agreement that nobody has seen.

    These payments are routine at major banks, several of which have explicit policies, found in filings with the SEC, outlining automatic awards for executives who rotate into government. Goldman Sachs offers “a lump sum cash payment” for government service, for example.

    Other banks’ policies are subtler. Banks often defer certain types of compensation in order to retain talent. When an executive terminates employment, unvested stock options and other forms of deferred compensation are usually forfeited. But several companies let executives’ equity options continue to vest if they leave for a government position, or allow them to keep retention bonuses that would otherwise be returned to the firm. A 2004 tax law banned accelerated payments but made an exemption for employees who leave for government service. Critics wonder whether the gifts are intended to fill the government with friendly faces who will act in their former employer’s interests.

    “It fuels the revolving door between banks and the government,” said Michael Smallberg, an investigator for the Project On Government Oversight (POGO), whose 22013 report detailed these types of compensation agreements. The average executive branch salary is substantially less than these millions in awards, so the bonuses effectively supplement the lower pay, raising questions about who the government officials actually work for.

    While questions about special Wall Street-to-government ‘golden parachutes” just are certainly important to ask, it’s also worth pointing out that, even if there were no golden parachutes at all, you have to question the wisdom of hiring people straight out of Wall Street for these positions at all. If you’re trying to find the best people to oversee a notoriously greed-driven industry, why hire someone that already took the ‘I wants lots of money and power’ career path in the first place?! Sure, there’s obviously going to be some useful talent working in Wall Street, but presumably they’re useful because they’re disgusted with how it operates and want to reform it and don’t think all that Wall Street cash is worth the guilt.

    If someone needs to be basically paid off to work for the government, how much is their expertise really worth even if they’re quite knowledgeable? It seems like there are better talent pools government agencies should be focusing on.

    Posted by Pterrafractyl | May 19, 2015, 5:33 pm
  44. Just FYI, Wall Street’s epidemic of late-onset affluenza has yet to peak:

    The New York Times
    Many on Wall Street Say It Remains Untamed

    MAY 18, 2015

    Andrew Ross Sorkin

    Wall Street has changed. But perhaps not as much as you would think.

    The past several years have been filled with headline-grabbing legal settlements by financial services firms — $11 billion here, $5 billion there. Most of them involved conduct that took place before the 2008 crisis. Virtually every major Wall Street firm has pledged to redouble its efforts to instill an ethical culture. And virtually all the large firms said that if there was bad behavior, it is behind them.

    Well, it isn’t.

    A new report on financial professionals’ views of their industry paints a troubling picture. Rather than indicating that Wall Street has cleaned itself up, it suggests that many of the lessons of the crisis still haven’t been learned. And the mind-boggling settlement numbers, as well as stringent new rules, like the of Dodd-Frank regulatory overhaul in 2010, appear to have had little deterrent effect.

    In the study, to be released Tuesday, about a third of the people who said they made more than $500,000 annually contend that they “have witnessed or have firsthand knowledge of wrongdoing in the workplace.”

    Just as bad: “Nearly one in five respondents feel financial service professionals must sometimes engage in unethical or illegal activity to be successful in the current financial environment.”

    One in 10 said they had directly felt pressure “to compromise ethical standards or violate the law.”

    And nearly half of the high-income earners say law enforcement and regulatory authorities in their country are ineffective “in detecting, investigating and prosecuting securities violations.”

    Two years ago, this column reported on an earlier version of this report. The attitudes were concerning then.

    This year, the University of Notre Dame — on behalf of the law firm Labaton Sucharow — expanded its questionnaire to more than 1,200 traders, portfolio managers, investment bankers and hedge fund professionals both in the United States and Britain. Its results appear even more noteworthy today for the sheer number of individuals who continue to say the ethics of the industry remain unchanged since the crisis (a third said that, by the way).

    Every report has an asterisk of some sort and this one does, too: Although it was conducted by Notre Dame and surveyed a large number of people in the industry, it was paid for by Labaton Sucharow, a firm that often represents whistle-blowers in cases against the financial services firms.

    But if anything, the opinions expressed demonstrate that despite the very public campaign by the government to root out bad behavior in finance, it remains a problem that still deserves attention, notwithstanding the industry’s protestations that it has changed.

    “The pattern of bad behavior did not end with the financial crisis, but continued despite the considerable public sector intervention that was necessary to stabilize the financial system,” William C. Dudley, the president of the Federal Reserve Bank of New York, said in a speech late last year on Wall Street culture. “I reject the narrative that the current state of affairs is simply the result of the actions of isolated rogue traders or a few bad actors within these firms.”

    Is there something inherent to Wall Street that leads to bad behavior?

    Mr. Dudley challenged the view that “risk-takers are drawn to finance like they are drawn to Formula One racing.”

    But there is truth to that. Wall Street is a business of risk-taking and those who seemingly do it most successfully find that edge of the line and get as close to it as possible without crossing it.

    Mr. Dudley, however, also made the case that “the degree to which an industry attracts risk-takers is not preordained, but reflects the prevailing incentives in the industry. After all, risk-takers have options. Second, and, more importantly, incentives matter even for risk-takers.”

    If incentives are the problem, the perspectives suggest a dire situation. Nearly one-third of those asked “believe compensation structures or bonus plans in place at their company could incentivize employees to compromise ethics or violate the law.”

    It is unfair to suggest the entire industry is a den of thieves. In many ways, Wall Street is quite different than it was before the crisis, and for the better.

    On virtually every question, those in Britain seem to indicate that ethics problems could be even more widespread there. “Respondents from the U.K. are either more willing to commit a crime they could get away with — or are more frank about it,” the report’s authors write.

    One of the big problems, it seems, is that so few people in finance are willing to speak up and report bad actors, even after the Securities and Exchange Commission developed a whistle-blower program.

    Many of those asked said they worried “their employer would likely retaliate if they reported wrongdoing in the workplace.”

    And quite a few said that they had signed, or been asked to sign, a confidentiality agreement that would prohibit them from reporting illegal or unethical behavior to the authorities.

    Equally disturbing was that many respondents said they would use nonpublic information to make a guaranteed $10 million, if there were no chance of getting arrested for insider trading. A quarter said they would do so. That’s up from two years ago, and it is that attitude of “getting away with it” that worries many who hope to root out problems in the industry.

    “The vast majority of people are good and ethical, but they have become desensitized on Wall Street,” said Jordan A. Thomas, a partner at Labaton Sucharow.

    “The vast majority of people are good and ethical, but they have become desensitized on Wall Street”

    Note that if we’re to take Wall Street’s excuses seriously, that sort of means the rich and powerful can’t really be trusted with their riches and power because their innocent minds are inevitably going to become infected by the larger affluenza echo-chamber they’re operating within.

    Sure, we often hear about how even if we taxed the rich at 100% you still wouldn’t get rid of poverty. And while that’s worth debating, it’s important to keep in mind that heavily taxing the super-rich doesn’t just allow for more money to help everyone else. It also helps stop the affluenza-infected individuals from using their riches to trash the rest of society. In other words, taxing the rich isn’t just about the redistribution of wealth. It’s also about not redistributing all the horrible affluenza-inspired bad ideas from the rich that inevitably make their way into the halls of power.

    The more money you have the more contagious your affluenza becomes.

    Posted by Pterrafractyl | May 20, 2015, 10:20 am
  45. Ben Bernanke just released a memoire which is inevitably going to include some “what should we have done differently?” speculation. Wall Street executives probably aren’t going to be thrilled to hear his recommendations for the Justice Department, but, then again, they should be very excited about the reason he has to issue the recommendation in the first place:

    USA TODAY
    Ben Bernanke: More execs should have gone to jail for causing Great Recession

    Susan Page,
    2:27 p.m. EDT October 4, 2015

    WASHINGTON — This season, Ben Bernanke was able to sit through an entire Nationals game.

    During the financial meltdown in 2008, the then-chairman of the Federal Reserve would buy a lemonade and head to his seats two rows back from the Washington Nationals dugout, a respite from crisis. But often he would find himself huddling in the quiet of the stadium’s first-aid station or an empty stairwell for consultations on his BlackBerry about whatever economic catastrophe was looming.

    “I think there was a reasonably good chance that, barring stabilization of the financial system, that we could have gone into a 1930s-style depression,” he says now in an interview with USA TODAY. “The panic that hit us was enormous — I think the worst in U.S. history.”

    With publication of his memoir, The Courage to Act, on Tuesday by W.W. Norton & Co., Bernanke has some thoughts about what went right and what went wrong. For one thing, he says that more corporate executives should have gone to jail for their misdeeds. The Justice Department and other law-enforcement agencies focused on indicting or threatening to indict financial firms, he notes, “but it would have been my preference to have more investigation of individual action, since obviously everything what went wrong or was illegal was done by some individual, not by an abstract firm.”

    He also offers a detailed rebuttal to critics who argue the government could and should have done more to rescue Lehman Brothers from bankruptcy in the worst weekend of a tumultuous time. “We were very, very determined not to let it collapse,” he says. “But we were out of bullets at that point.”

    Still, he does acknowledge some missteps by the Fed. Analysts were slow to realize just how serious the economic downturn would become, and he faults himself for not doing more to explain to Americans why it was in their interests to rescue the financial firms that had helped cause it.

    “Every time I saw a bumper sticker which said, ‘Where’s my bailout?’ it hurt,” he told Capital Download.

    The decision about whether to prosecute individuals wasn’t up to him, he says. “The Fed is not a law-enforcement agency,” he says. “The Department of Justice and others are responsible for that, and a lot of their efforts have been to indict or threaten to indict financial firms. Now a financial firm is of course a legal fiction; it’s not a person. You can’t put a financial firm in jail.”

    He would have favored more individual accountability. “While you want to do everything you can to fix corporations that have bad cultures and encourage bad behavior — and the Fed was very much engaged in doing that — obviously illegal acts ultimately are done by individuals, not by legal fictions.”

    “While you want to do everything you can to fix corporations that have bad cultures and encourage bad behavior — and the Fed was very much engaged in doing that — obviously illegal acts ultimately are done by individuals, not by legal fictions.”
    Corporations are people legal fictions, and as Bernanke points out, legal fiction justice is basically fictional justice. And you know who agrees: The Justice Department. Yes, it’s the agency that’s been in charge of actually perpetuating the legal fiction justice farce, but they now agree it’s farcical:

    The New York Times
    Financial Crisis Cases Sputter to an End

    White Collar Watch
    By Peter J. Henning
    APRIL 20, 2015

    Yogi Berra once said that “it ain’t over ‘til it’s over.” Unlike the final out or winning run in a baseball game, determining when cases arising from the 2008 financial crisis will end is a bit harder to discern. But the resolution of two cases last week clearly indicates that enforcement actions for conduct leading up to the crisis are pretty much done, with no real finding of liability for violations.

    In one case, the Securities and Exchange Commission resolved fraud charges against Richard F. Syron, the former chief executive of the mortgage giant Freddie Mac, and two other senior executives related to statements regarding the company’s exposure to subprime mortgages. The case did not even end with the usual settlement in which the defendants neither admitted nor denied liability. Instead, it concluded only with an acknowledgment “that no party is the prevailing party.”

    In the other case, the New York State attorney general, Eric T. Schneiderman, reached a $10 million settlement of accounting fraud charges against Ernst & Young for its role as the auditor for Lehman Brothers, whose collapse in September 2008 in the largest bankruptcy in American history ignited the near meltdown of the financial system. Although Mr. Schneiderman asserted that the resolution showed that auditors can be held accountable for violations, DealBook reported the the accounting firm’s statement that “after many years of costly litigation, we are pleased to put this matter behind us, with no findings of wrongdoing by E.Y. or any of its professionals.”

    Both cases took direct aim at conduct at the center of the financial crisis, and neither yielded anything close to a finding of actual wrongdoing.

    The S.E.C. dropped its investigation into Lehman Brothers in 2012 despite an extensive report by Anton R. Valukas that concluded that management was aware of accounting maneuvers used to make its finances look stronger than they were. No one at the firm ever faced a civil action, much less criminal charges, and the modest payment by Ernst & Young looks more like a nuisance settlement.

    In addition to the Freddie Mac defendants, three Fannie Mae executives, including its former chief executive, Daniel H. Mudd, were charged by the S.E.C. in December 2011 with the same type of violations regarding the company’s exposure to subprime loans. These were among the few cases to take aim at the management of a top player in the subprime mortgage market for its role in the financial crisis.

    The problem the S.E.C. faced in the Freddie Mac case was that there was no accepted definition of a subprime mortgage, so proving that Mr. Syron and others intentionally made misstatements about the effect of those loans on the company’s portfolio was almost impossible. The case against the Fannie Mae defendants remains outstanding, but it is unlikely the S.E.C. will obtain much more than what it obtained from the Freddie Mac executives, which included total payments of $350,000 that were covered by the company’s insurance policy.

    Prosecutors have been successful in using a provision of the Financial Institutions Reform, Recovery and Enforcement Act, better known as Firrea, to pursue civil cases against banks for violations of the mail and wire fraud statutes for misstatements about subprime loans bundled into securities that were sold to investors. JPMorgan Chase, Bank of America and Citigroup all paid multibillion-dollar settlements for Firrea violations. The law carries a 10-year statute of limitations, so cases from the financial crisis remain viable.

    In February, Attorney General Eric H. Holder Jr. said in a speech at the National Press Club that he had given federal prosecutors 90 days to decide whether to file charges against executives for misconduct related to mortgage-backed securities. That deadline is fast approaching, and there has been no indication yet that a case will be filed against any individuals.

    Banks have been willing to settle with hefty payments, but to date only one individual, a former executive at Countrywide Financial, has been found liable for a violation. Although Firrea remains a potent tool, evidence from the financial crisis is undoubtedly becoming stale because fraud cases, unlike fine wine, do not age well.

    DealBook reported last November that prosecutors were considering filing civil charges against Angelo R. Mozilo, Countrywide’s former chief executive, but nothing has materialized. Mr. Holder’s 90-day deadline may push prosecutors to file a few cases against individuals, but the likelihood of any being pursued against a top Wall Street executive looks to be almost nil.

    For all the billions of dollars paid in penalties by banks and Wall Street firms, the sense of dissatisfaction with how prosecutors investigated those involved in the financial crisis remains pervasive, especially when companies enter into multiple agreements that allow them to avoid charges for repeated misconduct but no individuals are named. The Justice Department has threatened to “tear up” a deferred or nonprosecution agreement if a company commits additional violations, but whether that will happen remains to be seen.

    Even that shift drew a rebuke from Senator Elizabeth Warren, who described it in a speech last week as a “timid step.” For corporate misconduct, she said, “no firm should be allowed to enter into a deferred prosecution or nonprosecution agreement if it is already operating under such an agreement — period.”

    With the era of financial crisis cases drawing to a close, the main lesson the Justice Department seems to have taken away is that the focus should be more on individuals who cause corporations to engage in misconduct rather than just the organizations themselves. In a speech last Friday at New York University, the head of the Justice Department’s criminal division, Leslie R. Caldwell, reiterated the point that the primary target will be those inside the company who are responsible for wrongdoing.

    Federal prosecutors expect cooperation for corporate misconduct, but self-reporting will no longer be enough to consider a company to be cooperative. “True cooperation, however, requires identifying the individuals actually responsible for the misconduct — be they executives or others — and the provision of all available facts relating to that misconduct,” Ms. Caldwell said.

    “With the era of financial crisis cases drawing to a close, the main lesson the Justice Department seems to have taken away is that the focus should be more on individuals who cause corporations to engage in misconduct rather than just the organizations themselves.”

    Posted by Pterrafractyl | October 4, 2015, 7:05 pm
  46. Mega-fines for mega-crimes: It’s just the cost of doing business:

    Bloomberg Business
    Deutsche Bank Sets Aside $1.3 Billion, Mostly for Subprime Probe

    Gavin Finch
    January 28, 2016 — 8:09 AM CST

    * DOJ probing how bank marketed mortgage-backed securities
    * Litigation cost for 2015 rose 165% to $5.7 billion vs 2014

    Deutsche Bank AG set aside an additional 1.2 billion euros ($1.3 billion) in the fourth quarter as it prepares to resolve a series of long-running regulatory investigations, including whether it improperly sold mortgage-backed securities to investors.

    “We’re working very hard on a number of cases where there are signs that we might be able to resolve them relatively soon,” Chief Executive Officer John Cryan told reporters at a press conference in Frankfurt. The next two years will “be burdened with, sadly, either direct costs or more provisions,” he said.

    Cryan is battling multiple regulatory investigations and rising public and political opprobrium following a string of scandals including a record fine for manipulating interest rates. Authorities are still probing allegations of money laundering at the firm’s Russian unit, and examining what role the bank played in the industry’s manipulation of currency exchange rates and precious metals trading.

    Deutsche Bank is one of several Wall Street firms being held to account by the U.S. government for creating and selling subprime mortgage bonds that helped spur the 2008 financial crisis.

    Authorities have already penalized four of the biggest U.S. banks — JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Goldman Sachs Group Inc. — more than $42 billion for misrepresenting to investors the quality of mortgage loans they securitized into risky bonds.

    ‘Millstone’

    Cryan said the various probes were “a millstone around the neck of the bank” after legal charges at Germany’s largest lender more than doubled to 5.2 billion euros last year. The firm has now racked up more than 13 billion euros in legal expenses since 2008, more than any other continental European institution.

    Deutsche Bank said it settled a number of regulatory investigations in the fourth quarter. In November, it agreed to pay $258 million to the Federal Reserve and New York’s Department of Financial Services, as well as fire six employees, to resolve a probe into sanctions violations from 1999 to 2006 for allegedly handling transactions linked to Iran, Libya, Syria, Burma and Sudan.

    The lender said in October that its review of Russian transactions had turned up violations of its internal policies and deficiencies in its anti-money laundering controls. It told investors that it had increased its litigation reserves by 1.2 billion euros, mainly to cover possible liabilities related to its Russian operation.

    The firm has shut much of its Moscow operation and has taken disciplinary action against the individuals involved. In November, the bank said it would stop accepting new customers in locations with high-risk ratings while it reviews how it vets account holders.

    “Cryan said the various probes were “a millstone around the neck of the bank” after legal charges at Germany’s largest lender more than doubled to 5.2 billion euros last year. The firm has now racked up more than 13 billion euros in legal expenses since 2008, more than any other continental European institution.”
    Note that these kind of “millstones” double as a US tax write-off. Again, it’s just a business expense.

    And in related news, guess which large bank has a new subprime auto loan probe to start saving up for…

    Posted by Pterrafractyl | January 28, 2016, 9:13 am

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