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Introduction: In FTR #‘s 772  and 792 , we looked at a rash of suspicious deaths in the banking industry, coinciding with a number of investigations into misdeeds by the institutions at which many of the deceased had been employed.
This program updates that line of inquiry, supplementing the previous broadcasts with discussion of some new, suspicious “suicides,” as well as problems looming on the horizon of the global financial lanscape.
Beginning with a Financial Times story about a social psychology experiment indicating that the banking profession inclines those who work in it toward dishonesty, the broadcast notes the deaths of Deutsche Bank’s Calogero Gambino  and Citicorp’s Shawn Miller , both supposed “suicides.”
Both Citigroup and Deutsche Bank are among the financial institutions under investigation for various misdeeds. Deutsche Bank is a target  of the New York Fed’s critical eye at the moment.
Adding to anxieties about the future of the financial industry is the dabbling by maj0r investment banks in commodities. A Senate investigation found that those institutions’ exposure to fluctuations in the commodites’ markets placed them–and by extension US–at risk.
Much of the program sets forth a story about a scary fluctuation in the market for U.S. Treasury bills, a financial safe haven of choice in these perilous economic times. From the standpoint of statistical probability, the chances of such an event happening is roughly once in every 1.6 billion years!
Program Highlights Include: Calogero Gambino’s previous work for the SEC; review of the death of Deutsche Bank’s William Broeksmit; comparison of the roles of Broeksmit and Gambino at Deutsche Bank; collation of the endeavors of some of the deceased bankers and activities being investigated by various regulatory bodies; Citigroup’s Shawn Miller’s 911 calls prior to his “suicide;” Shawn Miller’s animated arguments with an unidentified man prior to his “suicide;” rumination about the precipitous decline in the price of oil and its possible impact on investment banks that have engaged in commodities speculation; deleterious effects of the investment banks’ commodities investing,
1. Worth considering is the possibility that the problem is, in the most literal sense of the term, “systemic.”
“Banking Makes You Less Honest, Research Finds” by Clive Cookson; Financial Times; 11/20/2014; p. 3.
Swiss researchers have come up with what they say is compelling scientific evidence that bankers lie for financial gain.
The team at the University of Zurich used game playing experiments to show “that the prevailing culture in the banking industry weakens and undermines the honesty norm, implying that measures to reestablish an honest culture are very important.”
The study, published in the journal Nature, probes the psychology behind what the researchers call ‘a dramatic loss of reputation and a crisis of trust in the financial sector” as a result of rogue trading, rigged interest rates such as Libor and tax evasion scandals. . . . . .
If everyone was completely honest, the proportion of winning tosses across each group would be 50 per cent. The control group came close to this with 51.6 percent.
The treatment group, who had been primed by the preliminary questions to think about banking, reported 58.2 per cent winning tosses–a statistically significant tilt towards dishonesty; the proportion who cheated was estimated at 26 per cent. . . .
2a. Deutsche Bank is in hot water, according to the New York Fed.
The Federal Reserve Bank of New York has found serious problems in Deutsche Bank AG’s U.S. operations, including shoddy financial reporting, weak technology and inadequate auditing and oversight, people close to the matter told Reuters.
In a letter to the German lender’s executives last December, a senior official with the New York Fed described financial reports produced by some of the bank’s U.S. divisions as “low quality, inaccurate and unreliable”, said one of the sources, who is familiar with the letter.
The New York Fed, as the U.S. central bank’s eyes and ears on Wall Street, directly supervises the biggest U.S. and foreign banks, partly through embedded regulators who go to work each day inside the firms.
“The size and breadth of errors strongly suggest that the firm’s entire U.S. regulatory reporting structure requires wide-ranging remedial action,” said the letter, first reported by the Wall Street Journal. (http://on.wsj.com/1r3VIn3 )
The New York Fed declined to comment, citing the confidentiality of supervisory activities. The European Central Bank and German financial watchdog Bafin declined to comment.
Deutsche said it was investing 1 billion euros ($1.4 billion) to upgrade its internal systems, including the quality of its reporting, with about 1,300 people working on the improvements. “We have been working diligently to further strengthen our systems and controls,” a spokeswoman said.
The letter is nonetheless a blow to Deutsche Bank co-Chief Executives Juergen Fitschen and Anshu Jain, who have been seeking to transform the lender’s corporate culture amid scandals, investigations and fines following the financial crisis of 2008–2009.
While the New York State Department of Financial Services is looking at Deutsche in relation to issues including possible forex manipulation and Iran sanctions violations, the New York Fed’s concerns are separate and arose from routine examinations by its staff, a source familiar with the matter said. . . .
2b. Did Deutsche Bank’s difficulties–set forth above–have anything to do with the suicide of Calogero Gambino?
Back on January 26, a 58-year-old former senior executive at German investment bank behemoth Deutsche Bank, William Broeksmit, was found dead after hanging himself at his London home, and with that, set off an unprecedented series of banker suicides throughout the year which included former Fed officials and numerous JPMorgan traders.
Following a brief late summer spell in which there was little if any news of bankers taking their lives, as reported previously , the banker suicides returned with a bang when none other than the hedge fund partner of infamous former IMF head Dominique Strauss-Khan, Thierry Leyne, a French-Israeli entrepreneur, was found dead after jumping off the 23rd floor of one of the Yoo towers, a prestigious residential complex in Tel Aviv.
Just a few brief hours later the WSJ reported that yet another Deutsche Bank veteran has committed suicide, and not just anyone but the bank’s associate general counsel, 41 year old Calogero “Charlie” Gambino, who was found on the morning of Oct. 20, having also hung himself by the neck from a stairway banister, which according to the New York Police Department was the cause of death. We assume that any relationship to the famous Italian family carrying that last name is purely accidental. . . .
. . . . As a reminder, the other Deutsche Bank-er who was found dead earlier in the year, William Broeksmit, was involved in the bank’s risk function and advised the firm’s senior leadership; he was “anxious about various authorities investigating areas of the bank where he worked,” according to written evidence from his psychologist, given Tuesday at an inquest at London’s Royal Courts of Justice. And now that an almost identical suicide by hanging has taken place at Europe’s most systemically important bank, and by a person who worked in a nearly identical function — to shield the bank from regulators and prosecutors and cover up its allegedly illegal activities with settlements and fines — is surely bound to raise many questions.
The WSJ reports that Mr. Gambino had been “closely involved in negotiating legal issues for Deutsche Bank, including the prolonged probe into manipulation of the London interbank offered rate, or Libor, and ongoing investigations into manipulation of currencies markets, according to people familiar with his role at the bank.”
He previously was an associate at a private law firm and a regulatory enforcement lawyer from 1997 to 1999, according to his online LinkedIn profile and biographies for conferences where he spoke. But most notably, as his LinkedIn profile below shows, like many other Wall Street revolving door regulators, he started his career at the SEC itself where he worked from 1997 to 1999. . . .
. . . . Going back to the previous suicide by a DB executive, the bank said at the time of the inquest that Mr. Broeksmit “was not under suspicion of wrongdoing in any matter.” At the time of Mr. Broeksmit’s death, Deutsche Bank executives sent a memo to bank staff saying Mr. Broeksmit “was considered by many of his peers to be among the finest minds in the fields of risk and capital management.” Mr. Broeksmit had left a senior role at Deutsche Bank’s investment bank in February 2013, but he remained an adviser until the end of 2013. His most recent title was the investment bank’s head of capital and risk-optimization, which included evaluating risks related to complicated transactions.
A thread connecting Broeksmit to wrongdoing, however, was uncovered earlier this summer when Wall Street on Parade referenced his name in relation to the notorious at the time strategy provided by Deutsche Bank and others to allow hedge funds to avoid paying short-term capital gains taxes known as MAPS (see How RenTec Made More Than $34 Billion In Profits Since 1998: “Fictional Derivatives ”)
From Wall Street on Parade :
Broeksmit’s name first emerged in yesterday’s Senate hearing as Senator Carl Levin, Chair of the Subcommittee, was questioning Satish Ramakrishna, the Global Head of Risk and Pricing for Global Prime Finance at Deutsche Bank Securities in New York. Ramakrishna was downplaying his knowledge of conversations about how the scheme was about changing short term gains into long term gains, denying that he had been privy to any conversations on the matter.
Levin than asked: “Did you ever have conversations with a man named Broeksmit?” Ramakrishna conceded that he had and that the fact that the scheme had a tax benefit had emerged in that conversation. Ramakrishna could hardly deny this as Levin had just released a November 7, 2008 transcript of a conversation between Ramakrishna and Broeksmit where the tax benefit had been acknowledged.
Another exhibit released by Levin was an August 25, 2009 email from William Broeksmit to Anshu Jain, with a cc to Ramakrishna, where Broeksmit went into copious detail on exactly what the scheme, internally called MAPS, made possible for the bank and for its client, the Renaissance Technologies hedge fund. (See Email from William Broeksmit to Anshu Jain, Released by the U.S. Senate Permanent Subcommittee on Investigations .)
At one point in the two-page email, Broeksmit reveals the massive risk the bank is taking on, writing: “Size of portfolio tends to be between $8 and $12 billion long and same amount of short. Maximum allowed usage is $16 billion x $16 billion, though this has never been approached.”
Broeksmit goes on to say that most of Deutsche’s money from the scheme “is actually made by lending them specials that we have on inventory and they pay far above the regular rates for that.”
It would appear that with just months until the regulatory crackdown and Congressional kangaroo circus, Broeksmit knew what was about to pass and being deeply implicated in such a scheme, preferred to take the painless way out.
The question then is just what major regulatory revelation is just over the horizon for Deutsche Bank if yet another banker had to take his life to avoid being cross-examined by Congress under oath? For a hint we go back to another report, this time by the FT, which yesterday noted  that Deutsche Bank will set aside just under €1bn towards the numerous legal and regulatory issues it faces in its third quarter results next week, the bank confirmed on Friday.
In a statement made after the close of markets, the Frankfurt-based lender said it expected to publish litigation costs of €894m when it announces its results for the July-September period on October 29.
The extra cash will add to Deutsche’s already sizeable litigation pot, where the bank has yet to be fined in connection with the London interbank rate-rigging scandal.
It is also facing fines from US authorities over alleged mortgage-backed securities misselling and sanctions violations, which have already seen rivals hit with heavy fines.
Deutsche has also warned that damage from global investigations into whether traders attempted to manipulate the foreign-exchange market could have a material impact on the bank.
The extra charge announced on Friday will bring Deutsche’s total litigation reserves to €3.1bn. The bank also has an extra €3.2bn in so-called contingent liabilities for fines that are harder to estimate.
Clearly Deutsche Bank is slowly becoming Europe’s own JPMorgan — a criminal bank whose past is finally catching up to it, and where legal fine after legal fine are only now starting to slam the banking behemoth. We will find out just what the nature of the latest litigation charge is next week when Deutsche Bank reports, but one thing is clear: in addition to mortgage, Libor and FX settlements, one should also add gold. Recall from around the time when the first DB banker hung himself: it was then that Elke Koenig, the president of Germany’s top financial regulator, Bafin, said that in addition to currency rates, manipulation of precious metals “is worse than the Libor-rigging scandal.”
It remains to be seen if Calogero’s death was also related to precious metals rigging although it certainly would not be surprising. What is surprising, is that slowly things are starting to fall apart at the one bank which as we won’t tire of highlighting , has a bigger pyramid of notional derivatives on its balance sheet than even JPMorgan, amounting to 20 times more than the GDP of Germany itself, and where if any internal investigation ever goes to the very top, then Europe itself, and thus the world, would be in jeopardy.
3. Add the name of Citigroup banker Shawn Miller to the list of collateralized “death” obligations.
“Banker, 42, Slashed His Own Throat in Manhattan Bathtub During Drug-and-Booze-Filled Bender: Sources” by Tina Moore, Rocco Parascandola and Bill Hutchinson; New York Daily News; 11/19/2014. 
The death of a Citigroup banker found with his throat slashed in his posh Manhattan pad was being investigated Wednesday as an apparent suicide, sources told the Daily News.
Shawn Miller’s body was found Tuesday afternoon in the bathtub of his Greenwich St. apartment in Lower Manhattan, his throat slashed ear-to-ear.
Cops initially suspected foul play, saying earlier that no weapon was found in the apartment and that Miller, 42, was caught on surveillance video arguing with a male companion in the building’s elevator.
When crime scene investigators moved Miller’s body, they discovered a knife under him, leading them to believe he slashed his own throat and collapsed into the tub on top of the weapon, sources said.
Detectives now suspect Miller killed himself after going on a booze- and drug-fueled bender since at least Monday with a stranger he hooked up with through the classified advertising website Backpage.com, the sources said.
Police found evidence of alcohol and drug use in the apartment, including what appeared to be crystal meth, sources said.
The man who Miller was arguing with in the elevator apparently left the banker’s apartment late Sunday or early Monday, sources. Miller called down to the lobby and asked the doorman not to allow the man back into the building, according to sources.
Detectives found no evidence the man returned to the building and there was no sign of a break-in or struggle in Miller’s apartment, sources said.
Shawn Miller’s body was found Tuesday afternoon in the bathtub of his Greenwich St. apartment in Lower Manhattan.
Records showed that at least two 911 calls were made from Miller’s apartment since Monday. The caller, believed to be Miller, complained about someone outside his building stalking him, sources said.
The body was found at 3:11 p.m. Tuesday after Miller’s boyfriend called and pleaded with the building’s doorman to check on Miller’s welfare, sources said.
Citigroup confirmed Miller’s death in a statement. Miller was managing director of environmental and social risk management and had worked for the financial services firm since 2004.
“We are deeply saddened by this news and our thoughts are with Shawn’s family at this time,” the Citigroup statement reads.
Miller’s LinkedIn profile described him as “a thought leader and pioneer in sustainable finance focused on creating change and building sustainable business through collaboration, engagement and partnership with others.”
He was a 1995 graduate the Maxwell School of Citizenship and Public Affairs at Syracuse University.
4. Speculation in commodities by major banking institutions places the financial system at risk.
“US Blasts Banks’ Commodities Deals” by Gina Chon; Financial Times; 11/20/2014; p. 13.
Goldman Sachs, JP Morgan and Morgan Stanley exposed themselves to catastrophic financial risks, environmental disasters and potential market manipulation by investing in oil, metals and power plant businesses, according to a senate report.
The findings of the two-year probe by the Senate investigations subcommittee said that the banks’ involvement in the physical commodities put them in the same vulnerable position as BP, which has been hit with several lawsuits and billions of dollars in fines because of the 2010 Gulf of Mexico oil spill.
“Imagine if BP had been a bank,” said senator John McCain, the senior Republican on the subcommittee. “The liability from the oil spill would have led to its failure, leading to another taxpayer bailout.”
A 2012 Federal Reserve review found four financial groups, including the three in the subcommittee report, had shortfalls of up to $15bn to cover “extreme loss scenarios,” the report said, the Fed is considering restricting banks’ physical commodity activities.
The report also says the banks’ ownership or investments in physical commodity businesses gave them inside knowledge that allowed them to financially benefit through market manipulation or unfair trading advantages. . . .
“Anatomy of a Market Meltdown“by Tracy Alloway and Michael MacKenzie; Financial Times; 11/18/2014; p. 7.
The Sharp fall in Treasury bond yields on October 15 has drawn comparisons to the ‘flash crash’ in stocks. Regulators and investors are asking if the world’s financial safe haven needs to be shored up.
Legend has it that a young man once asked the financier J Pierpont Morgan what the stock market was going to do. “It will fluctuate,” Mr. Pierpont is said to have replied.
Had the young man asked Mr. Pierpont about today’s US Treasury market – where the US government sells trillions of dollars worth of bonds to a wide range of investors – he may have received a very different response.
For decades, the US Treasury market has been a bedrock of global finance. While stock markets are prone to sudden price swings, such episodes in the vast and easily-transacted world of Treasuries have been far rarer – giving the market an exceptional reputation for orderly trading.
That reputation took a big hit last month.
On October 15, the yield on the benchmark 10-year US government bond, which moves inversely to price, plunged 33 basis points to 1.86 per cent before rising to settle at 2.13 per cent. While that may not seem like much, analysts say the move was seven standard deviations away from its intraday norm – meaning it might be expected to occur once every 1.6bn years.
For several minutes, Wall Street stood still as traders watched their screens in disbelief. Electronic pricing machines, which now play a bigger role than ever in the trading of Treasuries, were halted and orders cancelled by nervous dealers as prices see-sawed.
The events have sparked a financial “whodunit” as investors, traders and regulators seek to understand what happened – and to determine whether October 15 was a unique event or a harbinger of further perilous trading conditions to come.
“We’re all looking for a chief reason because clients want to understand the impetus behind market volatility,’ says Reggie Brown, head of exchange-traded fund trading at Cantor Fitzgerald.
Among US regulators’ concerns is whether a tougher regulatory climate for big banks, coupled with the inexorable rise of electronic trading, has fundamentally altered how the $12.4tn government bond market functions. The answer has profound consequences for the conduct of Federal Reserve policy and how the US funds its national debt.
For the Fed, the resilience of the Treasury market will be a consideration as it begins to raise interest rates. Analysts say the risk of a highly volatile market reaction suggests the central bank will move in measured steps when it begins to raise borrowing costs, which many expect to begin next year.
One worry is that the US Treasury market might have suffered a pronounced loss of support for prices – or “liquidity” in financial parlance – due to changes that have swept over Wall Street including the rise of computer-driven trading. Some draw parallels with the “flash crash” that hit stock markets in May 2010, which eventually spurred efforts to reform the wider equity market.
James Angel, associate professor at Georgetown University, says the US Treasury market should be regulated in a different way now that it has embraced electronic trading.
“When people use computers to provide prices across markets it [liquidity] can be withdrawn in a heartbeat,” he says. “How much market liquidity really exists under this type of market structure and what changes should be made are the questions for regulators.”
Unlike other bond markets, US Treasuries are viewed as being open for business for the entire global trading day. They also enjoy safe-haven status during times of tension. The immense size of the market means investors can easily express opposing views about the direction of interest rates by buying or selling the government debt.
Any indication that the market can suddenly shut down with little warning raises troubling questions about how the nature of trading has changed in recent years. Electronic systems are more visible to the whole market, so trades tend to be smaller than those that take place in private telephone conversations between dealers and investors.
A recent gathering of US Treasury officials and key representatives of dealers and investors, known as the Treasury Borrowing Advisory committee, held in a Washington hotel, revealed “a wide variety of views regarding the potential drivers of the intraday volatility” on October 15. Members of the TBAC include JPMorgan Chase, RBS, Morgan Stanley, BlackRock, Pimco, Citadel, Brevan Howard and other major players in the Treasury market.
A number of US regulatory agencies are looking at last month’s Treasury market mayhem. An official at the Federal Reserve Bank of New York told the Financial Times: “In the course of our normal market monitoring we regularly explore and assess market developments.”
Timothy Massad, chairman of the US Commodity Futures Trading Commission, which regulates interest rate futures trading at the Chicago Mercantile Exchange, said that the agency’s initial view was that the market had functioned reasonably well given the high number of trades.
“Let me just add, that’s based on our preliminary look. New evidence might come to our attention that suggests otherwise.”
When dawn broke on a grey October 15 in New York, traders and investors had plenty of reasons to be nervous. Concerns over the spread of Ebola and weakening economic activity in Europe and China were weighing heavily – helping to push bond yields lower as investors sought the refuge of US treasuries.
The scuppering of AbbVie’s L32bn [pounds] deal to acquire Shire left many big hedge funds nursing heavy equity losses and may have contributed to the rapid repositioning that would eventually engulf markets.
When US retail sales for September flashed across news screens at 8:30am and confirmed the first monthly decline since January, concern mounted among investors that the US economy could well be softening. For investors who had positioned themselves for a strengthening economy that would propel the Fed to raise interest rates before 2017, it was a painful reversal of sentiment. Many had placed record bets on interest rates moving higher via futures contracts listen on the CME.
With many hedge funds and money managers already suffering a poor year, their offside wagers on interest rates and other failing trades now required emergency action. What subsequently unfolded, according to traders, was a series of massive positions being liquidated and dumped onto the market.
One hedge fund manager recalls being bewildered by subsequent events: “What on earth was charging through the market to want volume at such a price and why, in response to that catalyst, did the electronic marketplace just take any and all liquidity away?”
By 8:45am, liquidity began noticeably deteriorating, and the process accelerated after 9:30am, according to data from Nanex, a market research firm. By 9:33am, the yield on the 10-year Treasury had sliced through the critical 2 per cent level, causing many who had bet on rising yields finally to capitulate and close out their negative bets by buying back US government debt and various interest rate futures contracts.
In September, hedge funds had established a record net “short” position in interest rate futures according to CFTC weekly data. Between the end of September and the week ending October 21, this big bet shrunk from 1.27m contracts to just 217,000 reflecting more than $1tn of notional exposure being cut.
“The elephant tried to squeeze through the keyhole,” says John Brady, managing director at RJ O’Brien, a futures broker in Chicago.
Eric Hunsader, Nanex chief executive, says the scale of the shift in US Treasury prices may have prompted the “market-makers” who usually support trading of the debt to retreat: “The speed of the move was abnormal and trading systems lack historical data for such episodes that can provide them with some guidance.”
When the day drew to a close nearly $1tn worth of cash Treasuries had changed hands, illustrating the intensity of the rush for the exit. Such huge volumes also show liquidity was available, but was possibly difficult to obtain at prices deemed reasonable by investors on the day and amid rapidly fluctuating markets.
The head of trading at a major dealer-bank says: “Once volatility shows up, you don’t want to make a mistake in a fast market and so you always see dealers pull back from providing prices.’
Compounding such pressures are changes that have transformed Wall Street since the financial crisis, with the big banks who once dominated Treasury trading now under tougher balance sheet constraints thanks to regulation and newfound aversion to risk.
This trend has encouraged greater electronic trading and a migration of experienced traders fro dealers to hedge funds and asset managers, leaving a younger generation of traders manning Treasury desks at big banks. Many of these have never experienced the gung-ho pre-crisis days when banks were more willing to make bets on the market.
“The appetite to take on a position is lower than it was pre-new regulation,’ says Greg Gurevich, managing partner at Maritime Capital Partners, adding that compensation structures “do not reward the trader to take risk that may ultimately cost the trader his or her job”.
The two main electronic trading venues for US Treasuries are run by Nasdaq’s eSpeed and Icap’s BrokerTec. In recent years these platforms have opened up to a range of broker-dealers and high-frequency traders. These firms do not underwrite US Treasury debt sales and are often viewed as opportunistic – providing prices when they spot a quick profit and then retreating when trading turns tricky.
Customer orders are now transacted and almost instantaneously hedged, or offset, by computer systems – a type of automation that works well when trading is orderly but rapidly breaks down when the situation changes. At such moments, turning off the machines becomes a necessity. This contributed to the downdraft in liquidity on October 15.
“Dealer-banks don’t really position in bonds,’ said one head trader at a large US bank. “They basically act as a pass-through to places like BrokerTec and eSpeed or match off their client flow. The market-makers in this new market are not obligated to be there when everyone’s selling.”
The worry is that even the highly dependable US Treasury market may suffer from sudden droughts in liquidity because big banks have been barred from “proprietary” trading. The “prop traders” could take the other side of huge customer demand to buy or sell bonds.
“If the Street – for balance sheet, risk appetite and regulatory reasons – can’t provide a speed bump between buyers and sellers such as hedge funds and asset managers, then the Treasury market will experience a lot more jumps in trading,” says one trader.
As the market becomes increasingly driven by electronic trading, more rules may be required to help deal with sudden violent swings, similar to the adoption of circuit breakers in stock markets.
Prof Angel says: “The Treasury market is a freewheeling world where trading is not formalized like that of an exchange and where the use of circuit breakers can help steady activity.” These kind of curbs matter for markets that increasingly trade electronically and also influence other financial areas, such as derivatives and futures.
A broader consequence of last month’s turmoil may be that Fed rate rises will be more likely to take the form of a series of slow steps, rather than big moves that run the risk of sparking turmoil in the bond markets, according to analysts.
For the US Treasury, which is responsible for making sure budget deficits and maturing debt are refinanced smoothly, further episodes of turmoil could well impair the market’s ability to underwrite government debt efficiently, says Michael Cloherty, analyst at RBC Capital Markets.
Mr. Cloherty says the US Treasury market has altered structurally and lacks the depth to absorb easily surprises in Fed policy and changes in market sentiment. This trend has gathered pace as the central bank has become a major owner of Treasury debt through its emergency bond-buying programme, further limiting liquidity.
He adds that any sign that the Treasury market’s liquidity has declined would cast a shadow over investor confidence – and may ultimately raise the cost of selling government debt.
Says Mr. Cloherty: “Investors know they can trade large amounts of Treasuries and any erosion of confidence in the market’s liquidity has long-term consequences.”