NEWS,20.08.2012

ECB: Greek exit viable but undesirable

A Greek exit from the eurozone would be manageable, European Central Bank (ECB) policymaker Joerg Asmussen was quoted on Monday as saying, although he would prefer it if the crisis-stricken country remained within the single currency bloc. He also said that the Bundesbank, whose chief ECB President Mario Draghi singled out earlier this month for expressing reservations over the bank's new bond-buying plans, was not isolated in Europe.The comments on Greece from the ECB executive board member, Germany's deputy finance minister until he took the post at the end of last year, sum up a growing debate in Berlin on the possibility of cutting Greece free. Most would prefer not to, but an increasing number of MPs and influential figures have come out of the woodwork saying the eurozone is strong enough to deal with the fallout. "Firstly, my clear preference is that Greece should remain in the currency union," Asmussen was quoted as saying in an advance copy of an interview due to appear in Germany's Frankfurter Rundschau on Monday. "Secondly, it is in Greece's hands to ensure that. Thirdly, a Greek exit would be manageable."But Asmussen also warned that a so-called Grexit would not be as orderly as some imagined: "It would be associated with a loss of growth and higher unemployment and it would be very expensive - in Greece, Europe as a whole and even in Germany."He also said it would be good if the eurozone's permanent bailout mechanism, the European Stability Mechanism (ESM), successor to the European Financial Stability Facility (EFSF), were up and running as soon as possible."The ESM is a better instrument for dealing with the crisis than the EFSF," he was quoted as saying.Germany's Constitutional Court has said it will deliver its ruling on whether the ESM and the fiscal pact are compatible with the German constitution on September 12. Germany cannot legally ratify the two treaties without the go-ahead from the court and the ESM cannot come into effect without German backing.On eurozone bonds, Asmussen said such common debt was only logical in a full fiscal union and added that they were not crisis management tools.Draghi indicated earlier this month that the euro zone's central bank may again start buying government bonds to reduce crippling Spanish and Italian borrowing costs but not before September and only if governments activated the euro zone's bailout funds to join the ECB in buying bonds.Whether the plan goes ahead at all, however, remains largely a question of whether leaders in Germany, whose own central bank opposes bond-buying, agrees over the course of a series of key meetings next month.Whereas Draghi said that Bundesbank chief Jens Weidmann had been the only ECB policymaker to register reservations against the bond-buying proposals at this month's meeting, Asmussen hinted that the division may not be as clear cut."No-one should try to give the impression that the Bundesbank or its president is isolated," said Asmussen, adding that he and Weidmann worked closely together and trusted each other.Noting that Draghi had not said the new bond-buying programme would be limited in terms of time and volume, the paper asked Asmussen if this meant it could be successful as it would be unlimited."You heard him correctly. But wait and see. We are working on further details of the new programme and we will discuss this at our next meeting," Asmussen replied.

The Unrepentant and Unreformed Bankers

These days, the business sections of newspapers read like rap sheets. GE Capital, JPMorgan Chase, UBS, Wells Fargo and Bank of America tied to a bid-rigging scheme to bilk cities and towns out of interest earnings. ING Direct, HSBC and Standard Chartered Bank facing charges of money laundering. Barclays caught manipulating a key interest rate, costing savers and investors dearly, with a raft of other big banks also under investigation. Not to speak of the unprecedented wrongdoing that precipitated the financial crisis of 2008.Evidence gathered by the Financial Crisis Inquiry Commission clearly demonstrated that the financial crisis was avoidable and due, in no small part, to recklessness and ethical breaches on Wall Street. Yet, it's clear that the unrepentant and the unreformed are still all too present within our banking system.A June survey of 500 senior financial services executives in the United States and Britain turned up stunning results. Some 24 percent said that they believed that financial services professionals may need to engage in illegal or unethical conduct to succeed, 26 percent said that they had observed or had firsthand knowledge of wrongdoing in the workplace, and 16 percent said they would engage in insider trading if they could get away with it.That too much of Wall Street remains unchanged is not surprising. Simply stated, the banks and their leaders have paid no real economic, legal or political price for their wrongdoing and thus have not felt compelled to change.On the economic front, the financial sector has rebounded nicely from its brush with death, thanks to an enormous taxpayer bailout. By 2010, compensation at publicly traded Wall Street firms had hit a record $135 billion.Last year, the profits of the nation's five biggest banks exceeded $51 billion, with their chief executives all enjoying pay increases. By 2011, the 10 biggest U.S. banks held 77 percent of the nation's banking assets.On the legal front, enforcement has been woefully inadequate. Federal criminal financial fraud prosecutions have fallen to a two-decade low. Violations are settled for pennies on the dollar  the mere cost of doing business, with no admission of wrongdoing and with the bill invariably picked up by insurers or shareholders. (When it's shareholders, that's not someone else far away, that's your 401(k), pension fund or mutual fund.) When Goldman Sachs was charged with failing to set policies to prevent insider trading, it was fined $22 million, an amount the bank collects in about seven hours of trading. Goldman's record $550 million penalty for securities fraud in 2010 amounted to less than 2 percent of that year's revenue.On the political front, after a brief stint in the penalty box, the big banks have resumed the political muscling that got them two decades of deregulation.To block reform, the financial industry has spent more than $317 million on lobbying in Washington over the past two years and more than $230 million in federal political contributions in the 2010 and 2012 election cycles.It's been to good effect. Two-thirds of the regulations called for in the financial reform law passed two years ago are still not in place. And the House Republicans, the banks' sturdiest allies, have slashed at the budgets of the Securities and Exchange Commission and the Commodities Futures Trading Commission to impede their ability to investigate wrongdoing.Clearly, the present order is unsustainable. We need to demand fundamental changes now, breaking up the big banks to snap their stranglehold on our markets and our democracy, ensuring that the newly minted financial reform laws are implemented, and wringing out rampant speculation.But true reform can only occur if we root out the corruption that has distorted our banking system and undermined the productive work of the many good people in the financial sector.The system of financial law enforcement is clearly broken. Think of it this way: If someone robbed a 7-Eleven of $1,000 but could settle a few days later for $25 and no admission of guilt, would they do it again?Only enforcement with real consequences will work. That means vigorous pursuit of criminal cases against individuals involved in wrongdoing, the surest method to deter malfeasance.It means enforcement agencies eschewing weak settlements in civil cases and seeking remedies with teeth such as civil penalties, restitution and executives forfeiting their jobs. And, it means tougher financial fraud laws. In that regard, the bipartisan proposal by Sens. Jack Reed, D-R.I., and Charles Grassley, R-Iowa, to increase fines for securities fraud is a place to start.To make any of this a reality, the U.S. Department of Justice and the federal regulators must have the will and the resources to do the job. President Obama has asked for additional funds for the Department of Justice, the SEC and the Commodities Futures Trading Commission. Giving these agencies the tools to detect and prosecute wrongdoing will more than pay for itself  the Commodities Futures Trading Commission's fine against Barclays for interest rate manipulation alone will pay for almost an entire year of that agency's budget.None of these changes will come easily, but this much is clear: We cannot allow Wall Street to continually flout our sense of right and wrong, to erode faith in our legal and political systems, and to put our financial system and economy in jeopardy.

NEWS,14.07.2012

JPMorgan Traders May Have Hidden Losses, Could Face Criminal Charges

 

JPMorgan Chase & Co said its traders may have deliberately hidden losses that have since climbed to $5.8 billion for the year, in a development that may result in criminal charges against traders at the bank.The losses came from bets on corporate debt now known as the "London Whale" trades made at JPMorgan's Chief Investment Office. Chief Executive Jamie Dimon said that in the worst-case scenario the derivatives trades would lose another $1.7 billion, and that the bank has fixed the CIO problems.Investors cheered the bank for capping losses and taking steps to ensure it avoids similar bad bets in the future. JPMorgan's shares rose nearly 6 percent on Friday.Even with the trading losses, JPMorgan earned nearly $5 billion overall in the second quarter, thanks to its strong performance in areas such as mortgage lending.The trading losses may be mostly over, but with the disclosure that traders may have lied about their losses, regulatory and legal consequences will linger for some time. Blame for the problems at the CIO office may go further up the management chain to some of the most senior executives at the firm, lawyers said.A source said that federal criminal investigators are looking at people at JPMorgan in London, where the CIO's risky bets were placed. The criminal investigation began in earnest in the past few weeks after JP Morgan's internal investigation uncovered that CIO traders may have intentionally masked losses, the source said."I see little doubt that someone is going to get charged with fraud," said Bill Singer, a lawyer at Herskovits in New York who provides legal counsel to securities industry firms, and publishes the BrokeandBroker website.Authorities ranging from the FBI to the U.S. Securities and Exchange Commission are probing the bank. The SEC could charge JPMorgan with weaknesses in oversight and internal controls, said James Cox, a securities law expert at Duke University."I think the SEC will continue to look at 'What exactly did Jamie Dimon know and when did he know it?'" Cox said.An internal review found that some of the CIO traders appear to have deliberately ignored the massive size of their trades - and the difficulty in liquidating them - when valuing their positions. The result was not reporting the full declines in the value of positions, which is forcing JPMorgan to restate its first-quarter results. The bank is cooperating with authorities.The trading losses and possible deception from traders are a black eye for Dimon, who was respected for keeping his bank consistently profitable during the financial crisis. Dimon, who has criticized regulators for meddling too much with banks, has lost credibility because of difficulties in his own house."How do we know there are not more roaches in the kitchen?" said Paul Miller, an analyst at FBR Capital Markets, referring to the maxim that seeing a single roach typically means there are far more hiding in the woodwork.The Chief Investment Office became infamous in May when JPMorgan said bad derivatives bets had triggered about $2 billion of paper losses, a figure that turned into $4.4 billion of actual losses in the second quarter.One trader in the CIO, Bruno Iksil, took big enough positions in the credit derivatives markets to earn the nickname "The London Whale." He made at least some of the big bets that caused trouble for the bank, and has since left JPMorgan, a source said on Friday.Ina Drew, who headed the CIO, has also left, and offered to give back as much of her pay as the bank was contractually entitled take back, said Dimon, whose pay could be taken back as well. A spokesman for the bank said JPMorgan had accepted Drew's offer.The bank said it had moved the bad trades from the CIO, which invests some of the company's excess funds, to its investment bank. JPMorgan was one of the inventors of credit derivatives, and its investment bank is one of the biggest traders of the product on Wall Street.The CIO will now focus on conservative investments, JPMorgan said. The bank has taken a number of other steps to prevent these types of losses from repeating, including changing the way it limits risk taking in the CIO's office."People feel good that the loss is largely contained at this point," said Nancy Bush, a banking analyst at independent research firm NAB Research.JPMorgan said later on Friday that its former CIO risk officer, Irvin Goldman, had resigned. Goldman "behaved with integrity and we wish him well," JPMorgan said.JPMorgan's shares rose $2.03 to close at $36.07 on the New York Stock Exchange.THE TEMPEST LEAVES THE TEAPOT The bank posted second-quarter net income of $4.96 billion, or $1.21 a share, compared with $5.43 billion, or $1.27 a share, a year earlier.The derivative loss after taxes reduced earnings per share by 69 cents, the company said.JPMorgan said it expected to file new, restated first-quarter results in the coming weeks, reflecting a $459 million reduction of income because of bad valuations on some of its trading positions. The bank found material problems with its financial controls during the period.The bank said its internal investigation combed through over a million emails, tens of thousands of taped conversations, and other evidence. It learned that some traders may have intended not to value their trading positions at the proper levels.In particular, the traders recorded the value of their trades at current market prices, rather than prices they would get if they liquidated their large positions, in an effort to avoid reporting their full paper losses.The bank made trades that were intended to protect it against the credit markets tanking, but allowed those positions to morph into bets on credit markets getting better.Friday's financial report came three months to the day after Dimon, 56, told stock analysts that news reports about Iksil and looming losses in London were a "tempest in a teapot."That remark, which Dimon told Congress last month was "dead wrong," added to the damage the loss has done to his reputation and his argument that his bank is not too big to be managed safely.A host of international regulators and agencies are probing the trading mishap. Besides the FBI and the SEC, they the UK's Financial Services Authority, the U.S. Federal Deposit Insurance Corp, the U.S. Commodity Futures Trading Commission, the U.S. Treasury's Office for the Comptroller of the Currency, and the Federal Reserve Bank of New York.

Libor Scandal May Hit U.S. Banks Harder Than Their British Counterparts

 

Barclays Plc and other UK banks may escape lighter than their U.S. rivals if shareholders seek damages in the wake of an interest rate-rigging scandal, because such cases are costlier and harder to win in Britain.Cases pursued in America by investors alleging they suffered a loss because of the wrongdoing of a financial institution, will often be deemed ineligible to be heard in U.S. courts when the bank in question is foreign, legal experts said.But if investors opt to take their cases to UK courts, they will find Britain's legal structures make such claims harder to win, costlier and riskier."Would we like to sue Barclays in the New York courts weknow well and we're very good at prosecuting in? Sure. But we're not going to because this is a UK situation," said Dominic Auld, a litigation expert at U.S. law firm Labaton Sucharow.Since Barclays admitted its role in manipulating the London interbank offered rate (Libor), lawyers on both sides of the Atlantic are taking calls from investors."I did take a call this morning from an institutional investor who is interested in looking at litigation both from a UK perspective and the U.S ... I expect there will be a good deal of similar interest," said Owen Watkins, a barrister in the corporate department of London law firm Lewis Silkin.More than a dozen banks are being investigated for their roles in setting Libor, including Citigroup, JPMorgan Chase & Co, Deutsche Bank, HSBC Holdings Plc , UBS and Royal Bank of Scotland..Morgan Stanley analysts have calculated the litigation risk to each of the 16 banks involved in setting Libor, an estimate of the rate at which banks could lend to each other and a benchmark for setting many other types of loans, at between $60 million to $1.1 billion. But lawyers say that while it was once commonplace for European investors to issue proceedings in the States, this transatlantic "legal tourism" was brought to an effective end in 2010 by a Supreme Court ruling in the United States.In a case brought against National Australia Bank, the court ruled U.S. securities laws do not have jurisdiction over so-called "F cubed" cases involving foreign investors and a foreign company traded on a non-U.S. market In the case of Barclays, only about 4 percent of its market capitalisation is traded in the U.S. in the form of American Depository Receipts. Any pursuit of meaningful damages from investment losses related to falls in Barclays' share price caused by the scandal will have to be carried out in Britain."Bringing proceedings here is not easy because there are various questions about causation. But most importantly Barclays would fight hard and you take a substantial risk in relation to costs that you would have to pay if you lost," said David Greene, senior partner at London-based law firm Edwin Coe.Furthermore, proceedings by institutional investors are rare and run against the traditions of the City of London financial district which had in part prompted disgruntled investors to make claims in the United States until it was halted by the F-cubed ruling."I don't think that sort of thing would be held in a UK court. I think they would just say the nature of the capital markets is shares go down as well as up. It's the guiding principle here," said one institutional investor who declined to be named because he is a major Barclays shareholder.