Smackdown

Dr. Jeffrey Sachs, a very influential/well-known professor from Columbia University, absolutely laid the smack-down on the American banking system. In case you have around 30 minutes to spare, do listen to this.

Examples:

• Wall Street is full of “crooks,” and it never properly cleaned up its act after the financial crisis of 2007 and 2008.
• What has been revealed, in my view, is prima facie criminal behavior
• It’s financial fraud on a very large extent. There’s also a tremendous amount of insider trading — you can even watch when you are living in New York how that works.
• We have a corrupt politics to the core, I am afraid to say, and . . . both parties are up to their neck in this. This has nothing to do with Democrats or Republicans.
• They have no responsibility to pay taxes; they have no responsibility to their clients; they have no responsibility to people, to counterparties in transactions. They are tough, greedy, aggressive and feel absolutely out of control in a quite literal sense, and they have gamed the system to a remarkable extent.

Remarkable. Do give it a look.

On the continuing LIBOR saga...

Wow, has it really been 9 days since I posted something here last? 

Have been busy but that shouldn't excuse the tardiness. I hope not to repeat this again. I haven't been totally off the grid, but have been collecting (assimilating?) info about the LIBOR saga, which is moving into really sticky terrain.

In no particular order,

In case you didn't quite get what LIBOR is from my long-winded explanation, here's a much better primer from Donald MacKenzie. What's in a number? One very important part that I left out earlier is that each input given by a bank is made public soon after the day's rate is published, which means that the manipulation, if any, was done entirely in public. 

Here's a link to a MS report on 'LIBOR Risk Sizing' for banks. A lot of jargon. Skip past all the predictions; if someone's put it down on paper somewhere, its a pretty good bet its not going to happen. The interesting part begins from Page 7 onwards, where they start with implications for UK banks, then go on to give details of litigation that the banks find themselves in, and on Page 9, where they give the disclosures that various banks have made in their filings. UBS looks next in the firing line, which is also what the chatter around the market has been.

Some good editorials/blog posts: Lie More, as a Business Model, where the author correctly identifies the role of incentives in this, and in my opinion, most other scams. If your income depends on you lying, chances are that you will lie. Also read this excoriating piece from the Economist: The Rotten Heart of Finance. From The London Banker, which I haven't been following, but must now, comes Lies, Damn Lies and LIBOR.

And from FT's Martin Wolf:

My interpretation of the Libor scandal is the obvious one: banks, as presently constituted and managed, cannot be trusted to perform any publicly important function, against the perceived interests of their staff. Today’s banks represent the incarnation of profit-seeking behaviour taken to its logical limits, in which the only question asked by senior staff is not what is their duty or their responsibility, but what can they get away with.

Ouch.

The Economist, also to be noted, has made 'Banksters' an official term. This will hurt.

The Telegraph says Lock 'em up!

Here's a linkfest not of my making. The Big Picture blog rounds up articles from 2007-08 which were talking about the LIBOR scandal. None of this is new, its just blowing up now...

September 26, 2007:  The Financial Times – Gillian Tett: Libor’s value is called into question

One of these is a growing divergence in the rates that different banks have been quoting to borrow and lend money between themselves. For although the banks used to move in a pack, quoting rates that were almost identical, this pattern broke down a couple of months ago – and by the middle of this month the gap between these quotes had sometimes risen to almost 10 basis points for three month sterling funds. Moreover, this pattern is not confined to the dollar market alone: in the yen, euro and sterling markets a similar dispersion has emerged. However, the second, more pernicious trend is that as banks have hoarded liquidity this summer, some have been refusing to conduct trades at all at the official, “posted” rates, even when these rates have been displayed on Reuters.

April 16, 2008:  The Wall Street Journal – Bankers Cast Doubt On Key Rate Amid Crisis 
The concern: Some banks don’t want to report the high rates they’re paying for short-term loans because they don’t want to tip off the market that they’re desperate for cash. The Libor system depends on banks to tell the truth about their borrowing rates. Fibbing by banks could mean that millions of borrowers around the world are paying artificially low rates on their loans. That’s good for borrowers, but could be very bad for the banks and other financial institutions that lend to them.

May 2, 2008:  The Wall Street Journal – Libor’s Guardian Bristles At Bid for Alternative Rate 
The group that oversees a widely used interest rate fired back Thursday at an effort to introduce an alternative to the rate, known as the London interbank offered rate, or Libor. In recent weeks, the British Bankers’ Association, which calculates Libor, has faced questions about the accuracy of the rates that a 16-bank panel submits to reflect their dollar-denominated borrowing costs. The group said a review of how Libor is calculated “is due to report shortly,” though it declined to offer an exact date. It also noted that any substitute for Libor — which is supposed to reflect the rates at which banks make short-term loans to one another — would have to meet high standards to “win the market’s confidence.” On Wednesday, ICAP PLC, a London broker-dealer with offices in New York, said it plans to launch a new measure of the rates at which banks borrow dollars. ICAP expects to begin publishing the rate, known as the New York Funding Rate, or NYFR, as soon as next week, said Lou Crandall, chief economist at Wrightson ICAP, a New Jersey research firm that is part of the ICAP group. Mr. Crandall said NYFR isn’t intended to replace Libor.

September 24, 2008:  The Wall Street Journal:  Libor’s Accuracy Becomes Issue Again
Questions on Reliability of Interest Rate Rise Amid Central Banks’ Liquidity Push
Earlier this year, Libor appeared to be sending false signals. Banks complained to the BBA that rival banks might not be reporting their true borrowing costs because they didn’t want to admit that others were treating them as if they had troubles. That led to a BBA review and the pledge that the rates banks contribute would be better policed. Every morning, 16 banks submit borrowing rates in a process that produces Libor rates at lunchtime in London.

October 20, 2008:  The Wall Street Journal – Bank-Lending Boost Could Spur Thaw 
On Friday, three big banks led by J.P. Morgan Chase & Co. made multibillion-dollar offers of three-month funds to European counterparts, causing an immediate stir in the shriveled markets for unsecured lending. That raised expectations that lenders would finally open their doors and businesses would be able to borrow again, removing one of the biggest stresses on the global economy.

In the story above (October 20, 2008), JP Morgan, a two trillion dollar bank, made $10 to $15 billion of LIBOR loans to other multi-trillion dollar banks and then proudly announced that LIBOR rates had fallen, the market was thawing and the credit crisis was easing.  As we wrote in 2008, this was nothing short of rigging the market.

Sum it up and all the revelations we are reading about this week were already evident about four years ago.  None of should be surprising.  As Jean-Claude Juncker told us last year, “when it becomes serious, you have to lie.”

David Merkel of The Aleph Blog delves into the LIBOR rates from 2005-2008 and this is what he comes up with:

My initial diagnosis is this: whether formally or informally, you have two groups of banks submitting rates for LIBOR.  One group is trying to pull LIBOR up, the other is trying to pull LIBOR down.  Statistically, if I add up their intercept terms from the first table, they both sum to 0.23%, one positive, the other negative.  Even if LIBOR were a simple average, which it is not, this is a colossal game of tug of war, with two equal teams.

As it is, LIBOR excludes the outliers, and calculates an average off of those that remain.  It’s a difficult measure to manipulate.  There may have been attempts to manipulate LIBOR, and even two groups of banks trying to pull LIBOR their own way, but successful systemic manipulation of LIBOR is unlikely in my opinion.

But if you disagree, here are the two clusters of banks, pursue their collusions:

Coalition to pull LIBOR up

• Barclays
• BTMU
• Credit Suisse
• HBOS
• Norinchuckin
• RBS

Coalition to pull LIBOR down

• Citi
• HSBC
• JP Morgan
• Lloyds
• Rabobank

Start with Barclays and JP Morgan, they are the outliers, and if there is collusion, they are the likely leaders.

 When all this is settled, it'll only be the lawyers who are left standing. Lawsuits...and more of the same. Apparently, we're moving on to criminal charges as well, which would be novel. Also here and here. My question is, why isn't any Indian firm suing these banks? C'mon, surely, surely someone in India has entered into a LIBOR-backed transaction. Who'll step up? 

The regulators knew something shady was up and really didn't bother about it... Here's Reuters on the same. This is the turn that the scandal has taken in the past week, with the focus shifted to the regulators. The NY Fed basically admitted that it knew Barclays used to manipulate LIBOR and did almost nothing about it. This should mean more bad news for the banks. If the regulators find themselves falling into a shit-hole, you can damned well be sure that they won't go in there first, or at least, not before pushing everyone else in before them. And now they'll be under more pressure to come down even more harshly on the banks.  

And after reading all this LIBORamayana, if you're still asking who/what LIBORam is, go here and here and also, see this:

Graphic by www.accountingdegree.net

CDR Cases - India (Oh, and copying?)

Two quick graphs on CDR cases in India via Reuters:

Any way you look at it, industry's not going to be able to pull on (well) for much longer. 


*******************************************************************************


The above was my original post. These pictures, I originally got from a Moneycontrol article titled: Deadbeat corporate borrowers? Not in India
Then I went searching on Reuters and to my surprise, got the same article, with the same title, same authors, same photo even and the same copy here: Deadbeat corporate borrowers? Not in India
See for yourself:

Agreed, on moneycontrol, it was filed under 'Wire News' but can we still do that? Just copy paste stuff from reputed news sites, without linking to the original, and scrape page views off? I guess I should get someone to write a script for me that does the same. Pageviews guaranteed.
Interesting...

A to Z of Bad Banking

Via The Independent. Putting up the entire thing here in case they decide to ever yank the page... See especially Bonus and Zoo.

Asset Backed Security: Or one of the things responsible for the mess we're in. You bundle together assets that are otherwise difficult to sell or trade, such as mortgages or car loans. You then sell shares in them to a variety of investors around the world such as banks, pension funds, even local councils (this was done with US sub-prime home loans, contaminating the globe when they went pop).

Adoboli, Kweku. The London-based UBS trader accused of fraud and false accounting over a $2bn trading loss, charges he denies.

Bonus: The prospect of which is what gets bankers out of bed in morning.

And Bad Debt. Loans, or other forms of credit, which don't look like they will be repaid. Lots of the Asset Backed Securities sold prior to the financial crisis count as this now.

Credit Default Swap: Or CDS. Derivative that is very similar to insurance. The buyer pays a premium and receives a pay-out if a company, or a country, goes bust. Neither buyer nor seller need to have any connection to the company (or country) concerned, which makes it look not so much like insurance as it does a bet: hedge funds and banks often buy them when their analysts think that a company (or country) is set to go belly up.

And Collateralised Debt Obligation or CDO. A type of Asset Backed Security (See Bad Debt).

And Chief Investment Office. The JP Morgan unit now showing losses of more than $3bn (and rising). JP says that its job was Hedging. Critics allege that its activities look rather more like Proprietary Trading.

Diamond, Bob: The chief executive of Barclays who has become the lightning rod for the controversy over Bonus(es) in Britain on account of his £17m pay package in 2011. Most of this came in the form of bonuses despite Barclays missing the financial targets he set.

And Derivatives. Lots of which are traded by investment banks. A derivative is a contract between two parties. Payments between them depend on the performance of an underlying variable. That variable can be a share price, or a currency or even the weather. Named because the contract is derived from the underlying variable. The number of these in circulation has been growing rapidly. You can even get derivatives of derivatives. Things get really interesting when an unexpected event, such as the credit crunch, throws the trading positions that banks take in derivatives into a spin.

Excess: Which is what the banking industry indulged in with wild abandon before the credit crunch got under way in 2007.

Fabulous Fab: Or Fabrice Tourre. The 31-year-old Frenchman and former Goldman Sachs employee is awaiting trial for fraud in the US where regulators allege that he failed to disclose that a hedge fund helped pick the debt that was bundled up into a CDO that he created with the intention of betting that it would blow up (with the help of CDSs). Goldman settled fraud charges for $550m without admitting liability after it did indeed blow up. Mr Tourre, whose lovelorn emails to a co-worker were published as part of the case, was earning $2m a year by the age of 28. His thirties have been harder. The New York Post has described him as a "weenie" and he's recently been doing volunteer work in Rwanda while studying for a PhD.

And Financial Conduct Authority, which will take over the job of Britain's chief financial watchdog from the Financial Services Authority, although the Bank of England's Prudential Regulation Authority will keep tabs on the financial health of banks.

Glass-Steagall Act: A US law dating from the 1930s' Wall Street Crash which was designed to control financial speculation and separate retail banks from investment banks. No longer in force. Which shows just how little we have learnt from history.

Hedging: A hedge is an investment position taken by a financial company with the intention of covering losses from another position. For example: Some brokers allow clients to take out Contracts for Difference (CFDs), which are bets on whether a share price will rise or fall. If a client places a bet with his broker that BP will rise, the broker then buys enough BP shares to cover the bet (this is the hedge). If the share rises, the broker can pay the client with its BP share profits. If the share falls, the client pays. The broker makes money either way by charging a fee. Hedges usually involve Derivatives and can get much, much more complex than the above example.

Inter-broker Dealer (IBD): These companies allow banks to trade all sorts of financial instruments with each other, anonymously. They are regularly involved in court battles with other IBDs over staff poaching. These tend to be quite colourful. Previous examples have featured revelations of cocaine use, strip clubs, and lots and lots of booze. The City at its most raw. Examples include ICAP, BGC Partners, Tullett Prebon.

Jamie: The nickname favoured by James Dimon, the boss of JP Morgan. A New Yorker who seemed to walk on water while steering an (apparently) smooth course through the financial crisis after which his bank emerged as the world's biggest. He was leading the industry's attack on banking reform until it emerged that JP had lost $2bn after a single London-based trader was allowed to build up huge positions in Derivatives. Oops.

Kerviel, Jerome: Another French rogue trader who racked up €4.9bn in losses at French bank Société Générale. A native of Britanny, he briefly became a counter-culture icon and is now appealing a conviction for breach of trust. The bank said he was a rogue trader who acted alone. This has been greeted with a degree of scepticism.

Lloyd, Blankfein: The boss of Goldman Sachs and crown prince of casino capitalism. A former lawyer turned financial trader, he joined Goldman when the latter bought J Aron & Co. Paunchy, bearded and with a fondness for conventional gambling (on the Las Vegas gaming tables) in an earlier life, he smartened up his act and became a master of the financial casino. Made $72m in 2007, according to Forbes magazine, which gave him the number one slot in its "Biggest CEO Outrages of 2009" after he told The Sunday Times that he was "just a banker doing God's work".

And London Whale. The Nickname of Bruno Iksil, yet another French trader. He built up huge trading positions, largely in debt, for JP Morgan's Chief Investment Office. They have now started to show huge losses.

Market abuse: In simple terms this is using knowledge you have but which other people don't have – either deliberately or by accident – to make a profit from shares, bonds, or anything else covered by the Financial Services & Markets Act. Also covers share ramping (spreading rumours to push up the price of shares that you hold) and various other nefarious practices. The FSA has become quite serious about policing it of late.

Non-status lending: Another way of saying sub-prime lending. It means lending to people with poor credit ratings. People who have previously defaulted on debts, or who don't have much of a credit history, for example. A major cause of the financial crisis. With interest rates low, banks started looking around for ways of generating higher yields. They thought non-status lending was the answer. By packaging up parcels of loans to these people you create a product with a potentially handsome yield because non-status borrowers have to pay very high interest rates whatever the base rates set by central banks like the Bank of England do. While more non-status borrowers tend to default than is usual with "prime" borrowers, this was supposedly factored into the way the products (Asset Backed Securities) were set up. Worked fine until nearly all the borrowers started defaulting.

Options: No not the Derivative of that name. Options as in share options. A way of paying executives and bankers by allowing them to buy shares at a fixed (low) price with the intention of selling them on at higher prices. Rather fallen by the wayside in favour of restricted shares, which are bought by the bank and handed over as a bonus at a later date if certain (usually rather simple) performance criteria are met. Regulators have demanded such shares be clawed back if banks make losses attributable to particular bankers. When Lloyds Banking Group clawed back shares from former executives in charge at the time of the Payment Protection Insurance scandal the squeals from the City could be heard in Outer Mongolia.

Proprietary Trading: Banks tend to have a lot of money sloshing around. They can either hold it safely in low-risk places, or they can use it to trade, taking bets on how markets will perform usually through the use of Derivatives. Can generate huge profits for banks and huge bonuses for bankers. Can also generate huge losses for taxpayers if things go wrong (But Bonus(es) tend not to be too badly hit).

Queen of Wall Street: The nickname given to Ina Drew, who has been dethroned thanks to being in overall charge of JP Morgan's Chief Investment Office when it started racking up big losses. Ms Drew will take the crown jewels with her: she made $15m a year before "retiring" and her pension plan is likely to be eye-popping.

Regulation: There wasn't much of this in the run up to the financial crisis. Bankers now claim the pendulum has swung too far the other way with ever higher capital requirements being imposed to cover banks against future losses and the European Parliament considering measures to force ever-lower bonuses. And Royal Bank of Scotland. Too little of that Regulation allowed its chief executive Fred Goodwin to steer the bank on to the rocks requiring a multibillion pound bail out.

Squid, Great Vampire, Wrapped Around the face of Humanity, Relentlessly Jamming its Blood Funnel into Anything That Smells Like Money: The memorable description of Goldman Sachs made by journalist Matt Taibi in Rolling Stone magazine in a lengthy evisceration of the company.

And SAS. The legendary regiment of which JP Morgan's top London dealmaker Ian Hannam is a veteran. After his discharge he turned to finance and transformed the face of the FTSE 100 index of Britain's biggest companies by filling it up with Kazakh copper miners and other assorted natural resources operations. This is controversial largely because their only connection with this country, aside from being listed here, is that their chief executives occasionally drop into London for a spot of lunch. Currently fighting an attempt by the FSA to fine him £400,000 for Market Abuse.

Trader: The boys, and occasionally girls, who take the big risks for banks and pocket the really big Bonus(es). They are also the people who make the really big losses but, until regulators forced a change in the rules, only after those bonuses had been banked.

Up the Creek: Which is where an economy like Britain's, which is horribly over-reliant on the City and financial services, has been left as a result of the financial crisis.

Volcker Rule: Named for Paul Volcker, a former chairman of the US Federal Reserve who proposed it. The rule is part of the US Dodd-Frank reforms which are designed to stop banks from making certain speculative investments and indulging in Proprietary Trading. Mr Volcker has suggested that such activities don't do anything to benefit customers but played a key role in the financial crisis. Jamie doesn't seem to like him very much and has been quite rude about him. However, some nasty people have suggested that the activities of the Chief Investment Office operated by JP Morgan rather proves Mr Volcker's point.

Wall Street: America's financial centre and where most of its big banks and brokers have their headquarters. Bitterly resented by Main Street, which is coda for pretty much everyone who suffers when it makes mistakes. Republicans have sought to exploit this resentment even though they receive quite a lot of money from Wall Street.

X Factor: Simon Cowell's TV show is often cited alongside the Bonus(es) lavished on bankers as a social ill. Some conservatives blame them for fostering a (possibly mythical) get rich quick or sulk about it mentality among Britain's youth.

Yesterday: The Beatles song, the lyrics to which are rather appropriate. It does seem like "Yesterday all our troubles were so far away". Thanks to the bankers and their financial crisis, swiftly followed by the eurozone crisis, they're pretty sure to be here to stay. Sir Paul McCartney said he believed in Yesterday. It's not a sentiment that's widely shared given what bankers were allowed to get up to then.

Zoo: A place where animals are held captive for people to go and see. The behaviour of said animals tends to be rather more civilised than that of the species frequenting the trading floors of big banks, and much of the rest of the banking industry, for that matter.

Yes, I know I've only been curating stuff... Will write more original stuff soon!