Tag Archives: banks

Wall Street: The Crematory Of Capitalism

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Bill Cara:

“Independent traders know as a fact that Humungous Bank & Broker (HB&B) research analysts are biased and unaccountable. We also know they give short-term tips to their firm’s proprietary traders and sales people that are at odds with their longer-term published opinions. These unfair practices are permitted because the fundamental conflict of interest structure of the securities industry is permitted.

Today the Wall St Journal has reported that FINRA (the Financial Industry Regulatory Authority) has launched a broad inquiry into how up to a dozen Wall Street firms disseminate stock ratings and research. Important questions are being asked.

On August 24 this year, WSJ informed the public of how Goldman Sachs analysts were tipping their traders with info that differed from published reports. These regular meetings were called “trading huddles”. At the time, I called it insider trading, which is criminal.”

My Comment:

A reader commented earlier that “insider trading” is a big yawn as a story  (for the latest insider trading arrest, see this case, of an ex-banker from Lazard, a relatively small case, admittedly)

Someone might come to that conclusion only if their knowledge of the practice were abstract and based on theoretical debate on the subject. But anyone who knows the history of the capital markets over the last 30 years or so knows that a big part of the story is that investment (merchant) banks turned into traders by the end of the century and that their proprietary trading became more important to them than their retail clients or customers. I’ve written about this in relation to Goldman Sachs, which was the most egregious (because it was the most powerful) of the lot.

Insider trading is essentially a failure of banking as a profession, with professional ethics. There is a fiduciary responsibility to shareholders (in the case of a company) and of clients (in the case of banks).  Conflict-of-interest is a problem in every other work place. Why not here?

Besides conflict-of-interest, insider trading involves an explicit fraud on the client.

That’s in addition to the crime of fractional brokering, as someone cleverly puts it. (This is quite different from fractional banking. Due to the confusion of language that lets banks perform both safe holding and investing functions at once, fractional banking is legal).  On the other hand, “fractional brokering,” which is what naked shorting and “fails-to-delivered” amount to, is illegal.

Unfortunately, the professional financial reporters seem too myopic to understand the gravity of the problem, our self-involved “gonzo” journalists (yes you, Matt Taibbi) are too politically-driven to explain it correctly, and right now I’m too disgusted by the intellectual dishonesty of the media to take the trouble to make the argument on the web and see it lifted by all and sundry with nary a link or footnote, let alone verbal acknowledgment.

As Cara points out correctly (and safely, since he’s in Canada), Wall Street and the American capital markets have become a joke, and a substantial part of the financial media still doesn’t seem to realize it’s the punchline.

That gives me no pleasure to say. For years, I defended American business to my foreign friends, claiming that Americans at least held to standards, regulations, and transparency requirements higher than theirs (meaning, Indian and non-Western).

Behind all the glitz “America” still operated somewhere, I argued.

The Marxists and communists who called the whole thing a charade and a lie didn’t quite get it, I was sure. The values of the American republic would prevail. Once most money-managers and businessmen were alerted to what was going on in the markets, I fully expected that their outrage would be enough to stem the rot. I saw CEOs stepping up to the plate and doing their duty, when the future of their own (rather than someone else’s) children was at stake.
That was four and a half years ago, when I first began researching the markets.

In retrospect,  I see I was incredibly naive.The rot goes deep.

Those are somber thoughts to have around Christmas time. But perhaps not inappropriate. If you recall, in the Christmas story, gold (or should I say, gld?) and frankincense were only two-thirds of the offering. The other third was myrrh. Myrrh is a resin whose oil, I read here, is used for embalming and whose incense is used by penitents at funerals and cremations.

That must be the bitter scent I smell rising from the capital markets.

Muckety Maps Barrick Gold-AIG Link

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Marshall Cohen – current positions
Barrick Gold Corporation – director
Cassels Brock & Blackwell – counsel
Lafarge North America Inc. – director
Metaldyne Corporation – director
TD Ameritrade Holding Corporation – director
TriMas Corporation – director
Marshall Cohen – past positions
American International Group, Inc. – director
Collins & Aikman Corporation – director
Molson Companies Limited – president & CEO

Madoff -Related Accounting Firm Does Dubai´s Accounts..

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From the Independent:

“Dubai World will start a formal process next week that will see it invite leading banks, including HSBC, Royal Bank of Scotland (RBS), Lloyd’s Banking Group and Standard Chartered, to create a steering committee to represent the many lenders. KPMG has been lined up by the lead banks to represent them in negotiations, with a formal appointment expected once the compilation of the five-to-six bank steering committee is finalised.

My Comment:

Now, KPMG is the big four accounting firm that gave Madoff´s representations to Tremont Group Holdings (a US fund that Madoff purportedly hoodwinked) a thumbs up.  The Tomchin Family Charitable Trust, one of numbers of investors who were allegedly scammed by Madoff,  has launched a lawsuit against KPMG and Tremont for negligence in monitoring one of Tremont´s funds that invested with Madoff.

The lawsuit included a list of other Madoff clients that included Victoria de Rothschild of the banking family of the Rothschilds and a Tory party contributor:

“Also on the list of Mr Madoff’s British clients is Lady Victoria de Rothschild, who is related to Nathaniel Rothschild, the co- chairman of Atticus Capital, the hedge fund.

Lady Victoria is a well-known figure on the society circuit and became known more recently as a lender to the Tory party, having set up a special company that gave the party a £1,014,000 loan that is due to be repaid in 2010.”

(Times Online, February 5, 2009)

KPMG has also been hit with a $1b lawsuit for “reckless and negligent” auditing of failed subprime broker, New Century Financial, reportedly the first major case against an auditor arising from the financial crisis.

My Comment

So we have a Madoff-tainted accounting firm KPMG, with multiple legal problems, representing the banks that loaned to Dubai on one side, and  (as I noted before) French banking legend Rothschild on the other side, heading up the restructuring efforts for Dubai….

Wiki has a list of KPMG´s legal infractions that includes this:

“In February 2007 KPMG Germany was investigated for ignoring questionable payments in the Siemens bribery case.[29] (Siemens agreed to pay a record $1.34 billion in fines to settle the case in December, 2008.) In November 2008 the Siemens Supervisory Board recommended changing auditors from KPMG to Ernst & Young.[30]

In 2006, Fannie Mae sued KPMG for malpractice for approving years of erroneous financial statements.[31]

In March 2008 KPMG was accused of enabling “improper and imprudent practices” at New Century Financial, a failed mortgage company[32] and KPMG agreed to pay $80 million to settle suits from Xerox shareholders over manipulated earnings reports.”

Some confidence-builder… a bank that´s been closely connected to the Madoff scam and to the Fannie and Freddie case (and hence, to Goldman Sachs)…

And, how about this:

KPMG and Deloitte were brought in to investigate India´s ¨Madoff¨” – the fraud- riddled IT outsourcing giant Satyam (now Mahindra Satyam, its post-merger avatar – over the objections of the Institute of Chartered Accountants, India´s regulator, which said KPMG was not registered with it and would thus not be subject to its code of conduct or disciplinary proceedings.

Fall-Out from Dubai World (Update)

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I´ll try rounding up the reaction in the market and the punditry to Dubai World´s threat of default.

Two clarifications.

First: Dubai World´s problem is being referred to as a sovereign debt problem, but as far as I can understand, it´s not. The Dubai government is the 100% owner of Dubai World, which is itself a holding company. But, as William Buiter points out in the Financial Times, the Dubai government has only limited liability, just like any other limited liability company.

It wouldn´t have to reach into its pockets to make good any obligation unmet by Dubai World or its subsidiary Nakheel.

Second. The debt crisis is being referred to as a Black Swan. Again, this is inaccurate. A black swan is an unexpected event that doesn´t fit (and in fact upends) the prevailing paradigm. This debt crisis has been on the horizon for a while. And the announcement of the standstill in payment was obviously calculated to roil the markets as little as possible – being made during the Thanksgiving holidays, when the market is partially shut, and also at the start of Eid which lasts until December 6.

Update: With those caveats, I was going to try and list the banks and sectors that might be affected…but I found that Bob Wenzel´s site  had already got a chart of Dubai World´s obligations to Nakheel Holdings from Izabella Kaminska at the Financial Times. You definitely need your coffee before you read this one.

However, the text below the chart, although just as abstruse, does make it clear that investors are not going to be able to get any blood out of the Dubai government.

“Investors should note, however, that the Government of Dubai does not guarantee any indebtedness or any other liability of Dubai World.”

Update: I should add here that while technically the government of Dubai is not responsible for the debt, it is implied everywhere that the safety of the debt derives from its backstopping by the government. The reaction of furious investors that Dubai would never be able to raise a penny again implies that default would taint the government and not simply the company.

Major Market Move in Offing

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Looks like there’ll be a good deal of volatility ahead in the markets this coming week and through the fall:

*From Monday last week onward, New York has been riled up by the news out of China that Chinese SOEs (State Owned Enterprises) might walk away on derivative contracts that they think have been deeply manipulated. (They’re right on that). The SOEs involved are Air China, China Eastern, and Cosco.

*The derivatives are not mortgage-backed securities (the cause of the 2008 melt-down) but – likely- hedged oil futures in the OTC (over the counter) market, which is unregulated (that is, the SEOs hold synthetic longs).

*The threat – if it is that – has forced gold out of its summer trading range to within points of the $1000 mark, before falling back..and it pushed up the Chinese market by about 5%.(Sept 3)

*The counter-parties are 6 foreign banks, said to include Goldman Sachs, UBS, and JP Morgan. Goldman could take a hit on the contracts for around $15 billion, it’s rumored.

Note: The Chinese have been buying IMF bonds (50 billion) and watching the US meltdown and “stimulus” hocus-pocus with a good deal of warranted alarm, because all it means is their investments are being manipulated and driven down.

Obama’s reappointment of Bernanke was also taken as a bad sign by the Chinese. (correctly).

*Rumors have been swirling of further defaults of major US banks.

*The G20 has a preliminary meeting this weekend and the Chinese are said to have put the purchase of off-market gold on the table.

*The Chinese are pushing gold and silver on their populations, probably in anticipation of a currency meltdown.

*Meanwhile, Hong Kong has asked for all its gold to be returned from London.

*Last week, Germany asked for all its gold to be returned from London.

*Meanwhile, Abu Dhabi Commercial Bank and King County, Washington State have brought suit against Moody’s, S&P, and Morgan Stanley on fraud charges for the contracts they wrote, a case that would have massive implications for how other contracts are treated.

*[Oddly (?), Washington State is also where the earliest swine flu cases in the US were detected and where one of the largest outbreaks on campus just surfaced today – with some 2000 students at Washington State University coming down with the virus. Washington State had previously received large grants from Homeland Security for emergency preparations for pandemics, had TV Public Service Ads in place, had written up plans and practiced exercises].

Government Profiting from Bailed-out Banks

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In the news, AP reports:

“Critics of the bailout were concerned that the Treasury Department would never see a return on its investment. But the government has already claimed profits from eight of the biggest banks.

The Times cited government profits of $1.4 billion from Goldman Sachs, $1.3 billion from Morgan Stanley and $414 million from American Express. It also listed five other banks — Northern Trust, Bank of New York Mellon, State Street, U.S. Bancorp and BB&T — that each returned profits between $100 million and $334 million.”

The government has also collected about $35 million in profits from 14 smaller banks, the Times reported.

Bail-Out for Insurers

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In the news:

“The Hartford Financial Services Group Inc. was the first to disclose Thursday that it had been notified by the Treasury Department that it was eligible for $3.4 billion from the Troubled Asset Relief Program, or TARP. Lincoln National Corp., which commonly goes by the name Lincoln Financial Group, said it has been initially approved for a $2.5 billion injection from TARP’s Capital Purchase Program.

Allstate Corp., Ameriprise Financial Inc., Principal Financial Group Inc. and Prudential Financial Inc. also are among insurers receiving preliminary investment approval, Treasury spokesman Andrew Williams confirmed. He declined to disclose the amount of investment each company will receive.

The total capital injection into the six companies will be less than $22 billion, The Wall Street Journal reported, citing a person familiar with the situation…”

My Comment

22 billion might not seem like a lot, but insurers’ holdings have taken a big hit in recent months, it seems, and a cut in their ratings would have been likely once their assets fell below a certain level.

So you have government ownership of large parts of the housing market (which itself covers, in all its aspects some 30% of the economy), extensive government intervention in banking and insurance, government run trade, government run schools and colleges, government run social security and medicaid and medicare, and what does the left think the problem is? The free market!

Allied Irish Chairman Pelted with Eggs

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In the news, BBC reports on another kind of Blackrock – Blackrock, South Dublin, where Gary Keogh was hastily removed from a building after chucking eggs at Dermot Gleeson, chairman of Keogh’s bank, Allied Irish. The outburst came at a shareholder’s meeting of Allied Irish to approve a 3.5 billion euro government recapitalization for the bank, which has lost 91% of its value over the past 12 months.

Said Keogh,

“I have no pension. My pension now is wiped out because of AIB. I cannot sell the shares because they are useless.

If we didn’t live in a tolerant society, the chairman and the rest of the board would be hanging by their necks with piano wire out on the road.

Meanwhile, inside, an unsettled Mr Gleeson stood in front of a blue AIB logo spattered with egg and continued to take questions from shareholders….”

My Comment

Hooray for Mr. Keogh.

Any society can only take so much ‘tolerance’ and ‘non-judgmentalism’ without bankrupting itself financially and spiritually.

The moral problem underlying all this is that we deny that actions have consequences. And we also refuse to judge our actions by their consequences.

We want to make every action free of consequence, although consequences are precisely what guide us in ordinary life.

We’re accountable when we drive on the roads, aren’t we?

So why do bankers get to abdicate that responsibility when it comes to larger social and economic issues?