Top 10 Financial Failures of 2011

It’s the financial service web site FierceFinance.com who have put together the list of the biggest blunders in the industry during the past year. Personally, I might have put a few other issues on the list, but when it comes to the final top position I think we have a winner:

“Led by CEO Jon Corzine, formerly of Goldman Sachs, MF Global was a trading powerhouse back in 2010. That all came crashing down in late 2011, as the bank filed for Chapter 11 bankruptcy and lost track of $600 million in capital.”

FierceFinance

Yeah, losing $600 million is probably harder than earning them, and quite an achievement…

FireceFinance writes:

“The MF Global failure was a total unraveling involving poor management and risky investment. For what it’s worth, Corzine said he will not be seeking to collect his $12 million Golden Parachute severance package. But reports surfaced in The Telegraph speculating that MF Global employees in the U.K. may have received Q3 corporate bonuses, even with the firm on the brink of failure.”

Read more: MF Global coverage.

Here’e the rest of the list:

2. Bank of America imposes debit card fee.

“The backlash against the bank was severe. But CEO Brian Moynihan defended the bank’s right to make a profit, saying in a statement that he had “an inherent duty as a CEO of a publicly owned company to get a return for my shareholders.”

3.  Frustration sparks Occupy Wall Street protests.

“What originated as peaceful has become violent, as reports surfaced of police using tear gas on protestors along with attempts to force them out of encampments.”

4. S&P downgrades US credit rating.

“Even though S&P went on to be criticized for its debt rating practices (the issue of credit rating agency credibility looms large), the move was significant at a time when budget showdowns in Washington and a stagnant economy were constantly in the headlines.”

5. Raj Rajaratnam slammed for insider trading.

“The convicted insider trader dominated the news in 2011 and in many ways is seen as the pinnacle of success for federal prosecutors, who have been cracking down on offenders.”

6. Citi stumbles after major data breach.

“Citi was reluctant to publicly announce the breach, finally doing so only after being pressed on the subject by the media. Citi offered a public explanation of the incident and tried reassuring customers that the stolen data was insufficient to commit fraud and that social security numbers, dates of birth and card security codes remained secure.”

7. Bank of America forecloses on couple.

“One of the more bizarre stories of 2011 was when Bank of America accidentally foreclosed on a Florida couple. Although the bank eventually backed down, the couple hired a lawyer to recoup attorney’s fees. Five months passed without payment–this coming after a judge ordered the bank to pay up. So the couple and its attorney showed up to foreclose on a local Bank of America branch, declaring their intent to remove furniture, cash and other property.”

8. RSA suffers cyber attack.

“RSA’s SecureID tokens are used by 30,000 organizations worldwide. RSA remained open about the attack, offering tips and posting details describing the anatomy of the breach. But even transparency didn’t reverse the fact that banks were forced to rethink security and look for new options.”

9. Typo costs Goldman Sachs $45 million.

“A tip for everyone who deals with contracts: Double check all calculations. Goldman Sachs learned that lesson the hard way back in June when it issued four warrants relating to Japan’s Nikkei index. Buried in the depths of financial jargon was a serious formulaic mistake: A multiplication sign was inserted where there should have been a divide by sign.”

10. John Paulson‘s Sino-Forest bust.

“In all likelihood, 2011 will not be a great year for hedge fund manager John Paulson. Among his failures was selling 35 million shares of the Chinese company Sino-Forest at an estimated loss of $500 million.”

Original post here.

Related:

• MF Global’s collapse looks like a scandal (blogs.ft.com)
• Missing MF Global Funds Could Top $1.2B, Trustee Says (foxnews.com)
• MF Global: The mess that keeps getting messier (finance.fortune.cnn.com)
• DealBook: British Regulators Bar Hedge Fund Executive From Industry (dealbook.nytimes.com)
• MF Global: Fraud, Incompetence, or a Bit of Both? (dailyfinance.com)
• House panel calls Corzine to testify (marketwatch.com)
• Analysis of the U.S. Savings and Loans Banking Market (prnewswire.com)
• Which? Sting Shows Banks ‘Give Bad Advice’ (news.sky.com)

Norwegian Bank Claims To Be Victim of Conspiracy

This must be the most interesting news story coming out of Scandinavia this week: The Norwegian bank, DnB NOR, who’s been found guilty of selling toxic saving products to private investors, not revealing the real risk involved, is facing the court again after appealing the first ruling. In its defense, the bank now claim they are the victim of a witch-hunt, and that the allegations are a result of a conspiracy against the bank.

“The majority of facts is conspiratorial in disfavor of the Bank.”

Anders Ryssdal 

Claiming Conspiracy:: Anders Ryssdal (Wiersholm, law firm), Nils Gunnar Brattlie (DnB NOR Markets), lawyer Catherine Sandvig and lawyer Trond Bjerkan. (Photo: DN.no).

I guess it could be seen as a sign of desperation when DnB NOR’s lawyer writes in the appeal paper that the ruling by Oslo District Court in June last year is “conspiratorial in disfavor of the Bank,” and that the choice of words in the verdict shows that the court has decided to “get” the Bank. But it could also be a part of a sneaky strategy to derail the whole case.   

Well, if I was a lawyer defending DnB NOR, I think I would have chosen a completely different – less ridiculous - strategy.

But perhaps Norway’s main bank is running out of arguments.

However, as you all know, conspiracy theories are always impossible to prove – or reject.

And that’s probably what DnB NOR is aiming for; making it impossible for the Borgating Court of Appeal to reach another verdict in disfavor of the Bank.

It is the Norwegian business website, DN.no, who have gotten hold of the appeal papers.

According to the website, DnB NOR’s lawyer Anders Ryssdal at the law firm Wiersholm, writes:

“In general, is the majority of the court’s valuation of the evidence conspiratorial in disfavor of the Bank.” 

The bank’s lawyer also argues that the Oslo District Court have chosen to disregard more confident calculation made by other experts, including DnB NOR’s own.

According to the appeal papers, DnB NOR argues that the majority of judges at the Oslo District Court have revealed through their wording that they more or less had decided to “get” bank before they made the  ruling.

The court use words and expressions of an “odious character,” the bank-lawyer  writes, in order to create an impression of the DnB NOR’s products as “suspect.”

“Odious” means disgusting or cruel.

As an example of the conspiratorial, odious wording,  DnB NOR points to the District Court’s conclusion that says the Bank’s sale of these saving funds is to be considered as marketing of “suspicious products,” according to a “carefully thought out plan.”

11 Years of Outhauling

This case started in 2000, 11 years ago, when private investor Ivar Petter Røeggen placed all his savings in two of DnB NOR’s so-called structured funds, that according to the Bank was guaranteed a pay-off.

But five years later Mr. Røeggen had lost NOK 230.000 of his original investment of NOK 500.000.

And in 2006 – encouraged by the money magazine “DINE PENGER” – he files a complaint to the Norwegian Consumer Council claiming the Bank had made false promises, and withheld information about the real risk involved.

According to the calculations by the independent experts, there was a 60% chance of loosing money by investing in DnB NOR’s guaranteed structured funds.

The Norwegian saver requires that DnB NOR cover his losses.

Now, the snowball starts rolling:

In December 2007 the Consumer Council says in a hearing, held by the Norwegian Financial Authority that it should be prohibited to sell these structured products to non-professional investors.

This becomes the conclusion of hearing, and the recommendation later sent to the Norwegian finance ministry, in January 2008.

The finance ministry comply with the request and makes it into law, March 1. 2008.

In January 2009 the national Finance Board of Appeals agrees with Mr. Røeggen, but just a couple of hours after the announcement by the Board of Appeals, DnB NOR makes it clear that they will not comply with the decision.

In April 2009 the case opens at the Oslo District Court, who in June the same year comes to the same conclusion as the Consumer Council, the Financial Authority and the Finance Board of Appeals.

However, DnB NOR still refuse to accept this view, and appeals the verdict to a higher legal body – the Borgating Court of Appeal.

And here we are…

Of Fundamental Principle Importance

According to Norwegian mass media there are about 2.000 other private investors who have lost money by placing their savings in the same “guaranteed” funds as Ivar Petter Røeggen.

They are eagerly waiting for a final verdict – if Norway’s partly state-owned bank is forced to cover the losses of all these people, it could result in a double-digit billion loss for DnB NOR.

At least, that’s what the Norwegian media, authorities and politicians think.

The fact is; it could be a helluva lot more…

For some reason, they seem to forget that DnB NOR now is the sole owner of the Baltic bank DnB NORD.

Up until January 2011, the Norwegian bank owned the Baltic bank in a 50/50 relationship with the German bank NORD LB - one of Europe’s leading developers and suppliers of structured financial products.

Due to the shady cross-border activity over the last decade, no one knows excactly how many dissatisfied customers that might turn up if DnB NOR loses this case.

But it will definitively be more than 2.000…

International Focus

The law suit against DnB NOR is also being followed closely by the international banking community.

The consequences can be far more widespread than most people think.

In the meantime, global banks are scaling down on their dodgy dealing as fast as possible.

The British Financial Services Authority (FSA) has advised more financial groups to amend or withdraw adverts as it now begins to cracks down on misleading advertisements, according to the law firm Reynolds Porter Chamberlain.

It has been reported that there was a 32% increase in promotions withdrawn in 2010, compared to 2009.

The increase is reported to have continued in the first quarter of 2011, with 66 withdrawals compared to 50 in the same period in 2010.

It is said that the crackdown is ahead of new powers being given to its successor, the Financial Conduct Authority.

The Financial Times has described one of the withdrawn adverts for an investment fund as claiming a 30 per cent headline growth rate but with risk warnings buried in the small print.

Jonathan Davies, partner at RPC, says:

“There is a very competitive market for many financial products. This puts pressure on firms to make their offering stand out and it is very easy to fall foul of the rules. With the FSA clamping down and with new powers for its successor on the way, it is more important than ever for businesses to make sure their adverts are watertight.”

So, if DnB NOR gets another conviction in the Appeal Court over the next weeks, it may blow a big hole in the ballon for financial institutions all over the world.

Related by the EconoTwist’s:

• DnB NOR: “Comprehensive System Failure”
• Are People of Latvia Complete Idiots?
• Latvia To Split And Sell Nations Leading Bank
• DnB NOR Acquire 100% of Baltic Subsidiary DnB NORD
• Norway Takes Over Presidency Of Baltic Council
• How To Make A Rat Look Like A Puppy
• “The  Baltic Lab Rat”
• “Not  Grounded In Reality”
• Financial Authorities See No Point In Stress Testing Norwegian Banks
• Norwegian Day Traders Convicted Of Market Manipulation
• Nordic Central Banks Agree On Baltic Bank Bailout
• Morgan Stanley To Buy Bad Baltic Loans?
• Are Governments Producing Conspiracy Theories?

Roubini and the Nonsens of Voluntary Bail-ins

There’s plenty of nonsense circulating on the subject of dealing with the European debt crisis. Professor Nouriel Roubini takes a shot at one of the latest genius ideas – an “induced voluntary bail-in” of the Greek bank’s creditors…  Now, don’t ask me how that is supposed to work….

“Trying to apply something that was originally designed to bail-in cross-border short-term interbank lines among banks to the bonded debt of a sovereign is a big fudge.”

Nouriel Roubini

“Now that the ECB has, for the time being, effectively vetoed any bail-in of Greece’s creditors, even a modest profiling of the debt, the official sector is running out of options for a meaningful bail-in of creditors.”

The following article is written by Professor Nouriel Roubini and syndicated by eurointelligence.com:

The latest idea — apparently deemed acceptable even by the ECB — is a “voluntary” maintenance of the exposure of Greece’s bank creditors by inducing them to hold their exposure to the sovereign once their bond claims mature by rolling over their maturing bonds into new bonds.

This option has been compared to the Vienna Initiative, which induced the cross-border exposure of foreign banks to the central and east European banking system during the 2008-09 global crisis, when a number of sovereigns and banking systems in that region were at risk of rolling off the claims of foreign creditors.

However, the idea of bailing-in cross-border exposure to the banking system of a country under financial pressure has a longer history and includes similar bail-ins of foreign banks’ cross-border exposures to local banks in 1998 in South Korea, in 1999-2000 in Brazil and in 2001-02 in Turkey.

The more successful experiences were the more coercive ones or when it was in the banks’ interest to maintain their exposures to their foreign affiliates.

A purely voluntary maintenance of exposure at current market rates would make the sovereign’s debt even more unsustainable and, in time, will ensure a default on the new bonds.

The only way to prevent the coupon/yield on the new bonds from being close to market rates and thus unsustainable would be to provide the new bonds with seniority or some collateral; but both options are undesirable as a rollover is not a case of “debtor-in-possession” financing and thus doesn’t justify such credit sweeteners.

If, instead the rollover occurs at original coupon or well below market rates, so as to provide Greece with some debt relief, the rollover option is not purely voluntary and has coercive elements; thus, it is not different in any substantial way from the orderly debt restructuring, or reprofiling, that the ECB and other official sector folks so vehemently oppose.

Also, banks alone would be bailed in — inducing massive inequality among creditors — and only maturing bonds would be sequentially rolled over as they mature, rather than a significant part of the debt being subject to a uniform debt exchange at a single point in time.

Only the latter provides meaningful debt relief for the debtor. Thus, there would be little debt relief and consequently the unsustainability of the debt burden of the sovereign would remain unresolved.

There is also significant risk of arbitrage as banks pass their exposure to Greek debt to hedge funds and other mark-to-market investors who will not be bailed in. Thus, the entire scheme risks to unravel if such arbitrage were to occur.

A debt exchange avoids this problem by roping in all creditors, not just a sub-set.

Only an orderly and market-oriented, but partially coercive, debt exchange could restore debt sustainability while avoiding contagion; a purely voluntary approach would make the debt even more unsustainable — and would risk eventually triggering a disorderly workout — if the rollover occurs at market rates that price in massive default probabilities.

An application of the Vienna Initiative to the issue of Greek public debt is also totally unrealistic.

If the rollover occurs at unchanged coupon (original yield at issuance), there is little difference between such a rollover and a more traditional and efficient debt exchange with a par bond and maintenance of the original coupon. Thus, trying to apply something that was originally designed to bail-in cross-border short-term interbank lines among banks to the bonded debt of a sovereign is a big fudge.

If it is done properly, it is no different from the sort of clean debt exchange that the ECB and others abhor; and if it is done on a “voluntary” basis, it creates an even bigger and more unsustainable debt monster for the sovereign.

As in the case of Argentina, which attempted a voluntary mega debt exchange at unsustainable market yields—it would ensure that a disorderly default will occur in 2012 or 2013. Thus, claiming that one can apply a voluntary Vienna Initiative to the case of Greece is just a continuation of the big fudge and delusional kicking of the can down the road that the ECB and the official sector has indulged in for over a year now in Greece.

The discussion of a Vienna Initiative for Greece shows the confusion of the official sector and of some market analysts when they talk of the likelihood of massive contagion and financial Armageddon in the event of an orderly restructuring.

Yet, they also claim to support for “voluntary” approaches.

The latter are highly contrived and counterproductive if not outright destructive of the debt sustainability that everyone is trying to restore in distressed sovereigns.

By Nouriel Roubini

Nouriel Roubini is chairman of Roubini Global Economics, and professor of economics at the Stern School of Business NYU.

Related articles:

• Is Greece the next Lehman? (curiouscapitalist.blogs.time.com)
• The euro crisis: A second wave (economist.com)
• Greek crisis exposes growing rift between France and Germany (telegraph.co.uk)
• Greek banks: The first casualties (economist.com)
• ECB Constancio: Restructuring Could Increase Contagion Risk (forexlive.com)