Tag Archives: Wells Fargo

EU To Investigate CDS Manipulation by Major Banks

Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM) and 14 other investment banks face a European Union antitrust probe into credit-default swaps (CDS) for companies and sovereign debt, Bloomberg.com reports. Well, at the moment no one can say for sure who’s manipulating who.

“I hope our investigation will contribute to a better functioning of financial markets.”

 Joaquin Almunia

CEO Lloyd Blankfein of Goldman Sachs

It may just be my twisted, suspicious mind, but there’s some red lights flashing in the back of my head. Just a few week’s ago about 200 European economist’s and financial experts made a formal request to the EU parliament to conduct an investigation of the Greek national debt. This was followed by a suggestion by the Greek government to probe the financial markets instead.

“Blame the speculators,” have also become like a mantra to the EU leaders during the crisis that they have no idea on how to manage.

In that particular light, this new investigation comes as no surprise.

I have just asked Markit to comment on the allegations, and are still waiting for their reply.

In the meantime, this is what Bloomberg reports:

The European Commission said today it opened two antitrust probes. It will check whether 16 bank dealers colluded by giving market information to Markit, a financial information provider.

It will also examine whether nine of the firms struck deals with ICE Clear Europe, a clearinghouse for derivatives, that block other clearinghouses from entering the market and give rivals “no real choice where to clear their transactions.”

“Lack of transparency in markets can lead to abusive behavior and facilitate violations of competition rules,” said Joaquin Almunia, the EU’s antitrust chief, in an e-mailed statement. “I hope our investigation will contribute to a better functioning of financial markets.”

Global regulators have sought to toughen regulation of credit-default swaps saying the trades helped fuel the financial crisis.

Lawmakers in the EU plan to encourage the use of clearinghouses and transparent trading systems. CDS are derivatives that pay the buyer face value if a borrower defaults.

Possible Collusion

JPMorgan, Bank of America Corp. (BAC), Barclays Plc (BARC), BNP Paribas (BNP) SA, Citigroup Inc. (C), Commerzbank AG (CBK), Credit Suisse Group AG (CSGN), Deutsche Bank AG (DBK), Goldman Sachs, HSBC Holdings Plc (HSBA), Morgan Stanley, Royal Bank of Scotland Group Plc (RBS), UBS AG (UBSN), Wells Fargo & Co. (WFC), Credit Agricole SA (ACA) and Societe Generale (GLE) SA will be investigated for possible collusion in giving “most of the pricing, indices and other essential daily data only to Markit.”

The commission said this “may have the effect of foreclosing the access to the valuable raw data by other information service providers.” It said some of the clauses in Markit’s licence and distribution agreements “could be abusive and impede the development of competition in the market for the provision of CDS information.”

The EU will also separately investigate credit default swap clearing and deals struck by ICE Clear Europe with Bank of America, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, Morgan Stanley (MS) and UBS.

These agreements have clauses on preferential fees and profit sharing arrangements “which might create an incentive for the banks to use only ICE as a clearinghouse,” the EU said. That may block other clearinghouses from starting up and limit choice for CDS dealers, it said.

Giles Croot, a spokesman for Barclays, wasn’t immediately available for comment when contacted by Bloomberg.

Deutsche Bank spokesman Ronald Weichert declined to comment as did Commerzbank spokesman Reiner Rossmann.

The probe will also cover fee structures used by ICE to check if they give “an unfair advantage to the nine banks by discriminating against other CDS dealers.”

Stay tuned for updates!

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How Banks Spin Their Earnings (And Make Media Dizzy)

About three years after mainstream media and the public in general suddenly discovered that we had a serious crisis on our hands – I’m still amazed and sometimes quite choked by the ignorance revealed in dealing with the banks and their reporting.

“A caricature is putting the face of a joke on the body of a truth.”

Joseph Conrad

In fact, I really can’t understand why so few have bothered to look up terms like  “off-balance products,” “mark-to-market accounting,” or “cross-border financing.” This, in turn,  makes it ridiculously easy for the banks to manipulate their official earnings reports.

So – with a little help from my friends – I’ll try to explain (one more time)  what’s going on:

Not surprisingly, banks, in their earnings reports, are quick to highlight the areas of strength and downplay the weak points.

Well, here’s what The New Tork Times/DealBook has to say about it:

Financial firms and other companies can be especially creative when it comes to the headline number they report, that is the profit they showcase at the top of their releases.

Consider Citigroup, which announced its first-quarter results last Monday.

At the top of its earnings release, the bank trumpeted its net income was $3 billion for the period, up from $1.3 billion in the fourth quarter of 2010.

That would seem to be great news, with profit rising more than 130 percent from the previous quarter.

But investors and analysts typically look at year-over-year growth, not quarter-over-quarter growth.

Finding the exact number required some digging.

“Although it nods at the profit decline earlier in the announcement, Citigroup disclosed on the second page of its release that it earned $4.4 billion in the same period of 2010 — meaning that profits fell on a year-over-year basis by 32 percent.”

The headline number wouldn’t be all that notable, except for that it deviates from previous earnings announcement.

In both the third and fourth quarter of 2010, Citigroup highlighted the year-over-year comparisons.

Of course, they were favorable, with earnings rising over that 12-month period.

Citigroup is also an outlier among its peers that have reported so far.

Last week, JPMorgan Chase announced first-quarter earnings of $5.6 billion, contrasting them prominently with the $3.3 billion in the same period of 2010.

Bank of America — which like Citigroup had a profit drop on a year-over-year basis — provided both first quarter 2010 and fourth quarter 2011 as points of comparisons for its latest earnings.

Most news reports points to the fact that Bank of America’s latest earnings was lower than expected, but very few seems to have figured out what NYT/DealBook points out; the numbers are, in fact, far worse.

To highlight the seemingly collective ignorance in the mainstream media, here’s a few examples of the most influential Norwegian media‘s presentation of Citigroup and JPMorgan Chase:

E24.no is Norway’s largest financial news web.

“Citigroup Shuffles In Money” – nice, huh?

As you may notice, E24.no refere to “SIX News” as their source for this news article.

SIX News is a newly established financial news provider in Europe, own by six major global banks.

That’s journalism, for you!

DN.no is supposed to have the most capable financial journalist in Norway.

And DN.no seems to have figured out – all by them self(!) – that JP Morgan increased their earnings by 300% in 2010.

Impressive!

As for the latest quarterly report, DN.no writes:

“The company can enjoy a very strong development in margins in the first quarter.”

Of course they can….

The website Hegnar.no is seen as the most specialized financial news provider.

The owner and publisher (and investor) Trygve Hegnar has a policy of not hiring journalist, only economists, to do the reporting.

Hegnar.no’s reporters makes it clear to everyone that both Citigroup and JPMorgan Chase deliver earnings that are better than expected.

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I have to point out that the Norwegian financial news providers mentioned above are not more ignorant og stupid than most others.

To a certain degree I can understand that it’s easier to just publish a prepared press release, instead of analyzing the numbers by themselves.

But this has turned into a global, serious and dangerous problem.

Fortunately, we some comedians who are able to see through the smoke screen and draw our attention in the right direction.

A caricature is “putting the face of a joke on the body of a truth,” according to author Joseph Conrad.

It’s a pleasure to introduce you to my favorite caricature, the humble and social responsible British investment banker, Sir George, explaining the financial crisis from his point of view:

I guess no further comments by me are needed.

I just hope you are able to see the whole picture a bit clearer.

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Looks Like A Classical Pump&Dump Setup

The global stocks markets are reaching for new highs, sending the benchmarks to the highest level since August 2008. Once again it’s the financials that’s leading the race after Wells Fargo raised its rating for large banks on prospects for higher dividends, JPMorgan Chase says it will use some of its reserves to boost earnings and Morgan Stanley says banks and insurance companies will be winners in the stock market this year. Well, it sounds like the same old song and dance routine to me, just like we’ve seen it over and over again for the last two years – a classical pump & dump scheme.

“Companies are sitting on tons of cash. Corporate earnings are coming in very strong. I see a gain of 10 percent to 15 percent for stocks in 2011.”

Philip Dow


Personally, I don’t think there’s many investors who actually believe a word of what the bankers and their stock pushers are saying. But that’s not the point. The point is, however, that the big financials are setting up another stock market rally so they can cash in a couple of billion dollar more before the new regulations takes effect and prohibit them from trading with their own money, shutting down their most lucrative area of business.

This may very well be the biggest opportunity investors will get in 2011. The financial shares have, more or less, controlled the stock market over the last two years – pushing the average prices up, then pulling them down again.

But this is no game for amateurs. You never know when the big players turn around, stop buying and dump the load right in your face. The so-called “swing trade,” where the goal is to figure out exactly when the market turns, is one of the most difficult investment strategies there is. It can also be the most rewarding.

But remember; there is nothing – I emphasize; nothing – that indicates that the problems are over for financial firms. On the contrary; several signs points to more trouble ahead.

The greatest factor of uncertain right now is the European debt crisis. Even if it’s the national governments that is about to go bankrupt, it is the financial industry who’ll get the punch when countries starts to default.

Something the credit market investors have figured out a long time ago.

(Read also: Smart Money Is Not Stupid (Or Is It?))

The second bomb about to detonate is the dodgy foreclosure case.

At the moment, the banks are allowed to accrue interest on non-performing mortgages  until the actual foreclosure takes place, which on average takes about 16 months.

This “phantom interest” is not actually collected, but still it’s booked as income until the actual act of foreclosure.

As a resullt, many bank financial statements actually look much better than they actually are.

This means that Bank of America, Citigroup, JP Morgan and Wells Fargo, and hundreds of other smaller institutions, can report interest due to them, but not paid, on an estimated $1.4 trillion of face value mortgages on the 7 million homes that are in the process of being foreclosed, according to Forbes.

“Ultimately, these banks face a potential loss of $1 trillion on nonperforming loans,” says Madeleine Schnapp, director of macro-economic research at Trim-Tabs, an economic consulting firm 24.5% owned by Goldman Sachs.

However, the central banks, and the governments will be pumping money into the financial markets as long as they can in order to keep the financial system running. And they might be able to do that for a year or two more (maybe even longer).

“The markets can stay irrational longer than you can stay solvent.”

(John Maynard Keynes)

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Anyway – who gives a shit?

The KBW Bank Index, which tracks 24 US financial companies, was up 13% in the four weeks through Jan. 5, three times the gains of the Standard & Poor’s 500.

And there’s also a third landmine in store for US banks.

According to Forbes, investors are now betting that the GOP-controlled Congress will water down the financial-services overhaul, and the great Wall Street reform will be just a joke, as many have feared.

On paper, the Dodd-Frank financial-services overhaul bill looks like a bank-stock killer.

It restricts how banks can trade for their own accounts, it raises capital requirements and it tightens supervision. By some estimates it will cut big bank profits by $22 billion annually—what the industry makes in a decent quarter.

Yet, bank stocks is rallying like it’s 2009.

Investors are banking that House Republicans will modify the new law, says Terry Haines, a senior analyst Potomac Research Group: “Back in July 2010, when Dodd-Frank became law, investors expected the quick imposition of rules with an immediate impact on the financial sector. But a lot of the key components of Dodd-Frank have not yet been implemented. And now there is a more favorable and moderate political environment as well.”

Note that any statement of just how much of the Dodd-Frank law will be changed by House Republicans is only speculation.

Investors may be overestimating the GOP‘s nimbleness.  The regulatory agencies could, in fact, begin to implement rules before the House Financial Services Committee holds any hearings on the matter, and the republicans may be distracted by efforts to reform the congressionally chartered mortgage giants Fannie Mae and Freddie Mac.

And some of the new regulations will simply not go away by themselves.

Banks will have to adhere to higher capital of some kind – the same goes for liquidity requirements – and the banks’ cost of deposit insurance and regulatory compliance are sure to increase significantly, regardless of what the GOP may accomplish.

“Every page of the law has something that impacts the bottom line,” banking lawyer Thomas Vartanian points out.

(The law is 848 pages long!)

Terry Haines points out that  the  regulators charged with writing regulations under the act will be scrutinized by the House Appropriations Committee as well as the Financial Services Committee.

“The Appropriations committee could limit the funding of controversial regulatory initiatives under Dodd-Frank, or even defund them entirely,” Haines says .

Perhaps. But the republicans could also easily be “Stewartized” into submission (mocked by the Daily Show’s John Stewart). And the general public is still quite upset over the fact that the hot-shots responsible for wrecking the economy still have their jobs and their bonuses, while about 8.5 million American workers lost theirs.

Something is going to hit the banking industry – whatever it will be…

“The people who took a political gamble on the sector in December most likely are traders who will take their money and run at the first sign of wavering by the House GOP,” Forbes writes.

If that’s the truth – the sector is set up for a classic pump and dump scheme.

Bank and life insurer stocks should see the biggest gains in 2011, according to a team of Morgan Stanley analysts. The team says its call is based on low valuations in the sectors, as well as increasing clarity about regulation that has weighed on the shares. An improving economy and the company’s increased capital deployment should drive return on equity.

Property and casualty insurers should also get a boost late in the underwriting cycle.

Morgan Stanley says its favorite names are Bank of America, Comerica and TD, for large cap, mid cap, and Canadian  banks, respectively.

In insurance, Prudential is the team’s pick for life insurers, with Axis Capital as a standout in P&C.

“Bank dividends and M&A activity signal the economy is transitioning from recovery to expansion,” says Philip Dow, director of equity strategy at RBC Wealth Management in a market comment at Bloomberg.com.

“Companies are sitting on tons of cash. Corporate earnings are coming in very strong. I see a gain of 10 percent to 15 percent for stocks in 2011.”

That’s right! Pump, baby. Pump!

 

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