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Institutional Investors Love Sleazy Bankers

8:42 am in Banksters by masaccio

Institutional Investors Defend the Bridge for Jamie Dimon

Jamie Dimon easily beat back a non-binding shareholders proposal to split the jobs of Chairman and CEO at JPMorgan Chase, winning 68% of the vote. Institutional investors own over 73% of the stock of JPM. That means that many if not most mutual fund managers and plenty of pension fund managers and endowment managers voted to keep in office a man who has presided over a string of law-skirting but money-making operations. JPMorgan’s list of offenses, described here, have earned the bank tens of billions at the cost of only billions in fines, penalties and put-backs from bad mortgages. And the bank estimates that there is more coming, maybe $6 billion more than it has set aside in reserves. JPM’s earnings are up, boosted by release of some $1.5 billion from reserves, but with a bit of luck, the hit will come later, now that Dimon is safe.

Mutual fund managers and other money managers think that the only important thing is the bottom line, and it’s a fact that ignoring the law delivers truckloads of money to the bottom line. That’s especially true for banks that are too big to prosecute. Eventually law enforcement shows up, in the form of bank fetishists like Lannie Breuer and his faint-hearted boss, Eric Holder, but what can they do? A minor fine, requiring the bank to give up some of its gains? An unpleasant press release? Maybe a grilling before some mild Senators, more impressed by the possibility of a campaign contribution than any interest in locking up wrong-doers?

I particularly like the coverage in the Washington Post, under the title, How Washington Humbled JP Morgan Chase Chief Jamie Dimon, in which we learn that Washington didn’t humble Dimon at all. Legal troubles, like those reported by Senator Carl Levin of the Senate Permanent Subcommittee on Investigations, are irrelevant to Dimon, who wasn’t at the hearing to take any of the responsibility for the London Whale Trade losses or misstatements.

And I just love the coverage given to the Capo di tutti Capi by Andrew Ross Sorkin and Steven Davidoff in the New York Times Dealbook blog. To read their praise of JPM and its Great Man, you’d never know that the bank might have side-stepped a few legal rules on its way to being the Greatest Bank Ever! They were aided in their efforts by the lobbying of such privileged rich white old men as Warren Buffett, Rupert Murdoch, Michael Bloomberg, and Hank Paulson.

I don’t know how much difference it made,though. For money managers, the only important issue is earnings. For that you need a top banker who is utterly indifferent to legal matters, willing to ignore the Weapons of Mass Destruction Proliferators Sanctions Regulations and the Iranian Transactions Regulations. And you need a Chairman/CEO who can fast talk his way out of trouble, like Dimon with his Fortress Balance Sheet and his presidential cuff-links. Isn’t it wonderful that people’s retirement is in part dependent of the ability of Jamie Dimon and his sleazy bank to make money?

But the real message these institutional investors and the privileged white rich old menare sending is that Dimon is their guy, and that politicians and regulators should do as he says. Right now, Dimon wants to defeat Brown-Vitter, which would force JPM to raise equity. Higher equity reduces the amount of money Dimon and his lieutenants can borrow, and it’s borrowing that increases the amount they can gamble for their profit and the taxpayers’ loss. That might mean lower compensation for the banksters. Gasp! But the win restores any political strength Dimon may have lost, and increases his ability to stop Brown-Vitter. That hurts everybody by leaving the mega-banks with their Obama/Holder/Breuer/Congressional approved status as Too Big To Fail.

Thanks a lot, institutional investors. We salute your willingness to subordinate basic law-abiding competence to sleazy money-grubbing. How very 21st Century of you.

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US Bank Depositors Unlikely to Take Losses

9:08 am in Banksters by masaccio

Probably won't need this guy

A recent post by Ellen Brown at Web of Debt claims that US bank depositors could lose some of their money if the bank failed, citing this paperfrom the FDIC and The Bank of England. She quotes from the paper, bracketed material is her addition:

An efficient path for returning the sound operations of the G-SIFI to the private sector would be provided by exchanging or converting a sufficient amount of the unsecured debt from the original creditors of the failed company [meaning the depositors] into equity [or stock]. In the U.S., the new equity would become capital in one or more newly formed operating entities. …

Brown doesn’t mention the National Bank Depositor Preference Act, 12 USC § 1812 (d)(11). That law says that in a bank receivership, the depositors get first call on any assets. It seems almost impossible that a bank could lose enough money to cause losses to depositors. But I have other questions about the paper.

The Rosy Assumptions of the FDIC/BOE Paper

The paper is a joint exercise between the FDIC and the Bank of England. It is designed to help with the difficulties presented by international financial entities that are too big to fail. The parties agree that the strategy for dealing with a failed TBTF should “assign losses to shareholders and unsecured creditors”, p. 2, and there is where the problem arises. When you deposit money in a bank, the money belongs to the bank, and you become an unsecured creditor. You have the right to get the money back from the bank, but if it doesn’t have enough to go around, you are just one of many creditors. In the US, we ameliorate that problem through the FDIC, which insures your deposit up to $250K, and the distribution priorities.

Prior to Dodd-Frank, the FDIC only had the ability to take over a failed bank. According to the FDIC/BOE paper, under Dodd-Frank, the FDIC would take over just the parent company of the TBTF bank, leaving the subsidiaries in full operation. The assets of the parent would include the stock it holds in its subsidiaries. Those would be transferred to a bridge financial holding company and hopefully the subsidiaries would continue their operations under new management. The shareholders of the parent and probably the unsecured creditors of the parent would be wiped out.

The FDIC would evaluate the subs to make sure they are adequately capitalized, then transfer them into private hands. The FDIC/BOE paper says “By leaving behind substantial unsecured liabilities and stockholder equity in the receivership, assets transferred to the bridge holding company will significantly exceed its liabilities, resulting in a well-capitalized holding company.” P.6. Well, maybe.

Shouldn’t We Think About Derivatives?

The FDIC/BOE paper doesn’t use the word “derivatives”, and it’s not wise to worry only about the problems we’ve seen in the past. However, derivatives retain the ability to blow a hole in the balance sheet of a TBTF bank, as we saw in the London Whale trades. As an example, let’s look at JPMorgan’s balance sheet from most recent 10-K. Total deposits are nearly $1.2 trillion, and other debt totals about $950 billion of which some may be secured. Total net worth of the consolidated enterprise is $204 billion. The balance sheet includes an entry for trading liabilities, which includes anticipated losses on derivatives (10-K, p. 214). The figure was about $132 billion, of which about $71 billion is “derivatives payable”. P. 221. We get another estimate of exposure to derivatives from the OCC call reports on derivatives. According to the most recent figures , JPMorgan bank subs had a total credit exposure to risk based capital ratio of 228%. This is a crucial number:

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The Uniparty Fights Back Against Regulating Derivatives

2:55 pm in Banksters by masaccio

Alpha Baboon in his/her prime.

Last week, the House Agriculture Committee voted to cut regulation of derivative transactions, and to insure that derivative transactions could take place inside FDIC insured banks. Six Democrats voted for the bill according to Gaius Publius at AmericaBlog, including Ann Kuster NH-2, one of those true progressives supported by the likes of EMILY’s List. It certainly is discouraging to see the party that claims to represent the interests of everyday Americans holding hands with the banksters.

One of the bills deletes a provision of Dodd-Frank that requires banks to put their derivative business into a separate corporation with its own capital base. That way the derivatives won’t pose a risk to the FDIC insured bank affiliate. Jim Hines, D-Goldman Sachs supported this bill. Zach Carter at HuffPo gives a good description of the money behind the vote here, which, by the way, was 31-14. In other words, this bill was so rotten that eight Republicans couldn’t stomach it.

This preposterous legislation comes the week after Senator Carl Levin ripped JPMorgan Chase and the Office of the Comptroller of the Currency to shreds over the billions of dollars lost by the London whale traders. New York Times writer Floyd Norris reminds us of one of my favorite parts of the Report issued by the Senate Permanent Subcommittee on Investigations. Bruno Iksil, the whale himself, made a presentation to senior management on January 26, 2012, offering a strategy to deal with the losses in the portfolio which at the time were about $400 million.

Mr. Iksil’s presentation then proposed executing “the trades that make sense.”
“The trades that make sense:
Specifically, it proposed:
• sell the forward spread and buy protection on the tightening move
o Use indices and add to existing position
o Go long risk on some belly tranches especially where defaults may realize
o Buy protection on HY and Xover in rallies and turn the position over to monetize volatility”

This proposal encompassed multiple, complex credit trading strategies, using jargon that even the relevant actors and regulators could not understand. Because the traders themselves declined the Subcommittee’s request for interviews and were outside of the Subcommittee’s subpoena authority, the Subcommittee asked other current and former CIO personnel to explain the proposal. Ina Drew, CIO head, told the Subcommittee that the presentation was unclear, and she could not explain exactly what it meant. Irvin Goldman, then the CIO’s Chief Risk Officer, told the Subcommittee that the presentation did not provide enough information to clarify its meaning. Peter Weiland, the CIO Market Risk Officer, offered the explanation that Mr. Iksil was basically describing a strategy of buying low and selling high. Report at 74, footnotes omitted.

Norris says he didn’t understand it either. His conclusion is that these people are out of control, their banks are too big to manage, and that they should be broken into small units that don’t threaten us all with financial annihilation. He points out that fraud flourishes when management doesn’t understand what the help is doing. I think he misses an important point. Often the help has no clue either.

In fact, one big problem is that the skills it takes to advance in management rarely have anything to do with the technical skills it takes to run a business. Can you imagine the head of an IT department writing trading algorithms? Or the head quant managing a portfolio of failed small business loans? The people who climb the greasy pole to the C-Suite have a set of skills visible in alpha males and females in baboon tribes: a drive to dominate and unwavering confidence in their intelligence. Trot one of these people out in front of a Congressional Committee consisting of beta males and females and watch the betas bow and scrape. Of course, it doesn’t hurt to have a set of cufflinks with the Presidential Seal on them.

So, our beta Congressionals of both parties, those who lust after bankster money, like Democrat David Scott, GA-13, who has raised more than $1.7 million from the financial sector; or like Jim Himes, completely unable to separate his own background from his public duties; or just ideological slugs; they are all happy to help their Alpha brethren, enthusiastic, even to put the taxpayer on the hook for bank derivative gambling habits.

Floyd Norris quotes Nick Leeson whose reckless trades caused the bankruptcy of Barings Bank:

“Luckily for my fraud, there were too many chiefs who would chat about it at arm’s length but never go further,” Mr. Leeson wrote in his memoir. “And they never dared ask me any basic questions, since they were afraid of looking stupid about not understanding futures and options.”

I would love to have seen Levin ask Dimon what the heck Iksil was talking about. Not that it would have made any difference to the slavish Uniparty Congressional Betas. Read the rest of this entry →

Worship of the Financial Sector Reaches New Heights

8:00 am in Banksters by masaccio

The Worship of the Bull God Apis, by a follower of Filippino Lippi, National Gallery of Art

The utterly incompetent prosecutors at the Department of Justice politely decline to indict HBSC or any of its present or former employees. Because, you know, things like this just happen and besides some of the responsible people don’t live here, and some of them got fired and others lost their bonuses, which is punishment enough. And anyway, we can’t indict unless we find evidence that someone specifically intended to aid money laundering. Or, as the simpering Lanny Breuer puts it:

“As bad as HSBC’s conduct was, this is not a case where the HSBC people intended — intended — to create money laundering,” he said. “They did not have the controls in place that they needed.”

One of the relevant statutes, 18 USC §1956, can be found here. In short, it’s a crime

“…knowing that the property involved in a financial transaction represents the proceeds of some form of unlawful activity, [to] conduct or attempt to conduct such a financial transaction which in fact involves the proceeds of specified unlawful activity [and]

(B) knowing that the transaction is designed in whole or in part—
(i) to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of specified unlawful activity; [grammatical changes to make readable.]

As used in this section—
(1) the term “knowing that the property involved in a financial transaction represents the proceeds of some form of unlawful activity” means that the person knew the property involved in the transaction represented proceeds from some form, though not necessarily which form, of activity that constitutes a felony under State, Federal, or foreign law, regardless of whether or not such activity is specified in paragraph (7);

(f) There is extraterritorial jurisdiction over the conduct prohibited by this section if—
(1) the conduct is by a United States citizen or, in the case of a non-United States citizen, the conduct occurs in part in the United States; and
(2) the transaction or series of related transactions involves funds or monetary instruments of a value exceeding $10,000.

Here’s an example of what HBSC and its employees did, taken from the Statement of Facts attached to the Deferred Prosecution Agreement (thanks, USA Today).

… [D]rug traffickers were depositing hundreds of thousands of dollars in bulk U.S. currency each day into HSBC Mexico accounts. In order to efficiently move this volume of cash through the teller windows at HSBC Mexico branches, drug traffickers designed specially shaped boxes that fit the precise dimensions of the teller windows. The drug traffickers would send numerous boxes filled with cash through the teller windows for deposit into HSBC Mexico accounts. After the cash was deposited in the accounts, peso brokers then wire transferred the U.S. dollars to various exporters located in New York City and other locations throughout the United States to purchase goods for Colombian businesses. The U.S. exporters then sent the goods directly to the businesses in Colombia.

HBSC admits that this is true in the Deferred Prosecution Agreement. Indicting the people who did this is apparently asking too much of these incompetent prosecutors. Here’s a clip of Lanny Breuer explaining (at about the 1:15 minute mark) that this agreement that no one is criminally liable is really a triumph of the prosecutorial art.

The reporters who go to press conferences like Breuer’s don’t know enough to ask Breuer and his crowd of incompetents which part of the statute they can’t prove. And why they can’t extradite and try anyone in any other country who was involved. The Statement of Facts is full of similar stories and identifies the kinds of people subject to indictment. And I bet the junior criminals would rat out their superiors in a heartbeat.

Breuer hides his bank love behind a statement of facts drafted to make it look like the only problems with this criminal money laundering business were mere negligent administrative screw-ups, and that’s nothing, now is it, Lanny? The clown prosecutors can’t imagine that a bunch of people thought they could make a huge pile of money laundering cash for drug cartels, terrorists and other scum of the earth. Now that they have slapped HSBC on the wrist, Lanny and his posse of lawyers who passed the bar on their third try can get back to work prosecuting pot smokers.

Knowing that his legal rationalizations are stupidly false, Breuer seeks the refuge of neoliberal apparatchiks: think of the jobs! Indicting this nest of rattlesnakes would lead to shutting down its US operations, costing jobs and disrupting the economy. That isn’t true either. Remember Riggs Bank? When it got caught doing a lot of the same stuff, it got clobbered, and shut down the criminal operation. The rest was absorbed into another bank. Why shouldn’t that happen to HSBC? Why shouldn’t we shut down their US operations?

The Obama administration regularly sacrifices the rule of law in adoration ceremonies to the Baals of the Financial Sector. The smoke rises to the heights proving their devotion, as the bag boys rush into the sacristy with some of that blessed money.