Category Archives: Derivatives

How Wall Street Gets Development Agencies to Push Emerging Economies into Derivatives

Yves here. This post helps fill readers in on an important, but under the radar topic: how various international organizations push hard to make emerging markets fertile ground for America’s financiers. I became aware of this practice by happenstance. A McKinsey colleague left to join the World Bank in the 1980s. Her job was to set up capital markets in emerging economies. Later on, she set up private equity funds in emerging economies. She left the World Bank recently to help found an emerging markets PE fund of her own. Mind you, it’s not as if she needed the money. She will get a $160,000 (no typo) annual pension for her time at the World Bank, and if she’d stayed a few more yeas, it would have been $220,000.

However, as this post details, the sort of revolving door practices that have been used to suborn regulators in the US appear to have the same sort of persuasive effect on key development agency officials.

World Derivatives Market Estimated As Big As $1.2 Quadrillion Notional, as Banks Fight Efforts to Rein It In

Yves here. Readers have asked us to write about the ginormous scale of the derivatives market. This article is a layperson-friendly discussion of bank efforts to stymie the not-onerous safeguards in Dodd Frank and why you should be up in arms about it.

Sheila Bair Talks about Bank Greed, JP Morgan London Whale Hearings on Bill Moyers

Not surprisingly, Sheila Bair was appalled by the revelations from Carl Levin’s hearings on the JP Morgan London Whale losses. She discusses not only what it says about the bank, but about the state of regulation in the US.

When You Weren’t Looking, Democrat Bank Stooges Launch Bills to Permit Bailouts, Deregulate Derivatives

One of the big lessons of the fraught negotiations over bailing out (or more accurately, in) Cyprus’s banks is that deregulating institutions with an implicit or explicit state guarantee is a bad idea. You’ve just given them a license to gamble with the public’s money, and you can rest assured that they will eventually avail themselves of it. A bit more than a week ago, Jim Himes (an ex Goldman officer) and Randy Hultgren introduced bills that not only aim perpetuate this situation but will make it worse.

Live Blogging JP Morgan Senate Hearing – a Rogue Institution on the Hot Seat

Yves here. I wasn’t planning on liveblogging this hearing, but listing to the introductory remarks, the knives are really out for JPM. In all the post-crisis hearings I’ve watched, I’ve never seen such unanimity between the Democrats and the Republicans on the severity of the problem and the need for more regulation.

Senate “Whale” Report Reveals JP Morgan as a Lying, Scheming Rogue Trader (Quelle Surprise!)

There is so much grist in the just-released Senate Permanent Subcommittee report on the JP Morgan London Whale trades that the initial reports are merely high level summaries, which is understandable. Even with the admirable job done by the committee in documenting its findings and recommendations, it will take some doing to pull out the critical observations and convey them to the public. Plus the hearings tomorrow should provide good theater and further hooks for commentary.

But some critical findings emerge, quickly. We here at NC were particularly harsh critics of JP Morgan’s conduct, and disappointed in the media’s failure to understand that the information JP Morgan presented as it bobbed and weaved showed glaring deficiencies in risk controls. Yet the failings described in the report are even worse than we imagined.

Thirty Years of Financial Inefficiency

Arjun Jayadev at Triple Crisis provides a quote from Thomas Phillipon that somehow never sees the light of day in the financial press:

…the unit cost of intermediation is higher today than it was a century ago, and it has increased over the past 30 years. One interpretation is that improvements in information technology may have been cancelled out by increases in other financial activities whose social value is difficult to assess.

Banks on the Counter-Attack in the Food and Finance Debate

By Jennifer Clapp, Professor in the Environment and Resource Studies Department and CIGI Chair in Global Environmental Governance, Balsillie School of International Affairs, University of Waterloo, Canada. Cross posted from Triple Crisis

NGOs have stepped up their critique of large investment banks’ involvement in agricultural commodity derivatives markets in recent months. Now, it appears that the banks are starting to fight back.

Quelle Surprise! UBS Gets a Cost-of-Doing-Business Fine for “Epic” Libor Fraud (Updated)

After the media uproar about HSBC’s deep involvement in the dirtiest sort of money-laundering, UBS’s mere Libor-fixing might look a tad pale. But the notice by the FSA clearly states that it regarded UBS’s conduct as far worse than that of Barclays, where the chairman, CEO, and president all stepped down.

UK Gets Tough on Missold Swaps; What Excuse Does the US Have?

Even though the executive branch of the English government has as much of a soft spot for its banks as America’s does, its regulators are less craven than ours (admittedly, ours set such a low standard that it is not all that hard, and the UK’s relative advantage may be about to go into reverse with the appointment of the new head of the Prudential Regulation Authority, since the designee presumptive believes big banks can’t be prosecuted).

Deutsche Bank’s $12 Billion in Hidden Losses: Why Whistleblower Charges Have Merit and Why They Matter

I’ve read the Department of Labor complaint of former Deutsche Bank employee Eric Ben-Artzi that, among other things, alleges that the German bank violated SEC, GAAP and IFRS (International Financial Reporting Standards) requirements and probably also Sarbanes Oxley, and have had follow up conversations with him and his counsel. The charges are specific and sufficiently well supported to merit serious investigation. In their efforts to dismiss his charges, defenders of the bank’s position overlook the public reporting requirements for complex financial transactions like the one in question, a leveraged super senior (LSS) trade. Nor does their Panglossian “everything worked out for the best” argument stand up to scrutiny.

Deutsche Bank Didn’t “Ignore” Losses of LSS Trade, It Went Through the Mother of All Canadian Restructurings

A default position among what passes for finance cognoscenti in the blogosphere is to argue that media stories pointing up bank improprieties are making a mountain out of a molehill. The form of the argument is usually, “If you only understood XYZ technical issue, this is not such a big deal.” Now that isn’t to say that position is wrong; we’ve more than occasionally made just that type of argument. But if you are going to go that route, it’s incumbent on you to take account of the relevant background; otherwise, whether you intend to or not, your argument can wind up being the equivalent of “Look, over there!”

We’ve seen this type of diversion-as-argumentation take place on the brewing Deutsche Bank scandal over losses that three separate whistleblowers allege that that bank hid from investors during the crisis. Matt Levine and Felix Salmon say, to use Levine’s turn of phrase, that all the German bank did was ignore the losses until they went away. That is a misrepresentation of what actually happened.

Khuzami Deathwatch: SEC Ignores Tips About $12 Billion of Hidden Losses at Deutsche Bank

Two days ago, we said it was time to fire the SEC’s chief of enforcement Robert Khuzami, who has not provided the tough policing warranted by the biggest financial crisis in the agency’s history. We didn’t anticipate that the story of Khuzami’s negligence would blow so big so quickly. Today, the Financial Times reported that three separate whistleblowers charged that Deutsche Bank had mismarked up to $12 billion in exposures to make it look healthier in 2008 and 2009 than it was, yet the agency had not acted on these allegations. And had Deutsche carried its positions at the levels these former employees suggest was more accurate, Germany’s biggest bank may well have needed a bailout.

Why Robert Khuzami Would Be a Terrible Choice to Head the SEC

Given that the Obama Administration appears to think that missing-in-action Attorney General Eric Holder has been doing a fine job, it probably isn’t surprising to see the SEC’s head of enforcement, Robert Khuzami, included on a short list of names rumored to be under consideration to head of the agency.

But if the object is to prove that regulators can’t regulate and it’s too hard to enforce securities laws, then Khuzami’s your man.

Let Us Now Shed Crocodile Tears for Jon Corzine

With Hurricane Sandy dominating the news, quite a few business stories from early in the week got only cursory notice. In some ways, that’s not a bad thing.

The Wall Street Journal had a bizarre sequence of reports on Jon Corzine.