Defaulting banks - where will it stop?

[Jan Klimkowski]

These banker scumbags have no shame and no morals.

Bonus time as banks pay out £40bn

Exclusive: Chancellor Alistair Darling's windfall tax has not led to cut in rewards for bankers

The world's biggest investment banks are expected to pay out more than $65bn (£40bn) in salaries and bonuses in the next two weeks, reinforcing the view that it is business as usual on Wall Street and in the City barely a year since the taxpayer bailout of the banking system.

Despite efforts by Alistair Darling to deter banks from handing out multi-million pound bonuses through the introduction of a 50% windfall tax, City sources believe that the biggest employers will absorb the cost of the tax rather than cut the size of the bonus pools they amass throughout the year.

This will mean that while proceeds from the tax could top £2bn – more than four times the £550m estimated by the chancellor in the pre-budget report – the government will have failed to alter the traditional bonus culture in the City.

Lord Oakeshott, the Liberal Democrat Treasury spokesman, described the size of the potential bonuses as "global greed by banks when global governance has failed". He added: "Britain's bonus tax only toys with the symptoms of the sickness, not its cause. These last few investment banks left standing have state-backed licences to print money so they must pay supertax on their superprofits, not hold taxpayers to ransom."

The leading Wall Street firms employ thousands of people in the City – Citibank alone employs 10,000 – and bankers are hoping their payments will not be reduced because of the 50% tax on bonuses over £25,000 implemented in last month's pre-budget report.

The major US players are scheduled to report their full-year trading performance in the next fortnight, starting with JP Morgan on Friday and culminating with the titans of Wall Street the following week when Goldman Sachs and Morgan Stanley will announce their results. Their bonus policies will be watched closely by their European rivals, particularly Royal Bank of Scotland – of which the taxpayer owns 84% – which has a large investment banking business and must have its bonus payments approved by the government.

Figures already published by the five highest-profile US banks reporting in the next fortnight show they have already set aside $50bn to pay their staff in the first nine months of the year. In the final three months of the year, analysts at Sanford Bernstein reckon a further $10bn will have been put aside by Goldman Sachs, Morgan Stanley and JP Morgan even though 2009 was the worst year for the US economy in 30 years.

While the Sanford Bernstein estimate takes the Goldman compensation cost to $19.8bn, analysts reckon it could swell further to $22bn and the other two banks might amass an estimated $5bn. Brad Hintz, an industrialist turned banker and now an analyst, conceded that workers on Wall Street are overpaid. "I've worked in the industrial world and I know there was equal talent in industrial America but when I went to Wall Street my compensation went up by a factor of three."

The potential for a $22bn compensation bill at Goldman was cited by an Illinois pension fund in a lawsuit filed on Thursday which argued that the payments harmed shareholders. Goldman maintained the lawsuit was "completely without merit".

The figures that the banks report as "compensation" include a number of costs including salary and benefits which are paid throughout the year, as well as the one-off cost of bonuses.

Staff at the banks will be informed of their bonus payouts in the coming fortnight although they may not receive the payments for a few more months.

http://www.guardian.co.uk/business/2010/...city-banks

[Jan Klimkowski]

Goldman admits 'improper' actions in sales of securities

WASHINGTON — Goldman Sachs' chief acknowledged Wednesday that the investment bank engaged in "improper" behavior in 2006 and 2007 when it made huge bets on a housing downturn while peddling as safe more than $40 billion in securities backed by risky U.S. home loans.

Lloyd Blankfein, Goldman's chairman and chief executive, made the surprising concession at the opening hearing of the Financial Crisis Inquiry Commission, a 10-member panel that Congress created to investigate and lay out for the public the causes of the worst financial crisis since the Great Depression.

Blankfein and senior officers of three other of the nation's most prominent banks told the panel that serious flaws in their risk models and business practices contributed to Wall Street's meltdown and the massive taxpayer bailouts that followed. The commission also heard testimony that the banks and quasi-government mortgage giant Fannie Mae recklessly took on as much as 95 times more risk than they could cover, and that Wall Street excels "at pulling the wool over the eyes of the American people."

Blankfein faced the toughest questioning.

Commission Chairman Phil Angelides, a former California state treasurer, warned Blankfein that he'd be "brutally honest" in his questioning. He asked why Goldman thought it was necessary to take out protection against investment-grade mortgage securities it was selling by purchasing insurance-like contracts known as credit-default swaps. Angelides likened it to selling a car with knowledge it had faulty brakes and then taking out an insurance policy on the buyer.

"I do think the behavior is improper, and we regret . . . the consequence that people have lost money in it," Blankfein told Angelides.

Until Wednesday, Goldman had insisted that it was merely managing its risks when it placed "hedges," in the form of wagers against the housing market, various venues including in secret offshore deals, with insurance giant American International Group and on a private London exchange.

In November, McClatchy reported exclusively that Goldman failed to tell investors about its contrary bets while selling $39 billion in risky mortgage securities it had issued, and another $18 billion in similar bonds issued by other firms. The Securities and Exchange Commission and Congress are investigating Goldman's swap dealings, said knowledgeable people who asked not to be identified because of the sensitivity of the issue.

While conceding that its contrary bets were improper, Blankfein said that in most cases Goldman took those positions to offset bets it had underwritten for clients seeking to wager on a housing downturn.

Similarly, he said that the firm got into the business of securitizing subprime loans to marginally qualified buyers on behalf of "sophisticated investors who sought that exposure."

Angelides, who crusaded for corporate accountability as California treasurer from 1999-2007, pressed Blankfein to explain why Goldman plunged deeper into subprime mortgages despite an FBI warning to Congress in 2004 that the lax lending standards could lead to a crisis. He also needled Blankfein for seeming to resist taking responsibility.

Goldman's purchase of the dicey loans, Blankfein admitted, allowed subprime mortgage lenders "to go out and originate more loans. So to that extent, we . . . played a part in making that market."

After the hearing, Angelides told McClatchy that he was "troubled" that Blankfein "never admitted that there was any responsibility of Goldman Sachs to make sure the products themselves were good products."

All the executives, including J.P. Morgan Chase Chief Executive Jamie Dimon, Morgan Stanley Chairman John Mack and Bank of America President and Chief Executive Brian Moynihan, acknowledged that they'd paid a huge price for failing to build the possibility of declines in home prices into their risk-management models.

That failure had disastrous consequences, since the banks packaged mortgages into investments that were sold worldwide as securities, often with top ratings from credit-rating agencies such as Moody's Investors Service. When home prices fell, these securities plummeted in value, the credit agencies' credibility plunged and distrust over banks' ability to cover tens of billions of dollars in swap bets created waves of panic that froze financial markets.

The lesson learned is that "given enough time, everything will happen, not can happen," Blankfein said. He noted that in the aftermath of the housing meltdown his firm models for even the most improbable scenarios in all its lines of business.

Dimon, whose company has been the least tarnished by the crisis, said that in retrospect it should have been obvious that mortgages given to people with little or no proof of income was a terrible idea.

However, he cautioned, until the market meltdown "you never saw losses in these products, because home prices were going up."

The sector's failure, he added, was the assumption that prices can only go up.

"I would say that was one of the big misses," Dimon said. "That is now part of the stress test" that J.P. Morgan conducts.

Moynihan, who's new in his job, said that post-crisis, his company tests for a range of improbable but possible scenarios in all areas where it extends credit.

Another criticism of the big banks that packaged mortgages into securities is that they didn't retain portions of what they were selling. They weren't exposed themselves to the risk that they were exposing others to. In plain speaking, they weren't eating their own cooking.

"We did eat our own cooking, and we choked on it," Mack said, referring to his firm's mistake in hanging on to too many of the securities.

Michael Mayo, a managing director and financial services analyst for the U.S. branch of French bank Calyon Securities, rattled off 10 causes of the financial crisis, including excessive investment in real estate, the surge in exotic bets such as credit-default swaps, and the fact that U.S. investment banks allowed leverage — the ratio to which their risks outstripped capital — to approach 40-to-1.

"I'm shocked and amazed more changes have not taken place," Mayo said. "There seems an unwritten premise that Wall Street, exactly how it exists today, is necessary for the economy to work. That's not true. ... Wall Street has done an incredible job at pulling the wool over the eyes of the American people."

Kyle Bass, whose Dallas-based hedge fund cashed in by betting on a housing downturn beginning in 2006, told the panel that AIG and other insurers could never have taken on such risk if they had been required to put up initial cash, or collateral, whenever they wrote protection via a swap contract.

He said that at one point in 2007, Fannie Mae had taken on risk exceeding 95 times the minimum capital it was required to hold, meaning its had set aside less than two tenths of a percent of its potential losses before it was placed in conservatorship in September 2008.

One commission member, Brooksley Born, enjoyed an element of sweet revenge Wednesday.

As the chair of the Commodity Futures Trading Commission in the Clinton administration, Born tried to persuade Congress to let her agency regulate exotic financial instruments such as swaps, but her views were overridden then Federal Reserve Chairman Alan Greenspan and then-Treasury Secretary Lawrence Summers, now a top Obama adviser.

On Wednesday, Born got a former executive of now-defunct investment bank Lehman Brothers to acknowledge that the "excessive" political lobbying power of large financial firms resulted in legislative changes that contributed to the crisis.

Surrounded by reporters during a recess, J.P. Morgan's Dimon maintained that "the people who should be blamed are the people in the management of the companies that failed."

Reacting to that assertion, Angelides told McClatchy that "there are some companies that survived because they got massive federal assistance," including Goldman and other banks whose officers testified Wednesday.

http://www.mcclatchydc.com/homepage/story/82270.html

[Jan Klimkowski]

Big kudos to Obama. He appears finally to have understood the huge and predatory danger that near totally unregulated financial markets pose to ordinary people and national economies.

The President’s proposal would strengthen the comprehensive financial reform package that is already moving through Congress.

“While the financial system is far stronger today than it was a year one year ago, it is still operating under the exact same rules that led to its near collapse,” said President Barack Obama. “My resolve to reform the system is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see record profits at some of the very firms claiming that they cannot lend more to small business, cannot keep credit card rates low, and cannot refund taxpayers for the bailout. It is exactly this kind of irresponsibility that makes clear reform is necessary.”

The proposal would:

1. Limit the Scope - The President and his economic team will work with Congress to ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.

2. Limit the Size - The President also announced a new proposal to limit the consolidation of our financial sector. The President’s proposal will place broader limits on the excessive growth of the market share of liabilities at the largest financial firms, to supplement existing caps on the market share of deposits.

In the coming weeks, the President will continue to work closely with Chairman Dodd and others to craft a strong, comprehensive financial reform bill that puts in place common sense rules of the road and robust safeguards for the benefit of consumers, closes loopholes, and ends the mentality of “Too Big to Fail.” Chairman Barney Frank’s financial reform legislation, which passed the House in December, laid the groundwork for this policy by authorizing regulators to restrict or prohibit large firms from engaging in excessively risky activities.

As part of the previously announced reform program, the proposals announced today will help put an end to the risky practices that contributed significantly to the financial crisis.

http://www.whitehouse.gov/the-press-offi...ons-rein-e

These proposals still have to be passed into law, and I anticipate huge opposition from investment banks, hedge funds, private equity funds etc through their bought and owned corrupt Senators and Congressmen. The markets have already declined sharply as the banker piggies see the trough full of taxpayer's money being dragged away from their dribbling snouts.

If passed intact, this legislation will prevent the likes of Goldman Sachs, JP Morgan, Citibank, hedge funds, private equity funds etc trading with massive amounts of capital that they do not have, and where the risk of failure does not exist because these institutions are "too big to fail" and therefore get bailed out with our taxpayer money when their insane bets fail.

Obama has declared war on Wall Street greed and recklessness.

Good for him.

I hope his legislation makes it onto the books with teeth still intact.

However there are very powerful deep political forces which are totally opposed to the changes as proposed.

Those forces are utterly ruthless.

[Jan Klimkowski]

I also concede the possibility that in my post above I have been duped by mere political rhetoric.

[Keith Millea]

I also concede the possibility that in my post above I have been duped by mere political rhetoric.

Good,now I don't have to come back with something cynical to post.

[Jan Klimkowski]

I also concede the possibility that in my post above I have been duped by mere political rhetoric.

Good,now I don't have to come back with something cynical to post.

:beer:

I agree that the more likely interpretation is that Obama's comments are all theatre.

However, the markets are certainly taking a dump all around the world.

MSM's official explanation for this is typically expounded by the financial propagandists of Bloomberg. It decodes as Obama is a socialist who hates markets which is obviously rubbish:

Jan. 22 (Bloomberg) -- U.S. investors overwhelmingly see President Barack Obama as anti-business and question his ability to manage a financial crisis, according to a Bloomberg survey.

The global quarterly poll of investors and analysts who are Bloomberg subscribers finds that 77 percent of U.S. respondents believe Obama is too anti-business and four-out-of-five are only somewhat confident or not confident of his ability to handle a financial emergency.

The poll also finds a decline in Obama’s overall favorability rating one year after taking office. He is viewed favorably by 27 percent of U.S. investors. In an October poll, 32 percent in the U.S. held a positive impression.

“Investors no longer feel they can trust their instincts to take risks,” said poll respondent David Young, a managing director for a broker dealer in New York. Young cited Obama’s efforts to trim bonuses and earnings, make health care his top priority over jobs and plans to tax “the rich or advantaged.”

Carlos Vadillo, a fixed-income analyst at Wells Fargo Securities LLC in San Francisco, said Obama has been in a “constant war” with the banking system, using “fat-cat bankers and other misnomers to describe a business model which supports a large portion of America.”

http://news.yahoo.com/s/bloomberg/201001...uii1bcrdmy

Of course, it's highly likely that the severe market falls have enabled some banker piggies to rake in more filthy lucre.

Having had more time to reflect on Obama's words, I will be astonished if any meaningful and watertight regulation of investment banking and proprietary trading becomes law.

[Jan Klimkowski]

Meanwhile, Wall Street cash is seeking to attack Obama's financial reform proposals:

Wall Street's $26m lobbyists gear up to fight Obama banks reform

Well-funded and influential lobby operation will argue that better regulation will be enough to solve problems

Banks are mobilising a smooth-running lobbying machine in Washington to *battle Barack Obama's plans to limit the size and scope of Wall Street institutions, as financial services firms gear up to stop a shake-up that could slice away large chunks of their operations.

Their influence on Capitol Hill is broad – the top eight US banks spent $26m (£16m) on lobbying efforts last year, an increase of 6% on 2008 despite their financial woes, according to Congressional records. And in the first 10 months of 2009, the financial industry donated $78.2m to federal candidates and party committees – more than any other business sector – according to political research institute the Centre for Responsive Politics.

"The power of the financial services sector in this city has not dissipated at all … they've just done things in a quieter way," said Ethan Siegel, an analyst at financial consultancy The Washington Exchange, who monitors Congress for big investors. "They haven't pulled back on their lobbying just because they've become piñata [punchbags] in the press."

Wall Street lobbyists argue that scaling back the size of banks misdiagnoses the cause of the financial crisis, jeopardises jobs, damages America's competitiveness and could inhibit growth.

The Financial Services Forum, which represents 18 top banks including Goldman Sachs, JP Morgan and Citigroup, says the problem of institutions becoming "too big to fail" ought to be tackled through more effective supervision, and by creating an authority able to wind down failing firms, rather than by forcing them to shrink. Spokeswoman Erica Hurtt said: "This was not a trading crisis and these proposals miss the mark. They won't get to the causes of the crisis."

Banks' persuasiveness has already had significant impact on the Obama administration. Plans for the creation of a consumer financial protection agency are meeting staunch Senate opposition and may be watered down to get the 60-40 support needed to override objections.

One widely used strategy by the financial industry has been to deploy representatives of smaller high-street banks to make the case to lawmakers. Organisations such as the Independent Community Bankers of America tend to get a sympathetic hearing because they can point to members in towns and cities in almost every Congressional district, rather than purely in lower Manhattan.

Douglas Elliott, a non-partisan expert in financial services at the Brookings Institution, said JP Morgan and a few other firms were likely to be particularly alarmed at the prospect of a tightening of the existing cap preventing a bank from holding more than 10% of America's insured deposits: "They may already be over any limit under consideration. If they are, they'll probably be allowed to stay unchanged but it will mean they have to eschew acquisitions."

He added that banks will not succeed in defeating restrictions entirely: "Everybody hates banks now and my intuition is that bank lobbyists overplayed their hand last year. It would have been better for them to work out some compromises rather than trying to destroy reform bills entirely."

http://www.guardian.co.uk/business/2010/...anks-obama

[Jan Klimkowski]

Looks like the FBI identified rampant criminality in the mortgage market back in, let's see, September 2004:

[B]

Assistant FBI Director Chris Swecker said the booming mortgage market, fueled by low interest rates and soaring home values, has attracted unscrupulous professionals and criminal groups

[/B]
That'll be Wall Street and the City of London then....

FBI warns of mortgage fraud 'epidemic'
Seeks to head off 'next S&L crisis'
From Terry Frieden
CNN Washington Bureau
Friday, September 17, 2004 Posted: 2144 GMT (0544 HKT)

WASHINGTON (CNN) -- Rampant fraud in the mortgage industry has increased so sharply that the FBI warned Friday of an "epidemic" of financial crimes which, if not curtailed, could become "the next S&L crisis."

Assistant FBI Director Chris Swecker said the booming mortgage market, fueled by low interest rates and soaring home values, has attracted unscrupulous professionals and criminal groups whose fraudulent activities could cause multibillion-dollar losses to financial institutions.

"It has the potential to be an epidemic," said Swecker, who heads the Criminal Division at FBI headquarters in Washington. "We think we can prevent a problem that could have as much impact as the S&L crisis," he said.

In the 1980s, many Savings and Loans failed because of poor management, risky loans and investments, and in some cases, fraud. Taxpayers were left with a $132 billion tab to cover federal guarantees to S&L customers.

The FBI has dispatched undercover teams across the country in an urgent investigation into dealings by suspect mortgage brokers, appraisers, short-term investors, and loan officers, Swecker, flanked by FBI executives and Justice Department prosecutors, revealed.

In one operation, six individuals were arrested Thursday in Charlotte, charged with bank fraud for their roles in a multimillion-dollar mortgage fraud, officials said. The two-year investigation found fraudulent loans that exposed financial institutions and mortgage companies to $130 million in potential losses, they said.

Also Thursday, federal agents in Jacksonville arrested two people and executed seven search warrants in connection with an alleged scheme designed to defraud banks of $22 million, officials said.

The number of open FBI mortgage fraud investigations has increased more than five-fold in the past three years, from 102 probes in 2001 to 533 as of June 30 this year, the FBI said. The potential losses are staggering, and many financial institutions are cooperating with investigators.

Officials noted mortgage industry sources have reported more than 12,000 cases of suspicious activity in the past nine months, three times the number reported in all of 2001.

While the FBI described mortgage-related fraud as a nationwide problem, it said the levels of illegal activity are worse in some locations than in others.

States identified as the top 10 "hot spots" for mortgage fraud are Georgia, South Carolina, Florida, Michigan, Illinois, Missouri, California, Nevada, Utah and Colorado.

"It's bad in Georgia, the Atlanta area," said John Gillies, chief of the FBI's Financial Institutions Fraud Unit. "It was bad in the Charlotte area, but we've had a lot of undercover activity there that's helped push the problem into South Carolina."

Josh Hochberg, head of the Justice Department's Fraud Section, said some organized ethnic groups are becoming involved in mortgage fraud schemes, but he declined to identify the groups.

Officials said mortgage fraud is one prominent aspect of a wider problem of fraud aimed at financial institutions. The FBI said action has been taken against 205 individuals in the past month in what it described as the "largest nationwide enforcement operation in FBI history directed at organized groups and individuals engaged in financial institution fraud."

In addition to mortgage fraud, "Operation Continued Action" also targeted loan fraud, check kiting, and identity theft as major problems.

In one check-kiting scheme in Binghamton, New York, the operator of a recycling business wrote in excess of $1 billion in worthless checks over a 14-month period, officials said. Not all of the checks were cashed.

The FBI said last week the businessman, Adam Weitsman, was sentenced to one year in prison and forfeited $1 million in assets.

http://edition.cnn.com/2004/LAW/09/17/mortgage.fraud/

[Jan Klimkowski]

Zero Hedge has an insider leak on the AIG/Fed manipulations, involving the usaal suspects - with Goldman Sachs in a leading role.

It's long, technical in parts, and important:

http://www.zerohedge.com/article/present...ub-50-cent

A couple of nuggets from the piece:

while Goldman bought all of its CDO protection from AIG exclusively, it definitely used a very broad seller base when it loaded up on the actual AIG protection. Therefore, Goldman's only, ONLY risk, was that of a complete systemic collapse and the repudiation of all contracts, CDS and otherwise. Which is why Goldman's various agents did everything they could to prevent that from happening, up to and including loading the Federal Reserve with trillions of toxic debt in the upcoming 12 months.

The fact that the Fed was willing to risk taxpayer capital with such reckless abandon, first in the form of accepting literally worthless reference securities from Soc Gen (as documented by BlackRock), and subsequently by bailing out Goldman at well over par (remember the money the firm made on its actual AIG counterparty-risk) protection, would have been sufficient to terminate Geithner's career in any self-respecting banana republic. Too bad America is no longer even that.

[David Guyatt]

I am also suspicious of Obama's words. Is it rhetoric without a real bite I keep wondering?

On the other hand his popularity waned so quickly in the year following his election -- all because of his non action on the banking community -- that he was in considerable danger of not being reelected next time round. Being a politician he knows where his bread is buttered but is also aware that he must woo back the electorate.

Time will tell if his words prove empty or not. I hope to God he goes for it. No matter though, as dear ol' Blighty will accommodate all bankers of all shades of crookery without reserve or restriction.