Big banks may not be evil. But what's becoming increasingly clear is that the bigger they are, the more evil stuff they are involved with.
Hidden in the document detailing Tuesday's settlement between the Department of Justice and JPMorgan Chase over Bernie Madoff's Ponzi scheme was this nugget: JPMorgan was essentially shorting Madoff.
In other words, it wasn't only that JPMorgan (JPM) ignored and failed to report to authorities the numerous red flags its employees encountered over the 20 years it served as the main banker to the largest financial fraud in history. To be sure, JPMorgan did that. But on top of that, the bank was actually betting that Madoff was a fraud, and presumably expecting to collect when others found out.
Given that fact, it's not much of a surprise that JPMorgan decided to settle for $1.7 billion rather than fight the charges.
JPMorgan is essentially being penalized for being Madoff's banker. But the big bank did a lot of business with Madoff over the years. It had the Madoff funds' main bank account. It also invested in Madoff through feeder funds. And it created derivatives that it sold to people who couldn't get into a Madoff fund but still wanted to profit from the performance of Madoff's hedge fund. The derivatives were supposed to rise and fall with Madoff's performance. But since it was all faked, the derivatives only rose. And people wanted them.
That last bit is how JPMorgan got into the messy business of shorting Madoff, which actually was the right call, but now looks pretty bad.
It is normally very hard to short a hedge fund. Most don't have shares that trade. And when they do, they are for the parent company and not the fund. But when you create a derivative based on a hedge fund, as JPMorgan did, you create the opportunity for a short. The buyer of the derivative is going "long," and the seller is going "short." And in this case, it was JPMorgan that was the seller of Madoff-linked derivatives, at one point as much as a few hundred million.
For a time, JPMorgan hedged its bet, in part by putting some of the bank's own money into Madoff-related funds. But in the fall of 2008, JPMorgan suddenly pulled nearly 80% of that money out. That left it essentially short Madoff.
But it didn't get its short right either. According to the settlement, JPMorgan bankers were worried that they were "exposed to substantial risk in the event that Madoff Securities continue to perform successfully." Madoff, even if it was a fraud, could continue to fake his returns for a while longer. That would mean losses for JPMorgan's short position.
So they eventually decided just to get out of Madoff completely. In late 2008, the bank spent nearly $75 million canceling all the equity derivatives it had left related to Madoff, except for $5 million. It held onto that position even after finally reporting in mid-October 2008 to British authorities that it feared Madoff was a fraud.
In late November 2008, just two weeks before Bernie was arrested, JPMorgan, according to the Justice Department's settlement, got an offer to rip up that last $5 million short bet against Madoff. The bank declined, with a trader replying that they thought the short bet was "as of today ... very valuable."
That was the best Madoff trade JPMorgan made; that is, until Tuesday.
Source: CNN Money
Showing posts with label JPMorgan Chase. Show all posts
Showing posts with label JPMorgan Chase. Show all posts
Wednesday, January 8, 2014
Thursday, September 20, 2012
Andrew Carnegie on value of money
"Man does not live by bread alone. I have known millionaires starving for lack of the nutriment which alone can sustain all that is human in man, and I know workmen, and many so-called poor men, who revel in luxuries beyond the power of those millionaires to reach. It is the mind that makes the body rich. There is no class so pitiably wretched as that which possesses money and nothing else. Money can only be the useful drudge of things immeasurably higher than itself. Exalted beyond this, as it sometimes is, it remains Caliban still and still plays the beast. My aspirations take a higher flight. Mine be it to have contributed to the enlightenment and the joys of the mind, to the things of the spirit, to all that tends to bring into the lives of the toilers of Pittsburgh sweetness and light. I hold this the noblest possible use of wealth." — Andrew CarnegieAndrew Carnegie poured a great deal of his energies and resources into institutions which would support and further his dedication to free education for all and the notion of a meritocracy. By the age of 35, Carnegie decided to leave his business enterprises behind and concentrate on philanthropy and writing, rather than personal profit. He sold the Carnegie Steel Company in 1901 to J.P Morgan for $480,000,000 and set up numerous institutions to fund educational projects around the world. Of these, the Carnegie Corporation of New York and the Carnegie Endowment for International Peace still operate today.
"People who are unable to motivate themselves must be content with mediocrity, no matter how impressive their other talents." — Andrew CarnegieSource: "Carnegie Libraries". Ontario Ministry of Tourism and Culture.
Wednesday, September 5, 2012
Banks Face Suits as States Weigh Libor Losses
The scandal over global interest rates has state officials like Janet Cowell of North Carolina working intensely behind the scenes to build a case for suing the nation’s largest banks. Ms. Cowell, the state’s elected treasurer, and several of her staff members have spent the summer combing through the state’s investments trying to determine how much the state may have lost because of suspected manipulation of the London interbank offered rate, or Libor, which is used as a benchmark for trillions of dollars of financial contracts around the world.
“We think this could be as big as the mortgage crisis settlement, that this could be a really high impact situation and that we should be aggressive on this,” Ms. Cowell said, referring to the $25 billion settlement that the nation’s biggest banks entered with state attorneys general.
The activity provides a glimpse at how widely the Libor scandal has spread through the financial world, and how much damage may still be in store for the banks accused of manipulating Libor. Her work also suggests just how difficult it is, and how long it may take, to get to the bottom of the losses.
The attorneys general in Maryland, Massachusetts, New York and Connecticut have all been examining how much their states may have lost as a result of a lowered Libor. A spokeswoman for Connecticut’s attorney general, George C. Jepsen, said that the state’s work with New York’s attorney general, Eric T. Schneiderman, “has broadened significantly over the last few weeks and we are now coordinating with a much larger group of attorneys general.”
Even before the British bank Barclays admitted in June that its employees had tried to manipulate Libor, there were a number of lawsuits filed by cities and municipal agencies seeking damages from large banks for manipulating Libor. But while those cases were filed by private sector lawyers, the public officials are looking at bringing more wide-ranging lawsuits on behalf of the states. The Justice Department has coordinated with the states and is leading its own investigation.
The government officials are hoping that their cases will be bolstered by new settlements between regulators and individual banks that are suspected of participating in the manipulation. Most of the more than one dozen banks involved in setting Libor have said in official filings that they are in discussions with regulators about their involvement in the Libor process.
Libor is supposed to represent how much banks are paying for short-term loans from other banks. It is determined by the British Bankers Association after a daily poll of the world’s largest banks. It then serves as a benchmark for rates paid by consumers and businesses on everything from mortgages to derivatives to student loans.
Barclays said in its settlement that it and other banks pushed Libor down artificially during the financial crisis to appear more healthy. Barclays also admitted that its traders tried to manipulate Libor at other points in order to sweeten particular financial deals. Barclays paid $450 million to settle the charges.
The financial products used by states and local governments are especially vulnerable to an artificially lowered rate.
Ms. Cowell, a 44-year-old Democrat and former business consultant who is running for another four-year term, was aware of the potential implications of the Libor case for North Carolina almost as soon as the Barclays settlement was announced on June 27. The next Monday, at her weekly staff meeting, she asked her office’s lawyers and investment officers to begin looking into it.
The inquiry has focused primarily on two areas of the state’s finances.
One was the state’s public pension plans, which in North Carolina are overseen by the treasurer. A state money manager began identifying bonds held by the state pension fund and money market fund investments that derived their value from Libor.
In July, lawyers from the treasurer’s office took part in a conference call on the topic with pension funds in other states. Ms. Cowell and members of her staff have found a few investments held by the $76 billion pension fund that were tied to Libor, but they have now determined that the losses were most likely “pretty small.”
The other, more significant area where Ms. Cowell began looking for losses was in a kind of financial contract that many states use, known as an interest rate swap. States use swaps when they want to issue a bond at a floating interest rate but protect themselves from future swings in rates. In a standard swap, a state makes a regular payment to its bank and gets a payment back that is determined by the level of Libor. If Libor was lower, the payments will be, too.
North Carolina had two major swaps at the time the benchmark was suspected of being rigged. Together, the two swaps were tied to $1.3 billion of bonds that were issued in 2002 and 2005. The banks on the other side of these contracts included Bank of America, of Charlotte, N.C., and JPMorgan Chase & Company based in New York, both of which are involved in setting Libor.
The challenge facing North Carolina and other states is that there is no agreement yet on how much the banks actually manipulated Libor, and for how long. The lawsuits that have already been filed have estimated that the banks held Libor down by at least 30 basis points, or 0.30 percent, for three years. By one method of calculation, that could have meant losses for North Carolina of around $10 million on their swaps.
Ms. Cowell said she assumed that as more banks settled with regulators, those numbers would become clearer. In the meantime, the treasurer’s office is working out formulas for losses that they can plug numbers into if and when new settlements are made public. At that point, Ms. Cowell also plans to share her work with other municipal agencies in North Carolina that held about 40 swaps during the period in question.
“This is an unprecedented level of analysis, and an unprecedented wide spectrum of financial impact,” Ms. Cowell said.
The inquiry could provide a political bump for Ms. Cowell, who is seeking another term as anti-Wall Street sentiment is running high. A graduate of the Wharton School of Business, she served on the Raleigh, N.C., City Council and then the state Senate before taking office in 2008. She cites among her accomplishments the state’s maintaining its status as one of eight with a AAA rating from the major credit rating agencies.
North Carolina’s attorney general will make the final determination on whether the state will join existing lawsuits, proceed with its own case or take no action at all. The attorney general’s office did not respond to requests for comment.
But the office has been involved in many of the discussions with the treasurer’s staff, people involved in the meetings said.
Source: New York Times
“We think this could be as big as the mortgage crisis settlement, that this could be a really high impact situation and that we should be aggressive on this,” Ms. Cowell said, referring to the $25 billion settlement that the nation’s biggest banks entered with state attorneys general.
The activity provides a glimpse at how widely the Libor scandal has spread through the financial world, and how much damage may still be in store for the banks accused of manipulating Libor. Her work also suggests just how difficult it is, and how long it may take, to get to the bottom of the losses.
The attorneys general in Maryland, Massachusetts, New York and Connecticut have all been examining how much their states may have lost as a result of a lowered Libor. A spokeswoman for Connecticut’s attorney general, George C. Jepsen, said that the state’s work with New York’s attorney general, Eric T. Schneiderman, “has broadened significantly over the last few weeks and we are now coordinating with a much larger group of attorneys general.”
Even before the British bank Barclays admitted in June that its employees had tried to manipulate Libor, there were a number of lawsuits filed by cities and municipal agencies seeking damages from large banks for manipulating Libor. But while those cases were filed by private sector lawyers, the public officials are looking at bringing more wide-ranging lawsuits on behalf of the states. The Justice Department has coordinated with the states and is leading its own investigation.
The government officials are hoping that their cases will be bolstered by new settlements between regulators and individual banks that are suspected of participating in the manipulation. Most of the more than one dozen banks involved in setting Libor have said in official filings that they are in discussions with regulators about their involvement in the Libor process.
Libor is supposed to represent how much banks are paying for short-term loans from other banks. It is determined by the British Bankers Association after a daily poll of the world’s largest banks. It then serves as a benchmark for rates paid by consumers and businesses on everything from mortgages to derivatives to student loans.
Barclays said in its settlement that it and other banks pushed Libor down artificially during the financial crisis to appear more healthy. Barclays also admitted that its traders tried to manipulate Libor at other points in order to sweeten particular financial deals. Barclays paid $450 million to settle the charges.
The financial products used by states and local governments are especially vulnerable to an artificially lowered rate.
Ms. Cowell, a 44-year-old Democrat and former business consultant who is running for another four-year term, was aware of the potential implications of the Libor case for North Carolina almost as soon as the Barclays settlement was announced on June 27. The next Monday, at her weekly staff meeting, she asked her office’s lawyers and investment officers to begin looking into it.
The inquiry has focused primarily on two areas of the state’s finances.
One was the state’s public pension plans, which in North Carolina are overseen by the treasurer. A state money manager began identifying bonds held by the state pension fund and money market fund investments that derived their value from Libor.
In July, lawyers from the treasurer’s office took part in a conference call on the topic with pension funds in other states. Ms. Cowell and members of her staff have found a few investments held by the $76 billion pension fund that were tied to Libor, but they have now determined that the losses were most likely “pretty small.”
The other, more significant area where Ms. Cowell began looking for losses was in a kind of financial contract that many states use, known as an interest rate swap. States use swaps when they want to issue a bond at a floating interest rate but protect themselves from future swings in rates. In a standard swap, a state makes a regular payment to its bank and gets a payment back that is determined by the level of Libor. If Libor was lower, the payments will be, too.
North Carolina had two major swaps at the time the benchmark was suspected of being rigged. Together, the two swaps were tied to $1.3 billion of bonds that were issued in 2002 and 2005. The banks on the other side of these contracts included Bank of America, of Charlotte, N.C., and JPMorgan Chase & Company based in New York, both of which are involved in setting Libor.
The challenge facing North Carolina and other states is that there is no agreement yet on how much the banks actually manipulated Libor, and for how long. The lawsuits that have already been filed have estimated that the banks held Libor down by at least 30 basis points, or 0.30 percent, for three years. By one method of calculation, that could have meant losses for North Carolina of around $10 million on their swaps.
Ms. Cowell said she assumed that as more banks settled with regulators, those numbers would become clearer. In the meantime, the treasurer’s office is working out formulas for losses that they can plug numbers into if and when new settlements are made public. At that point, Ms. Cowell also plans to share her work with other municipal agencies in North Carolina that held about 40 swaps during the period in question.
“This is an unprecedented level of analysis, and an unprecedented wide spectrum of financial impact,” Ms. Cowell said.
The inquiry could provide a political bump for Ms. Cowell, who is seeking another term as anti-Wall Street sentiment is running high. A graduate of the Wharton School of Business, she served on the Raleigh, N.C., City Council and then the state Senate before taking office in 2008. She cites among her accomplishments the state’s maintaining its status as one of eight with a AAA rating from the major credit rating agencies.
North Carolina’s attorney general will make the final determination on whether the state will join existing lawsuits, proceed with its own case or take no action at all. The attorney general’s office did not respond to requests for comment.
But the office has been involved in many of the discussions with the treasurer’s staff, people involved in the meetings said.
Source: New York Times
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