Archive for the ‘Banks and Financial Industry’ Category

Today’s biggest news on the corporate ethics front was the federal government’s settlement with Bank of America and other large banks related in part to their foreclosure processes.

According the Reuters story:

  • “The [foreclosure] reviews had already cost more than $1.5 billion. They turned up evidence that around 6.5 percent of the loan files contained some error requiring compensation, but most of those errors involved payouts much less than $125,000.”
  • Under the settlement the banks will provide “up to $125,000 to homeowners whose homes were being foreclosed when the paperwork problems emerged.”
  • Bank of America “also announced about $11.6 billion of settlements with … Fannie Mae to end allegations the bank improperly sold mortgages that later soured, and to resolve questions about foreclosure delays.”
  • “The bank is moving closer to the day when it can stop worrying about mortgages and start focusing on growth, analysts and investors said.”

This is great news for BoA and the other banks involved and the investors who lost money on the mortgage backed CDOs and other vehicles. They can get back to growth.

As for the people, often “sub-prime” mortgagees, who went through the traumas of foreclosure – locked out of their homes, their furniture on the street or ruined, their credit destroyed – the most they can get is up to $125,000. And how were they foreclosed on? Illegally. Paperwork not processed properly. Mortgages that had been sold to investors without a legal trail of ownership of the collateral – the home. Unable to pay for lawyers and court fees to protect their rights. Being told to re-finance and then foreclosed on when they followed the bank’s directions. We all remember reading those stories in the paper don’t we? And let us not forget our soldiers in uniform overseas whose homes were foreclosed in spite of clear federal law prohibiting that from happening.

Yes this was a great settlement for some and a life altering event for others.


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It is said that great events can test one’s character. This week’s storm has provided – and will continue to provide – a test of our national ethics. So far we are doing well. Professional ethics at its best has come to the fore in the past few days:

  • The actions of the NYU Langone Medical Center – doctors, nurses, staff and administrators – in reacting to the loss of power was an effort they can always be proud of. Saving the lives of young babies who were dependent upon respirators that no longer functioned; removing their patients down the dark stairwells from many floors up; and maintaining throughout a sense of order and calm was ethical professional behavior at its best.
  • The New York Fire Department, the people who never say “we can’t,” fought a raging fire in Queens at the edge of the incoming ocean in the midst of the storm.
  • The brave helicopter pilots and rescuers from the Coast Guard saved all but two of the crew of the Bounty, plucking them one by one from the massive waves in the Atlantic.

These and untold others are the many heroes we have among us. People who risked their lives to save others.

Now we have another test that will soon be upon us – a test of corporate and political ethics. The one that comes when ordinary citizens file their insurance claims.

We have some good friends who lost their home to Hurricane Katrina years ago. They were lucky enough to be out of town at the time; neighbors who stayed were never seen again. When they were able to return there was nothing left but a handful of personal items and a lot of memories. A total loss.

Many years later they were still fighting the insurance company who had their policy. Read the fine print. Disaster is tricky. Was their home destroyed by flooding? Or was it the wind? Or was it the storm surge? No camera was there to record what happened. No neighbor could serve as an eye witness. You think you have insurance… but you don’t.

Sandy is a huge insurance industry event. Enormous. My bet is that some in the industry will do everything they can to forestall and avoid paying claims. Call me a cynic, but there is a history. We will see. And regardless of who wins on Tuesday, I don’t expect any substantive new legislation that oversees the writing of the fine print to eliminate the question marks and loopholes for future natural disaster victims.

Meantime, kudos go to the airline industry. They have fine print too, but they waived the $150 change fees for people who had to cancel or desired to cancel their travel. The airlines lost money on this one and their financial health is not nearly as strong as the insurers. The airlines lead the way.

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Remember Jeff Skilling, the former ENRON CEO now serving time in the federal pen? One of Skilling’s infamous remarks while CEO was this joke: “What’s the difference between the Titanic and California? The Titanic still had the lights on when it went down.” Skilling was referring to the audacious energy trading and hedging activity being conducted by Enron that drove up the spot prices for electricity, forcing California to pay dearly. Later on we found out that Enron traders often engaged in a “game” in which market demand was temporarily created by other Enron traders for the sole purpose of driving the prices up. Enron would then profit from a trade, with California energy buyers on the other end, and release their position. Cute, huh?

This past weekend, Michael Hiltzik had an article in the Los Angeles Times discussing JPMorgan Chase’s activity in the California energy market. Hiltzik’s article was focused predominantly on the legal maneuvers the big bank and its attorneys have been taking in response to a FERC investigation of their trading activity. But along the way, almost as a sidebar to his discussion, he describes the scale of  JPMorgan’s impact in this market:

  • The bank has trading rights related to ten power generation stations in the state
  • After the California Independent System Operator, which manages the wholesale power market for California, closed a regulatory loophole, the bank found another one to exploit, thereby costing ratepayers over $ 5 million in five days
  • The bank does not actually own any power plants

JPMorgan Chase has been allegedly exploiting “loopholes” in the trading regulations and forcing consumers to pay more for their home electric bill so the bank can have more profits — at least ENRON was in the “b’dness” as Texans put it. JPMorgan is a bank. It’s time to get the banks back to banking and out of trading commodities directly for their own profits. When banks and investment banks, acting as traders for their own accounts, increase prices that ordinary people pay for basic necessities such as food, clothing (via cotton), oil and electricity, the foundation of supply and demand based pricing slips away. For the big banks to generate profits by forcing consumers to pay higher prices than market supply and demand would have dictated is unethical.

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News of the World Still Making News

Rupert Murdoch may have shut down his phone hacking London tabloid, but that hasn’t stopped it from generating news. This month’s stories include:

  • Parent company News Corp. named a new person to its Board of Directors – Mr. Alvaro Uribe, a former president of Columbia. Appropriately enough Mr. Uribe’s former chief of staff was arrested last year in connection with a case involving illegal wiretapping.
  • A number of prominent individuals have recently filed their own lawsuits seeking damages for the alleged hacking of their own phones. Among the names are Neil Kinnock, former head of Britain’s Labour Party, Stephen Byers, a former cabinet minister, and an assortment of actors and other celebrities.  A total of 53 new claims were submitted earlier this month bringing the total to 174.

News in the World of Banking

  • JPMorgan Chase may have been recently added to the list of banks included in the Iran money laundering investigation.
  • JPMorgan is also facing growing pressure in the US Senate regarding the losses in its risk management operation.
  • Freddie Mac stands to recover several $ Billion-with-a-B from various banks which had entered into mortgage repurchase agreements with Freddie Mac.
  • And then there was/is Lehman Brothers. Remember those guys? Well what’s left of their company has just sued JPMorgan Chase for over $ 2 Billion related to derivatives obligations. Lehman is also fighting JPMChase over the $ 6 Billion the big bank claims they are owed by Lehman.
  • And last but not least in the world of banking, a report just out from Better Markets claims that Americans have lost a total of $12.8 TRILLION since the collapse of Lehman Brothers.
  • In the meantime, asset manager Blackrock was fined $ 15 million by a UK regulatory agency for not following certain rules aimed at protecting investors’ money in the event that Blackrock went under.

Observation: Every piece of harm the banking industry has done ends up being an aggregate multi-billion loss for investors and consumers. Every successful prosecution ends up with a multi-million dollar fine and no one going to jail. What’s wrong with this picture?

Justice in the News

  • Stanford Financial’s former chief investment officer, Laura Pendergest Holt, was sentenced to three years in prison for her involvement in the Houston company’s multi-year ponzi operation.
  • A whistle-blower who testified against UBS was awarded $104 million by a federal court. The case was a significant test of the government’s ability to successfully award individual whistle-blowers. The particular case involved UBS’ alleged attempts to entice US citizens to evade taxes. UBS had settled with the US by paying $780 million to avoid being prosecuted.

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HFT is computer trading. In and out of a position in less than 50 milliseconds. Think it doesn’t affect your portfolio? Think again. Even though a trade may last such a very short time, it can impact your portfolio in two ways.

One impact, though rare thus far, can be quite dramatic. It is the software error that produces a “flash crash.” A flash crash occurs when one computer’s programming mistakenly identifies a sudden drop in a stock’s price or in a broader segment of the market. The computer immediately initiates orders to sell stock and, just like a human based panic, this triggers other programs on other computers to sell as well. Individual investors can be caught in this sharp decline before the bounce back either because they are on line at that time and see it occur or because they have stop loss orders set up on some of their investments. Their stock is sold at a greatly reduced price and the next day or 30 minutes later, prices are back up where they had been.

The second impact is in the overall perceived fairness and reliability of the market. Many recent analyses have been written about the large percentage of potential investors who are on the sidelines because they don’t trust the market. Knowing that flash crashes can now occur, knowing that a large percentage (some estimate as much as 60%) of the average day’s trading volume is initiated by computers, knowing their human stock broker and her firm cannot control this phenomena — all combine to discourage investment. When investment is discouraged, prices are depressed. When investors stay out, they miss potential market upswings.

But the debate I want to participate in is whether or not HFT is ethical. This weekend’s New York Times Business section devoted coverage to two stock brokers, Sal Arnuk and Joseph Saluzzi, who have written a book on HFT and are highly critical of this type of trading. The Times’ article mentions a heated exchange between Mr. Saluzzi and another guest on a CNBC program that resulted when he raised the “ethical” question.

Here is why I believe that the practice is ethically flawed: it violates the ethical standards in two layers of my Seven Layers of Integrity® — the community standards of fair play and moral and spiritual values.

Community Standards

The basic premise behind the market is that stock prices are “free market driven.” Perceived value of a share of stock is determined by supply and demand, by investors bidding for a share but limiting their bid to a particular value. HFT damages the free market for publicly traded stocks by manipulating prices to its advantage within a far shorter interval than humans can react:

  • As noted in the Times article, HFT does not just place trades. HFT is capable of gaining price intelligence, and then acting on that intelligence, in literally less time than you can blink your eye.
  • Programs submit trades, learn that the trade is not accepted, then cancel the trade all within a few milliseconds. The trade is re-opened in a smaller block or at a slightly better price.
  • An investor who sees a posted price on the exchange is not able to get that price as the computer on the other end alters its selling price by a penny, tempting the investor to move up.

None of these activities can be replicated by humans due to the rapid time span (hence, “high frequency”) in which the computers can operate. In short, it is like the IBM chess playing computer versus a human non-expert chess player. And the nature of what takes place alters the market pricing in a way that has nothing to do with the “free market” concept.

HFT eliminates a level playing field on the exchanges for all investors. No one is saying that all investors have equal intelligence, but all investors do have the right to expect their trades to be honored. I have personally seen my own limit orders go unexecuted even though the electronic ticker at my online brokerage service shows that the price dropped to below my limit during that timeframe and a buyer existed.

Moral and Spiritual Values

HFT has a tendency to create and increase instability in the market, thereby impacting the portfolios, savings and net assets of private citizens around the globe, not just the few investors in a particular stock on a particular date.

  • No computer program ever written is flawless.
  • As instability from one piece of software arises, it has a strong tendency, as seen in actual examples, to cause other programs on other computers to react negatively.
  • Crashes can occur at the speed of computer interaction.

As I have commented in other posts concerning the financial industry and its failure to acknowledge culpability in events that impact millions of people, there is no spiritual principle I am aware of that justifies risking the life savings and jobs of ordinary people around the world so that a few firms and their partners can have even more money. HFT has sent a few warning shots across the nation’s economic bow. As long as we allow it we are risking a much deeper impact across a much wider swath of the world’s economy.

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Money Laundering for Iran

It’s late August. Even the financial news takes a vacation. So of course it was a quiet couple of weeks with little news on Libor, the JPMorgan Chase hedge unit, News of the World or even Chesapeake. Government investigations likely continue their steady grind behind the curtain. Meanwhile both Tampa and New Orleans braced themselves for Isaac.

But wait, there was one new story of note: Laundries. Our own family has two laundries. One isn’t that great but it does a decent job with the standard business shirt for a reasonable price. The other is where we take our nicer outfits to be dry cleaned. It appears that Iran might have copied that model as several banks stand accused of laundering Iranian money on its way to and from the U.S. That would be illegal, due to the current international sanctions against Iran.

Standard Chartered

The story was just breaking in our last post when UK’s Standard Chartered was accused by the New York State Department of Financial Services with allegedly laundering $250 BILLION for Iran through its New York branch. The next week, Standard Chartered was reported working on a $340 Million deal with New York State allowing it to continue to operate in New York. The deal was completed, but only after their CEO left his vacation early (bummer!) to head directly to the US to negotiate.  Standard Chartered still has to face several US Federal agencies.

Standard Chartered was also sued by the estates of military personnel killed in Lebanon in 1983 on the basis that the bank had concealed its Iranian money at the time the plaintiffs won a suit against Iran in connection with the tragedy.

Deutsche Bank and RBS

Several days later, Deutsche Bank was named as an additional target of Iran money laundering investigators.

Not to be outdone by the Germans, the Royal Bank of Scotland was also cited as a target in the investigation.


While apparently innocent in terms of Iran, Facebook’s iPO debacle continued to spew out more stories. One of its prominent directors dumped a reported $$ Billion-With-a-B in stock as soon as his restrictions in selling had lapsed. And the COO reportedly let out to an investor that the $38/share IPO value had been determined in part based on what it would take to deter Wall Street traders from simply flipping the stock. You mean it had nothing to do with the company’s actual value?? Unbelievable.

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John C. Bogle, the 83 year old founder of the Vanguard mutual fund company, was the featured story in the Sunday New York Times Business Section. Anyone who is interested in making our financial markets a more ethical sphere of life, who is interested in a fair and level playing field for all investors and who wants to see a new cultural / behavioral standard in that industry should read this article. It cheered my heart to know that there is someone out there who built a company in that industry which has been a stellar performer while maintaining a customer focused and ethical culture. Thanks so much, Mr. Bogle.

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JPMorgan Chase may be facing inquiries from up to eleven different government agencies regarding its role in the Libor rate setting scandal.

The managing director of the U.K.’s Financial Services Authority stated last week that the Libor “is no longer fit for purpose.” He is pushing for it to be replaced with alternative indices. The Reuters article implies that other indices used in commodities and stocks may also be “under scrutiny.” This will surely be grist for the mill in the courthouse where lawsuits are already being filed from plaintiffs who believe their Libor based interest rates were calculated incorrectly. It also raises the question of legitimacy on any existing contract that is Libor based. This one is going to go on for a long time with many interesting and significant repercussions.

Standard Chartered

Standard Chartered is a great name for a UK bank, isn’t it? The name just feels old, stable, conservative…. all the things you would want in a bank. Now the New York State Department of Financial Services has a hotshot young regulator who is threatening to revoke Standard Chartered’s “charter” to operate in New York on the basis that the bank allegedly laundered $250 BILLION-with-a-B for Iran through its New York branch.


Goldman Sachs has escaped prosecution by the Justice Department for its actions related to packaging mortgages and reselling them as collateralized debt. The feds felt they didn’t have enough evidence to win the case. Sigh.


News Corporation announced a $1.6 Billion-with-a-B LOSS for the most recent fiscal quarter, primarily a result of write-downs related to the restructuring of its businesses around the world. That restructuring was announced following the phone hacking scandal at News of the World in London which has resulted in Murdoch’s protege Rebekah Brooks being formally charged in criminal court. However there have also been significant charges related to restructuring initiatives underway in the company’s Australian businesses.

Chesapeake Energy

Chesapeake, the scandal that keeps on giving future case studies, was in the news first for being served subpoenas in a US anti-trust probe and then for facing financial challenges in selling its Michigan properties, which are the subject of said investigation.


The Facebook saga continues as a lower price for its stock is causing the company to face significant challenges. Key personnel have been leaving for new opportunities, a possible sign of loss of faith in the company’s further upside potential. The company faces a $3 BILLION tax bill springing from its extensive employee stock plan. At the same time, shares that had been acquired on the private market pre-IPO will soon be able to be traded on the public market. Welcome to the real world. They obviously didn’t learn any lessons from GE which makes billions in profit without paying a dime in federal taxes. Facebook got it backwards – are they making any profits at all and yet have a billion dollar tax bill? No wonder I need a CPA to put my return together.

Knight Trading

Knight Capital Group Inc. announced that its after-tax losses on its trading glitch could amount to $270 million. Good Night.

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The Libor scandal has continued to evolve, with US Federal subpoenas now issued to Bank of America while Deutsche Bank admitted that some of its personnel were involved. Citibank continues to be rumored as a target of investigation. Lloyds of London received legal inquiries from the UK government.

Lawsuits are starting to be filed, as Libor was a benchmark rate for numerous types of financial instruments. Among possible plaintiffs are city, state and county governments, mortgage holders, pension funds and brokerage services. In almost all cases, plaintiffs will allege they lost money by paying higher rates than they should have. Yet in spite of the wide-ranging impact of this scandal, its potential to further tarnish the investment banking industry and its direct and indirect impact on everyday citizens, the amount of coverage by the major media networks‘ nightly news hours has evidently been dismal.

Meanwhile, Barclays apologized for its role in the Libor scandal while simultaneously announcing a $6.6 Billion profit. No mention of refunds to those injured by the rigging of this “free market” rate.


A former UBS mortgage securities strategist has claimed that he was pressured into filing “misleading reports.” In another case, a trio of ex-UBS personnel have been accused of rigging the bid process for certain municipal bonds. And in yet one more UBS item, the bank reported losing $350 million largely due to the results of Nasdaq’s glitch in the Facebook IPO. Nasdaq is offering up only $62 million so watch for a lawsuit there.


Speaking of Facebook, their shares dropped another 4% on Thursday (August 2nd) as more of their top executives departed. Recall that there are ethical issues related to their IPO as potentially negative financial information was released to a select group of investors but not the general public just prior to the IPO.

News Corp.
Rebekah Brooks, formerly Editor of News of the World and a Rupert Murdoch protege, was formally charged with “unlawfully intercepting voice-mail messages.”
But Wait, There Is One Good Guy Left
On the other hand, in Japan the CEO of Nomura, one of that nation’s largest banks, resigned because some of his employees were involved in an insider trading scandal. If only all of the bank executives were Japanese.

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Chesapeake Energy:

Chesapeake’s Board of Directors named Archie Dunham, former CEO of Conoco, as their new Chairman, removing co-founder Aubrey McClendon from that role. Soon after, Dunham made it clear that Chesapeake needs to continue to sell off assets thereby raising cash. In the meantime, news surfaced that CEO McClendon may have violated anti-trust laws by allegedly sending emails related to bid prices on land for future drilling.

JPMorgan Chase:

Remember a previous post titled “Black Holes?” As predicted then, the hedge unit’s loss at JPMorgan continues to grow. Now reportedly at $ 9 BILLION-with-a-B dollars. Slightly more than the original $ 2 Billion.

News Corp:

Rupert Murdoch is apparently considering splitting News Corp. in two. The split would separate the entertainment business from the publishing business thereby cushioning shareholders who are primarily investing in the entertainment businesses from suffering the effects of the scandal going on in the publishing business. That scandal involves cell phone hacking allegations against the News of the World organization in London.  The company’s board quickly approved of Rupert’s wish. Hmmm.

Goldman Sachs:

No action against them, but the SEC is reportedly filing a civil law suit against a hedge fund manager for allegedly giving favorable treatment to some investors. Goldman was one of the names that allegedly received special treatment. The hedge fund is Harbinger Capital Partners LLC of Wall Street.

Facebook’s IPO:

The SEC opened an investigation into the NASDAQ stock exchange which was unable to effectively process the large number of trades on the stock’s opening day.

And Finally…..Madoff:

Remember Bernie? His brother Peter was planning to plead guilty while at the same time insisting that he did not know about his brother’s massive fraud. ….. sure.

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