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Archive for the ‘Banks and Financial Industry’ Category

Remember 2008? Sure you do. That was the year Lehman Brothers went down and we all started hearing about something called “Libor.” No, that’s not a typo for LABOR. It’s LIBOR. It’s the London interbank offer rate, the very short term interest rate that banks use when lending money to each other overnight. And when the Libor became too high there was too much friction in the system. Money stopped flowing from bank to bank. The world economy was in grave danger. Bush and Paulson moved quickly to prevent collapse and the term bailout was suddenly on everyone’s lips.

Libor. How soon we forget. Until this past weekend as the news from London is that the world renowned Barclays has been the target of a multi-year investigation on both sides of the Atlantic, accused of manipulating the Libor during a critical period in the financial melt-down, allegedly to improve its own profits.

According to Reuters, “Barclays has admitted that some of its traders attempted to manipulate the setting of the London interbank offered rate (Libor)….”  “Barclays has admitted it submitted artificially low estimates of its borrowing costs from late 2007 to May 2009…” per Reuters. News over the weekend is that Barclays Chairman will announce his resignation today and, also per Reuters, the bank has agreed to pay a fine of over $450 million.

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Investigations:

Jamie Dimon, CEO of JPMorgan Chase, appeared before Congress on Wednesday. Admitting that the bank let people down, but not admitting that stronger regulation might have kept them out of trouble, Dimon pinned the bank’s surprise loss on an internal complacency based upon the London hedging unit’s past successes. What is it that mutual fund prospectuses warn about? Oh yeah, past results are no guarantee of future success.

Prosecutions:

News of the World’s Rebekah Brooks made a court appearance and posted bail. She will be back in court next week.

Rajat Gupta, former director of Goldman Sachs, former head of McKinsey & Co., and former member of Proctor & Gamble’s board of directors, is on trial for insider trading. His case was went to the jury yesterday. Gupta allegedly fed inside information to now imprisoned felon Raj Rajaratnam who was then the co-founder of Galleon Group, LLC.

Justice:

R. Allen Stanford was sentenced to 110 years in prison for running a $7 Billion-with-a-B ponzi scheme. Stanford Financial was based in Houston. Some of my Houston friends invested money in Stanford’s “Certificates of Deposit” that were “issued” by his “bank” in the Caribbean. Paid good interest too. How do you spell Madoff?

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A bank, an IPO and an Oil & Gas Driller all potentially have that one key characteristic of the astronomical black hole – a massive implosion sucking everything close enough to them into the abyss.

First the bank — JPMorgan Chase

This week’s news included the analysis that the hedging unit which lost $ 2 BILLION-with-a-B dollars of asset value faces a loss that is growing and likely to continue to grow. Most recent estimates are around $5 BILLION. Recall that when this story first broke, there was a total bet… uh, I mean trade, on the table of around $100 Billion in the “risky” category. Now that the whole world knows the situation, you can bet…. uh, I mean trade, on the prospect that there will be no takers on the other side should the bank try to unwind its position. Do you see the black hole now?  So if a 2 to 5 percent loss in this position wipes out about $20 Billion of shareholder value in JPMorgan Chase then what would a 50% loss do? Poof. No more bank. And who could possibly come to the rescue in order to prevent the next world wide financial meltdown? Hmmm.

And by the way, remember how banks can regulate themselves? It turns out that the 3 JPMorgan Chase directors who had responsibility for risk evaluation and the oversight thereof don’t really have the experience to do that. One is the head of a museum.

Ethical Analysis: As commented on in earlier posts, fiduciary responsibility to one’s shareholders – F; professional codes of ethics for financial advisors – F; adherence to the ethical expectations of the investing public and general citizenry – F.

Next the IPO – Facebook, Morgan Stanley, the NASDAQ

Before its IPO, Facebook was heralded as the largest IPO ever. Now it may be a major IPO bust, with stock hitting its peak on the day of the IPO and down since. The NASDAQ apparently could not keep track of all the individual investor trades, with news in the past two days that some of those investors had money removed from their account to support the purchase but found no shares of FB appearing in their account to reflect that purchase. Morgan Stanley is planning to dole out millions of its underwriting fees to those investors. How long do you think it will be before Morgan sues the exchange? In the meantime, Facebook is considering a move off the NASDAQ to a competing exchange and everyone seems to be questioning the company’s valuation. Then there is the allegation that the underwriters went forward with the IPO even though new financial data was bringing the IPO price into question. Not to mention that only some (I believe they were at first called “preferred”) potential investors were informed of this news. How do you spell SEC?

Morgan Stanley and the NASDAQ have big black eyes over this one, but with a likely SEC investigation, shareholder lawsuits already launched and the prospect of continued sell-off in the shares, this mess can only get bigger, nastier and more expensive.

Ethical Analysis: My jury is still out on Facebook, although their leadership clearly consented to go forward with the IPO in spite of changing financial data. NASDAQ appears thus far to be an operational blunder. Morgan Stanley and the underwriting team may have broken securities laws, certainly didn’t maintain a level playing field for the retail investors and should have delayed the IPO for few days. I would give them an F in meeting the ethical expectations of investors and in conducting a professional financial underwriting operation.

Finally the Oil and Gas Driller – Chesapeake Energy

The major news this week was that Carl Icahn is/has accumulated over 4% of the shares of Chesapeake. Also, two of the nine board members are up for re-election at the annual shareholders meeting in early June.

So why do I consider this one a potential black hole?

Where is the money? All that money that founder and CEO Aubrey McClendon borrowed from various entities using his personal interest in company wells totals to somewhere well north of $ 1 Billion-with-a-B dollars. At one point (2008) he even got the company to buy his map collection for $12 million in addition to paying him an annual bonus of $75 million. Where is all this cash going? The guy seems to have an amazing appetite for cash. That tells me that something is going on behind the curtain. His investment (and the company’s too, of course) in the Oklahoma City Thunder pro basketball team isn’t nearly enough to account for all these loans.Maybe it’s his hedge fund that he’s been running out of his CEO offices at Chesapeake. Maybe he has personal margin calls on his stock in the company. I don’t know and nothing has been coming out in the press.  What I do know is that there is another big piece of this story that is yet to come out and that Chesapeake’s investments and Mr. McClendon’s appear very much intertwined.

The potential black hole has similarities with the one that took down Skilling, Fastow and all of the Enron shareholders and employees. It is related to the value of the company’s shares which have fallen with the abundance of natural gas. In Enron’s case, there were off balance sheet liabilities that were tied up in deals with Fastow’s friends. Those deals started to unravel when the stock dropped below a certain value. I’m not saying that’s the mechanism involved here, but I am saying that McClendon’s personal need for cash accelerated as Chesapeake’s share value went down, a sign that he is over leveraged somewhere in his financial picture. The company may be as well, since almost everything that the CEO is involved in personally has company involvement as well. That may be why McClendon, who has known Icahn for many years, is now eager to have a financial white knight come to the table.  Stay tuned.

Ethical Assessment: Conflicts of Interest abound like a mound of fire ants. F-.

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As we all know, the Facebook IPO was a huge story. But only a few days later an even bigger story is erupting.

First, there were issues about the handling of the IPO by the Nasdaq. I personally didn’t read anything into that other than possible technical and management problems handling the biggest IPO of all time together with the many people who wanted to get in on the first day’s activity. I also thought the valuation was pricey, but I am not a financial analyst and haven’t done any substantive research on the stock valuation. And that could have been all there was to the story.

But now new threads have emerged related to the handling of the IPO.

Shortly after 7 pm Tuesday (May 22), Reuters reported that Morgan Stanley had issued a revised downward forecast on the company’s revenue just prior to the actual IPO. Morgan Stanley was the lead underwriter on the deal and it appears that they informed some investors but not the general public.

Also this evening (May 22) The Wall Street Journal online edition reported that Facebook’s CFO had requested a 25% increase in the number of shares to be offered to investors. That’s a significant increase in the offering and a decision that was made only a few days in advance of the scheduled IPO. Paste that news on top of the Reuters story and the IPO “calf scramble” and you have the makings for an SEC investigation.

Mary Schapiro, head of the SEC, has just recently been quoted as indicating there are “issues that we need to look at specifically with respect to Facebook,” and the Massachusetts Secretary of the Commonwealth has issued a subpoena to Morgan Stanley according to a Reuters report.

Couple all of that with the fallback in the share price the last 2 days and you can almost see the lawyers circling.

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JPMorgan Chase

The world of banking gave us more drama this week in the form of Jamie Dimon’s usually well-managed JPMorgan Chase. While it is not certain that wrong doing occurred, even Dimon admits the $ 2 BILLION trading loss in their London hedge fund unit was “eggregious,” “a mistake” and “almost inexecusable.”  Perhaps the “almost” applies to himself, Jamie Dimon, as reports this morning are that the entire unit may be out the door along with the unit’s leader. Political as well as financial fallout is already running high with the SEC announcing an investigation, voices of regulation speaking out on a return to the Glass Steagall days and Elizabeth Warren, consumer advocate and candidate for the US Senate, demanding that Dimon resign from his position on the New York Fed.

Ethical Assessment: It is not clear that the law was broken. On the other hand, this was not the bank’s money the bank was gambling with, as discussed in a prior post. And the size and scale of the bank involved (“too big to fail”) has implications beyond shareholders and depositors. Standards of financial and fiduciary responsibility have, in my opinion, been compromised.

In addition, the fact that Dimon sits on the New York Fed is reminiscent of Goldman Sach’s influence just prior to our last meltdown. For me there is a potential conflict of interest in having the CEO of a “too big to fail” international bank so closely involved with the Fed.

On the positive side I give Jamie Dimon credit for releasing this news as soon as he knew of it, admitting that a huge mistake had been made and taking swift action in holding his personnel accountable. All too often these things are left to drag out, no one loses their job immediately or ever and PR machines are cranked up to spin the story. Not so with Mr. Dimon.

Chesapeake Energy

Earlier in the week it was revealed that only days before the announcement that CEO Aubrey McClendon had borrowed about $ 1.1 Billion against his personal interests in Chesapeake well properties, he was busily arranging another $ 450 Million of similar loans. Not only that, but he was arranging these loans from the same investment management firm that was also putting together a $1.25 Billion loan for the company.

At the end of the week, Chesapeake announced that it had arranged a $ 3 Billion loan for the company itself.

While the company’s loan appears to be related to refinancing opportunities we as yet have no explanation as to McClendon’s need for such large loans. The fact that he has a hedge fund makes one curious as to whether there is some big unraveling going on in that operation and he may be borrowing to keep that afloat. Also Chesapeake shares had dropped from around 34 last August to the 25 area before all this news broke. Perhaps he had his company ownership leveraged too high. Either way it looks like a day of reckoning is coming for Mr. McClendon. Stay tuned.

In Brief

Avon, who is considering a possible merger with Coty, Inc., announced they are cooperating with an SEC probe into “suspicious” trading centering around the merger news.

Former News of the World executive and arrestee Rebekah Brooks was testifying again, but downplayed her relationship with David Cameron, the Prime Minister.

And finally, Tyco surfaced one more time as former CFO and still imprisoned felon Mark Swartz is now suing the company, claiming they owe him $60 Million in retirement benefits and something to do with his taxes. Would those be the taxes on all the money he stole?

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In this morning’s news: JPMorgan Chase reports a $ 2 BILLION trading loss from it’s overseas hedging unit. Bad news, but what does this have to do with corporate ethics?

The Bloomberg article states that CEO Jamie Dimon “had transformed the unit in recent years to make bigger and riskier speculative trades with the bank’s money,” according to former employees. The key phrase is “with the bank’s money” and the question is: Was it really the bank’s money?

Ultimately all of any bank’s money belongs to two key parties: depositors and shareholders.  But in the case of a major international bank such as JPMorgan Chase and many others, what happens to that money also indirectly, yet very significantly, impacts hundreds of millions of people around the world who are neither depositors nor shareholders. We know that is the case because we experienced if first hand, and still are experiencing it, in the 2008 global melt-down.

“Too big to fail” means that failure is a calamity. Banks play a vital role in the world economy and any careless risk-taking can affect all of us. For U.S. depositors the direct risk is mitigated by institutions such as the FDIC. Shareholders are always taking a risk on a corporation’s performance, but did bank management tell them that the risk curve was going up? Many of those shareholders are individuals with retirement assets holding shares of JPMorgan Chase either directly or indirectly via mutual funds and pension funds. In addition, when risk taking results in huge losses it is ultimately the citizenry that bears the brunt with a weakened economy. That is why regulation is appropriate and necessary.

So what does this have to do with corporate ethics? The answer lies in the term “fiduciary responsibility.” In our Seven Layers of Integrity®  model, corporate ethical failure occurred in two layers. Bank management and specific individuals failed to maintain the fiduciary responsibility called for by their profession (professional codes of ethics) and their lack of full transparency with investors failed the investment community and the general public (community standards).

Fiduciary responsibility is owed to one’s depositors and shareholders. It is their money, not “the bank’s money,” that is at risk. A major international banking organization should also have a fiduciary responsibility to the nations and people that rely upon banking stability. In this instance, bank management allegedly pushed the hedging unit to increase the size and risk of the trading positions involved. Was that prudent fiduciary responsibility? The investments they took positions in are called “synthetic credit securities.” Remember “collateralized debt obligations” and “credit default swaps?”  Here we go again.

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And because it was tax prep week, I am a few days late getting this post together.

Nonetheless, it was a busy week in the business ethics arena:

Wells Fargo was hit with $ 3.1 million in punitive damages by a federal bankruptcy judge over a case involving just one homeowner. The judge called the bank’s handling of the five year long litigation  “highly reprehensible.”

Kodak, who has filed for bankruptcy, has requested the court’s permission to issue bonuses to selected personnel to prevent them from being hired away by others. About $8.5 million of the $13.5 million would go to middle management employees and above. This is reminiscent of Enron, which also paid post-bankruptcy bonuses to upper levels of management even as regular employees saw their retirement funds nearly disappear when the company’s stock plummeted.

In a disappointing piece of news, a subsidiary of Johnson and Johnson was found guilty by an Arkansas jury of deliberately hiding risks associated with a multi-billion dollar drug. I say disappointing because I believe that J&J has a long history of ethical behavior dating back to its handling of the tylenol poisoning event many years ago. This week’s decision was against a subsidiary of the company.

And on tax prep week, here’s this interesting item. According to a report from the nonprofit taxpayer watchdog organization Good Jobs First, a number of states are allowing employers to retain the state income tax they have been withholding from employee paychecks. Sounds like a case of subsidizing the company’s profits with money taken from the employee. While one can understand the rationale if the companies involved were small businesses, the report states that corporate beneficiaries of state largess include such profitable enterprises as General Electric, Goldman Sachs, Procter & Gamble, Toyota and Chrysler among others.

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Less exciting than the prior week, but still a few news items on the corporate and financial fronts worthy of note.

Bank of America was mentioned in the American Banker as having sold credit card receivables to collection agencies without, how can we say this kindly, having scrubbed the data. Not to worry, the records were evidently sold “as is” per the contracts. But those consumers in the lists who had actually paid their debts may have found themselves getting collections calls nonetheless.

Senator Al Franken (D-Minnesota) gave a speech on data privacy to the American Bar Association’s Antitrust Section. His speech highlighted data privacy as an antitrust issue. An interesting speech that hits on some of the same issues I am dealing with in this blog (My Big Data Footprint and How Corporations Use It).

And in the sports world, Reebok was hit with a restraining order to cease manufacturing items with Tim Tebow’s name as their license to do so expired on March 1st. Details, details.

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