Archive for the ‘Monday Bites’ Category

Bloomberg: Standard & Poor’s, facing charges that it defrauded investors, will defend itself by claiming that no one should have paid attention to its claims of independence. Why else would a ratings agency exist?

Per Bloomberg’s article, S&P will claim that “the government can’t base its fraud claims on S&P’s assertions that its ratings were independent, objective and free of conflicts of interest because U.S. courts have found that such vague and generalized statements are the kind of “puffery” that a reasonable investor wouldn’t rely on.”

This, of course, is resorting to the fine print of our legal system in an attempt to destroy the government’s case against the once well respected, and trusted, ratings agency. Far be it from us to complain about reliance on the decisions of prior cases. That reliance is the principle that supports consistency in the application of the law and is an essential component of “blind justice.”

However, if this is the best S&P has to offer in its defense, they may as well close the place down after the case is over. The whole point of ratings agencies such as S&P is precisely to provide an independent and objective opinion on the risk of an investment instrument. The very words “independence and objectivity,” which frequently appear in the codes of ethics of many professions, mean that there is no conflict of interest – that the competent opinion being rendered is untainted by any relationship the professional has with the organization on which an opinion is rendered.

If reasonable investors can’t rely upon that independence and objectivity, then there is no purpose served by a Standard & Poor’s. Close them down.


Read Full Post »

Last week the U.S Senate conducted hearings on JPMorgan’s $6.2 billion 2012 trading loss in its London office. This was the amount of a trading loss attributed to the “London Whale,” an individual trader in the bank’s Chief Investment Office (CIO), an office whose responsibility is risk management. That individual and the executive in charge of the CIO were let go and the damage now seems to be contained. So why should the Senate be investigating? Why should we care?

Critics might argue that this is the business loss of a defined corporate entity, JPMorgan Chase, and therefore a matter for the company and its shareholders, not the general public and the Congress. In most cases I would agree.

However, this is not just any company and the causes of the loss have significance beyond its corporate and national bounds. An important point to make here is that while the bank was successful in holding the loss at $ 6 billion, it could have been more extensive and had greater consequences.  More importantly, the nature of the loss is indicative of a systemic problem that continues to threaten the nation’s economy, which is the reason it is definitely the public’s business.

When the Banks Fall It Hurts Us All

JPMorgan Chase is a global financial entity, the largest global bank according to an editorial in Bloomberg. As the editorial points out, the bank’s equity is only between 3 and 4 percent of its total value. A sufficient drop in stock price could potentially wipe out that underlying equity and set events in motion that would cause the American taxpayer to bail them out.

How much would that bail out be? JPMorgan has a total value of around $4 trillion.   As someone argued soon after the first bail out, “too big to fail will one day be too big to save.”

The area that should be our greatest concern is this: if Mr. Dimon is the best risk manager in the industry, then can the industry as a whole really be counted on to be a partner with the people (via regulation) in ensuring we do not have another global calamity? The Bloomberg editorial re-opens the discussion on capping the size of the largest banks.

It’s Not Their Money

There are people who believe the $6 billion loss is an issue for JPMorgan management and its shareholders and should be left there. But it is not just the bank’s direct shareholders that may be hurt in these situations. This bank’s stock prices impact many other investors and non-investors. Indirect investors in JPMorgan include those who buy ETFs including ETFs that track the S&P, the Dow and other metrics. People who do not directly invest but have pension and other retirement plans can be affected. A major bank failure, as we saw in 2008 and 2009 can impact the economy as a whole costing the jobs of people who have no investments of any kind.

We need to address bank size to protect us all. We need to understand that complex investments aimed at managing risk can introduce new risks. And we need to realize that the importance of fiduciary responsibility must be re-established in the industry.

Read Full Post »

Yesterday’s Sunday New York Times’ business section featured a lengthy article on the proposed takeover of the New York Stock Exchange by an Atlanta based company with the unfortunate three letter acronym of ICE. Here are parts of this story that caught my attention.

ICE, the IntercontinentalExchange, is located in a modest, nondescript office building in Atlanta. There are not enough employees working there to fill the building – at least two other companies have marquees out front. ICE personnel eat their lunch in the same cafeteria with those other companies’ employees. The small personnel footprint is a direct result of the computer based management of the exchanges that ICE already has. This fact has caused anxiety among the traders on the floor of the NYSE who still handle the orders.

While ICE founder and CEO Jeffrey Sprecher maintains that he knows investors will still want a human being on the other end of the phone overseeing the trading, I doubt that he will need as many such people physically present on the pricey NYSE trading floor as opposed to sitting at computers in Atlanta or anywhere else. In short the computer leverage that is already a powerful force in the trading process is likely to increase.

At the same time, Sprecher recognizes that the flash crashes that occasionally occur with individual stocks and less frequently with an entire market, are not a good thing for the long haul. According to the Times’ story, ICE “has been praised as one of the first exchanges to put limits on lightning-quick, high-frequency trading.” Having that mind-set at the helm should be welcomed by investors, and would lend some hope to addressing the ethical issues of high-frequency trading that we have discussed in a prior post.

Read Full Post »

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.

Read Full Post »

Friday’s tragedy in Connecticut made any problems I have seem miniscule. I almost typed “by comparison,” but there really is no comparison between the two. None. At the same time, we all seek to draw lessons from what has happened and wrestle with how to make sure this never happens again. One focal point of course is the second amendment, the right to bear arms. That is the law.

Then there is ethics. Ethics is doing what is “right” using whatever yardstick we measure our lives by. The Law allows us to bear arms. That doesn’t mean we have to, nor that we should. We still have a choice to make individually and as a nation.

Read Full Post »

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.

Read Full Post »

Tracking Your Eyeballs on the Internet

An announcement was made last week that Microsoft’s upcoming latest version of Internet Explorer will automatically default to the “do not track” option. Why is that an important ethical step in the online world?

Remember the term “eyeballs” – that quaint concept in the earlier days of the World Wide Web? The key to marketing success was to get as many eyeballs on your page as possible.  But as competition for eyeballs increased, mere “eyeball” count gave way to more sophisticated concepts such as “click through” and “driving traffic.” A whole new consulting opportunity sprang forth called Search Engine Optimization or SEO.

Swiftly and surely the focus then shifted from driving traffic to your site (still highly important) to getting as much information as possible about the site visits obtained. Cookies are being placed on your computer not just from the sites you actually visit but also from their web oriented marketing vendors who want to gather more data on YOU. Targeted marketing based on that information has created whole new companies which present you with specific online “coupons” in an attempt to get you to buy.

The web browsers, principally Internet Explorer, Safari, Firefox and others, provide a way for you to browse the web without such tracking going on, but most of us never use it. As a result our privacy is disregarded on the basis that we have given our permission to be tracked. However, that “permission” is based on a default selection chosen by others together with a lack of training and transparency for all but the more technical among us.

This week’s announcement that Microsoft’s newest version of Internet Explorer, still the most widely used browser, will automatically default to “do not track” and, more importantly, provide a visible alert of that fact to the user, is an important first step in increasing public awareness of the digital privacy issue. Unfortunately it only occurs when the browser is installed; not every time the browser is launched.

Read Full Post »

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.

Read Full Post »

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.

Read Full Post »

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.

Read Full Post »

Older Posts »