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- Why Recent Arrests of Bankers Are Merely Publicity Coups – SPIEGEL ONLINE
Extensive excerpt: Martin Hesse and Anne Seith write:
… it is no coincidence that these kinds of penalties never seem to shake the foundations of the financial world: The banks can easily afford them. Deutsche Bank, for instance, has achieved an annual net profit of some €13.6 billion since 2009. "A criminal prosecution of the largest financial institutions to the point of revoking their banking licenses is impossible, because the banks involved are too economically important for their existence to be called into question," says Harald Hau, a professor of economics and finance at the University of Geneva.
The six largest US banks have also made fat profits since the outbreak of the financial crisis. Although they had to pay $103 billion to cover litigation cost, JPMorgan and the others have earned $234 billion since the crisis began. JPMorgan alone has made over $80 billion since its competitor, Lehman Brothers, went bankrupt in the fall of 2008.
This despite the fact that Dimon has been hit with such a barrage of investigations, probes and lawsuits that one would be best advised to mark each one on a world map to avoid confusion. In the UK, a trader dubbed by colleagues as the "London Whale" gambled away $6 billion in 2012 on the financial markets. In China, managers allegedly hired the son of a high-ranking functionary to win lucrative contracts. Meanwhile, in the US, the bank stands accused of using doubtful procedures to collect money from defaulted credit card holders. To make matters worse, it is said to have served happily as Bernie Madoff's house bank while he was orchestrating his Ponzi scheme — and the bank allegedly manipulated electricity prices in California and Michigan.
Dimon has managed to reach settlements which made most of these allegations disappear in exchange for relatively manageable amounts of money and no admission of wrongdoing. But when it comes to the most recent settlement — which also covers the bank's potential liability for allegedly fraudulently peddling junk mortgage-backed securities — the Justice Department wants to set an example, and is insisting on the enormous sum of $13 billion.
Given that the majority of the controversial deals in question were made by Bear Stearns and Washington Mutual, two banks that Dimon saved during the financial crisis at the insistence of the government, that isn't completely fair. That said, Dimon won't have any trouble affording it.
It may be a bitter pill to swallow, but Dimon can easily pay this colossal settlement. "Some, maybe a lot of it, will be tax deductable," says Dennis Kelleher of the organization Better Markets, which is fighting for more transparency in the financial sector. Analysts are also predicting that the bank will continue to enjoy flourishing business: "JPMorgan remains a solid company," says expert Mike Mayo.
"…revoking their banking licenses is impossible…." AIG was temporarily nationalized, paid the taxpayers back, and then was privatized in a sense in that the US government sold off its shares. Why could the huge AIG be handled that way while the banks could not? AIG's business was every bit as complicated.
Would you pay $103 billion to cover litigation cost to make $234 billion all the while knowing you'd not be taken over or face any punishment for criminal wrongdoing, even watered-down charges of criminal negligence?
"…the Justice Department wants to set an example, and is insisting on the enormous sum of $13 billion." However, that isn't really the figure. It's more like 9; and as the article states, it may be tax deductible: a mere hand slap at most.
"Given that the majority of the controversial deals in question were made by Bear Stearns and Washington Mutual, two banks that Dimon saved during the financial crisis at the insistence of the government, that isn't completely fair." When do the rest of us get to buy a pig in a poke and feign it was unfair when we didn't even open the bag? The thing Jamie Dimon has going for him is that he bought because he was asked by the US government and the Fed to buy.
- The media can't stop sucking up to Alan Greenspan | New Republic
This is an absolutely scathing attack by David Dayen on Alan Greenspan and the moral hazard he reportedly created.
Greenspan spoke before the Credit Union National Association on that February day in 2004, and he took the opportunity to extol the virtues of adjustable-rate mortgages. "Recent research within the Federal Reserve suggests that many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade," Greenspan said, arguing that fixed-rate mortgages extract a high cost for protecting households against a sharp rise in interest rates. "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage," he concluded.
There's a kernel of truth to this. The research did show a benefit for adjustable-rate over fixed-rate mortgages in the timeframe Greenspan referenced. But that's mainly because Greenspan shrunk interest rates over the preceding years to 1 percent, their lowest level since the 1950s, creating the resulting rise in mortgage lending. After this 2004 statement, Greenspan belatedly hiked rates from 1 to 5 percent over a two-year span, which opened adjustable-rate mortgage holders to excessive risk.
More important, Greenspan willfully ignored the forces operating under his nose. He knew that brokers were selling not only ARMs, but no-documentation "liar's loans" and other dodgy products to unsuspecting subprime borrowers. Fed Governor Edward Gramlich gave a speech on the challenges of subprime just three months after Greenspan encouraged everyone to go into adjustable-rate loans. By September of that year, the FBI warned of a mortgage fraud "epidemic," particularly from this new breed of suspect mortgage brokers. Advisors warned him on multiple occasions to do something about the growing problem, to guard against overall risk and protect consumers from harm.
But instead of tamping down the irrational exuberance in the housing markets, Greenspan encouraged homeowners to seek out precisely the types of products being fraudulently peddled by unscrupulous brokers.
The thing we notice the most about Alan Greenspan and the media is that when Alan says "we" didn't have a clue, the media doesn't raise the people who did have a clue, those who, in fact, warned often and loudly about the huge errors Alan Greenspan was making at the time.
The "we" Alan Greenspan must be referring to are only those people who agreed with Alan. We did not. How about you? Did you believe Alan Greenspan was listening to the voices protesting his hands-off Wall Street policies?
- Sober Look: Covenant-light loans on the rise
Covenant-light loans give companies more leeway to avoid a default as they don't contain financial-maintenance provisions requiring the borrower to meet such restrictions as a set level of debt relative to earnings before interest, tax, depreciation and amortization.
However banks tend to hold very little of this debt and therefore have little incentive to tighten covenants. They structure, syndicate, and collect fees, while the risk moves somewhere else. Many argue that weak covenants don't matter when corporate default rates are as low as they have been recently. Haven't we heard similar arguments in 2006 with another asset class?
- Pound Slides Most Since July Versus Dollar on Fed Outlook – Bloomberg
Currency wars: Emma Charlton reports:
The pound posted its biggest weekly decline versus the dollar since July as signs the U.S. economy is strengthening fueled bets the Federal Reserve will slow stimulus that tends to debase the greenback.
Sterling fell for a second week against the U.S. currency as a gauge of whether U.K. data is beating forecasts dropped to the lowest level since June. Gauges of consumer sentiment and manufacturing output both fell short of economists' estimates. The pound strengthened the most in five weeks versus the euro amid speculation the European Central Bank will cut interest rates as soon as next week to revive growth. U.K. gilts dropped, with 10-year yields rising from a two-month low.
As the US dollar strengthens relative to other currencies, the Fed will be moved to hold off tapering.
- The recovery depends on housing, and housing depends on mortgage credit | Inman News
Lou Barnes writes:
Goldman leads the pack in blaming the rise in rates caused by the taper try. Nice try, but rates today are only a half-percent higher than in spring. A legitimate explanation goes to the diminished supply of distressed housing for sale, rising prices thereof, and the dampened ardor of cripple-shooters.
But the deep reasons are these: Incomes are not rising, which means that damaged households cannot repair themselves, and mortgage credit is absurdly tight. Stuck. Follow that thread in a meander past a financial oddity, and sneak up on the whys and wherefores of mortgage dysfunction.
This economic recovery depends on housing more than any other single factor. Housing isn't going anywhere without credit, and mortgage credit is still on life support.
Every trader is still watching the 10-year "head and shoulders" (below).
Break 2.47 percent and we'll dive to 2.2 percent or lower, mortgages re-entering the threes.
We see "the threes," maybe even the twos, if the Fed is true to form. How about you?
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