JPMorgan Chase & Co. (JPM:US)’s efforts to hide trading losses, outlined in a Senate report yesterday, probably will ignite debate over whether the largest U.S. bank is too big to manage and ratchet up pressure on Chief Executive Officer Jamie Dimon to surrender his role as chairman.
Dimon misled investors and dodged regulators as losses escalated on a “monstrous” derivatives bet, according to a 301-page report by the Senate Permanent Subcommittee on Investigations. The bank “mischaracterized high-risk trading as hedging,” and withheld key information from its primary regulator, sometimes at Dimon’s behest, investigators found. Managers manipulated risk models and pressured traders to overvalue their positions in an effort to hide growing losses.
After nine months of investigation, the panel concluded that JPMorgan had “a trading operation that piled on risk (JPM:US), ignored limits on risk taking, hid losses, dodged oversight and misinformed the public,” Chairman Carl Levin, a Michigan Democrat, told reporters yesterday. His team combed through 90,000 documents and interviewed dozens of current and former executives.
Former Chief Investment Officer Ina Drew, 56, among Wall Street’s most powerful women until she resigned in May four days after the bank disclosed the initial trading losses, will testify today at Levin’s hearing in her first public appearance since leaving the New York-based bank.
U.S. lawmakers have pushed banks to halt so-called proprietary trading, and regulators are weighing tightening exemptions for hedging. A panel of British lawmakers today urged regulators to “bear down” on prop trading and renew the case for an outright ban within three years.
JPMorgan, regarded on Wall Street as one of the best- managed banks in the world, lost more than $6.2 billion over nine months last year in a derivatives bet on companies’ creditworthiness.
The bank has “repeatedly acknowledged mistakes” in handling the loss, Mark Kornblau, a spokesman for the bank, said in an e-mail.
“Our senior management (JPM:US) acted in good faith and never had any intent to mislead anyone,” Kornblau said. The bank cooperated with the investigation and has “already identified many of the issues cited in the report,” he said. “We have taken significant steps to remediate these issues and to learn from them.”
Statements and regulatory filings by the bank “raise questions about the timeliness, completeness and accuracy of information” given to investors, the committee said in a section on securities laws and their requirements about disclosing information. The Securities and Exchange Commission has been conducting its own investigation of the bank’s losses.
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OTC Derivatives Traders in EU Face Tougher Rules Starting Today
Traders in over-the-counter derivatives will face tougher disclosure rules beginning today as part of a European Union push to regulate transactions that take place outside authorized venues.
The EU rules will require banks and other firms that conduct OTC transactions to provide more data to so-called trade repositories, including information on the value of contracts and on related collateral, according to the EU’s website.
Global regulators are seeking to toughen rules for the $639 trillion market for OTC derivatives, which became a target for oversight after the 2008 collapse of Lehman Brothers Holdings Inc. and the rescue of American International Group Inc., (AIG:US) two of the largest traders in credit-default swaps.
The Group of 20 nations set an end-2012 deadline for nations to adopt rules requiring standard forms of OTC derivatives to be processed through clearinghouses, and logged in trade depositories.
The measures that take effect today are part of a package of implementing standards published by the EU last month.
EU Said to Plan Concession on Using Tax Credits in Bank Capital
Banks in Europe may be given longer to adhere to rules restricting the use of tax credits as part of their capital buffers, according to four people with direct knowledge of the matter.
The Basel III regulations will stop European banks from using so-called deferred tax assets, or losses they can write off against tax, for more than 10 percent of their capital base. The European Commission plans to double the period that lenders have to implement the change to 10 years, said the people, who asked not to be identified because the talks are private.
Tax credits already account for about 10 percent, or 105 billion euros ($136 billion), of the core Tier 1 capital of banks assessed under the continent’s July 2011 stress tests, though some lenders’ levels were far higher, according to the European Banking Authority. European governments lobbied to extend the tax-credits change because it may encourage foreign banks to buy their most troubled lenders, the people said.
Stefaan De Rynck, a Brussels-based spokesman for the commission, declined to comment. Deirdre Farrell, a spokeswoman for the Irish rotating presidency of the European Union, declined to comment.
Dallas Fed Cap Would Force U.S. Banking Units to Shrink by Half
A proposal by the Federal Reserve Bank of Dallas to limit government support for banks could force JPMorgan Chase & Co. and Bank of America Corp. (BAC:US) to shrink their U.S. consumer and commercial-lending units by more than half.
The plan would cap assets at deposit-insured divisions of the largest U.S. financial firms at about $250 billion and wall off investment banking from traditional lending, Dallas Fed Executive Vice President Harvey Rosenblum said in an interview. The limit is needed to allow the Federal Deposit Insurance Corp. to shut a failed bank without using taxpayer funds, he said.
Rosenblum and his boss, Dallas Fed President Richard Fisher, join a chorus of Democratic and Republican policy makers in expressing dissatisfaction with efforts to assure that banks are no longer too big to fail. FDIC Vice Chairman Thomas Hoenig has called for breaking up the largest lenders and Senator Sherrod Brown, an Ohio Democrat, for limiting their size.
Fisher revealed the outlines of the proposal in a Jan. 16 Washington speech.
JPMorgan’s U.S. consumer and commercial-lending units had assets of $646 billion at the end of December, according to a regulatory filing (JPM:US) by the New York-based bank. Similar divisions at Charlotte, North Carolina-based Bank of America had $686 billion of assets.
That means each would have to shrink by about 60 percent to drop below the Dallas Fed’s proposed cap. JPMorgan is the largest U.S. bank by assets, and Bank of America is No. 2, when all their businesses are included.
Citigroup Inc. (C:US), the third-biggest lender, would need to reduce its U.S. consumer unit by about 30 percent. Traditional banking in the U.S. makes up a smaller portion of the New York- based firm’s total assets than at peers. San Francisco-based Wells Fargo & Co. (WFC:US), the fourth-largest U.S. bank, might have to shrink about 70 percent.
Spokesmen for the four companies declined to comment on the Dallas Fed proposal.
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CFTC’s Chilton Says Benchmark Pricing May Need Review
U.S. Commodity Futures Trading Commission member Bart Chilton said interest-rate rigging means other benchmark-pricing mechanisms may need reviews, after the Wall Street Journal reported the commission is discussing possible manipulation in gold and silver.
The CFTC is “discussing internally” whether daily price fixings of gold and silver in London are open to manipulation, the Wall Street Journal reported March 13, citing people familiar with the situation. No formal investigation has been opened, and the CFTC is looking at various aspects of the so- called fixings, including whether they are sufficiently transparent, the newspaper said.
Steve Adamske, a CFTC spokesman, declined to comment yesterday on the Wall Street Journal report.
The London gold fixing is conducted twice a day by five banks: Barclays Plc (BARC), Bank of Nova Scotia, Deutsche Bank AG, HSBC Holdings Plc (HSBA) and Societe Generale SA. (GLE) The pricing started in 1919. It began taking place by telephone in 2004.
David Rose, head of metals trading at HSBC, and Martyn Whitehead, head of metals sales at Barclays, declined to comment. Sebastian Howell, a spokesman for Deutsche Bank, and Ila Kotecha, a Societe Generale spokeswoman, declined to comment. Joe Konecny, a spokesman for Scotiabank, didn’t immediately return a voice-mail message seeking comment.
Aelred Connelly, a spokesman for the London Bullion Market Association, and Marcus Grubb, managing director of investment research at the World Gold Council, declined to comment when asked about the fixings.
Chris Hamilton, a spokesman at the U.K. Financial Services Authority, declined to comment on whether it was looking into the gold and silver fixings.
The FSA’s Managing Director Martin Wheatley and CFTC Chairman Gary Gensler are chairing an International Organization of Securities Commissions taskforce that is looking specifically at all benchmarks that could potentially be open to abuse similar to Libor, the FSA’s Hamilton said.
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PVM Oil Futures Gets Apology From FSA After Trading Probe
The U.K. financial regulator apologized to PVM Oil Futures Ltd., an oil brokerage firm, after its complaints commissioner found its conduct was “unprofessional” during a trading probe.
Financial Services Authority staff misled PVM about a March 2012 meeting to discuss a report on suspicious transactions, tried to remove the firm’s lawyer from proceedings and made intimidating comments about jail time, the commissioner found.
The FSA and PVM have crossed paths before, fining a former broker in 2010 for trading without client authorization and lying to his employer about it while going on drinking binges.
In the case that led to the apology, the FSA wrote to PVM in October 2011 asking whether the firm had considered filing a so-called suspicious transaction report in connection with trades placed by a client. Three months later, the FSA wrote again to schedule a meeting to discuss requirements for trade reviews in general.
PVM officials claimed the regulator misled them and that the FSA had planned to use the meeting as an opportunity to obtain evidence to support an enforcement case.
“As regulated persons must act with integrity, so must the regulator,” Sara George, the lawyer at Stephenson Harwood LLP referred to in the complaint, said in an e-mailed statement. “The FSA is responsible for policing the integrity of the markets. The public must have confidence that it applies the same standards of integrity to itself.”
Fresh Del Monte Wins Banana Cartel Fine Cut, Dole Loses
Fresh Del Monte Produce Inc. (FDP:US) won a reduction in a European Union cartel fine to 8.82 million euros ($11.4 million) while Dole Food Co. (DOLE:US) lost an EU court challenge against its 45.6 million-euro fine for rigging banana prices.
The EU General Court yesterday ruled Fresh Del Monte’s fine merited a reduction from the original 14.7 million euros, citing cooperation with regulators and mitigating circumstances. The Luxembourg-based court dismissed Dole’s appeal.
The European Commission, the EU’s antitrust regulator, in October 2008 fined the two companies for colluding on prices between 2000 and 2002 in eight EU countries, including Austria, Germany and the Netherlands. Banana exports rose to the highest in at least a decade in 2011, making it the most-traded fruit, according to the World Trade Organization.
“We strongly believe that the European competition laws were not violated and we will appeal this decision to the EU Court of Justice,” C. Michael Carter, Dole’s president and chief operating officer, said in a statement. “The General Court’s decision treats discussions about general market conditions the same as a price-fixing cartel.”
Fresh Del Monte got its penalty jointly with Internationale Fruchtimport Gesellschaft Weichert GmbH. Chiquita Brands International Inc. (CQB:US) escaped an 83.2 million euro-fine because it was first to tell EU regulators about the cartel.
Dole, based in Westlake Village, California, made an initial fine payment of $10 million to the commission in January 2009 and “provided the required bank guarantee for the remaining balance,” the company said in a March 12 filing.
The cases are: T-588/08, Dole Food and Dole Germany v. Commission; T-587/08, Fresh Del Monte Produce v. Commission.
Ex-SAC Fund Manager’s Tipper Nguyen Gets One Year in Prison
An expert-networking consultant who leaked illegal tips to former SAC Capital Advisors LP fund manager Noah Freeman and other portfolio managers was sentenced to a year and a day in prison.
The term imposed yesterday for Tai Nguyen is almost four years shorter than the sentence sought by prosecutors, who argued that Nguyen corruptly used his sister, then an employee at Abaxis Inc. (ABAX:US), to give him nonpublic information which he then sold to fund managers including Freeman, Barai Capital Management LP founder Samir Barai and others from 2006 to mid-2009.
Nguyen’s lawyer asked that the prison term be less than the 2 1/2 years recommended by probation officials, saying Nguyen was a refugee from Saigon, Vietnam, who emigrated with his family to the U.S. in 1975.
The judge ordered Nguyen to surrender to U.S. Bureau of Prison authorities by May 1.
“If there is ever a person in court who felt the weight of punishment and is significantly deterred, it is my client,” Wikstrom said. “I ask the court to be gentle with him.”
Nguyen pleaded guilty in June to a count of conspiracy to commit securities fraud and wire fraud by passing material nonpublic information about companies. Nguyen said he passed the illegal tips to Freeman and Barai and other fund managers. The SEC alleged that Nguyen reaped $145,000 by trading in Abaxis in his own personal account.
Nguyen agreed to forfeit $400,000 to the U.S. as part of his sentence.
The case is U.S. v. Nguyen, 12-cr-00495, U.S. District Court, Southern District of New York (Manhattan).
CFTC ‘Probably’ Can Avoid Furloughs, Move on Rules Agenda
The U.S. Commodity Futures Trading Commission has been operating cautiously in preparation for the sequester measures, Chairman Gary Gensler told the House Agriculture Committee.
Gensler also said the CFTC probably will complete uncleared swaps rule around the last three months of this year.
The “bulk” of the remaining rules are on track to be completed by August, he said. The agency aims to finish cross- border issues by July, while other international issues will continue on a day-to-day basis.
Gensler also said he’s not sure yet whether the agency will rework proposed rules aimed at bolstering the protection of customer deposits at futures commission merchants following the collapse of MF Global Holdings Ltd. and Peregrine Financial Group Inc.
The CFTC will take “very thoughtful look” at concerns raised about the cost and practicality of proposed regulations, he told the Committee. CFTC Commissioner Jill Sommers on March 13 called for the reproposal of a proposed CFTC rule.
The issue concerns the provision in which futures brokerages must keep so-called residual interest to cover deficits from their customers. Some brokerages say this isn’t practical because they sometimes use one customer’s surplus to guarantee other customers’ deficits on intraday basis, according to Gensler.
Warren Says CFPB Foes Protect Profits for ‘Bad Actors’
U.S. Senator Elizabeth Warren, a Massachusetts Democrat, spoke about the importance of consumer protection agencies and the stalled nomination of Richard Cordray as the head of the Consumer Financial Protection Bureau.
Warren, who set up the CFPB before seeking office, said Republicans preventing a vote on Cordray as the agency’s director are “keeping the game rigged.” She spoke to the Consumer Federation of America conference in Washington.
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Comings and Goings
Japan’s Upper House to Confirm BOJ Nominees, Nikkei Says
All three of Prime Minister Shinzo Abe’s nominees for the Bank of Japan (8301) have enough support from opposition parties to be confirmed, Nikkei newspaper reported.
Haruhiko Kuroda was endorsed March 13 by the lower house of parliament to become Bank of Japan governor, clearing the first hurdle in Abe’s plan to install a central bank leadership in favor of more easing. Lawmakers in the chamber, which is dominated by the ruling coalition, March 13 also approved Kikuo Iwata and Hiroshi Nakaso for two deputy governor posts.
Japan’s Nikkei 255 Stock Average (NKY), the best performing developed-market benchmark gauge this year, advanced after the lower house endorsed Abe’s nominees for the Bank of Japan’s leadership.
Kuroda attended All Souls College at the University of Oxford, where he studied with Nobel Laureate economist John Hicks.
Oxford gave Kuroda, 68, a different mindset than that of his predecessor, Masaaki Shirakawa. Kuroda is in line for the BOJ job on a pledge to pull Japan out of 15 years of deflation, while Shirakawa’s studies at the University of Chicago were steeped in Milton Friedman’s advocacy of low inflation and disciplined central banks in the context of well-run budget policy.
Kuroda’s views reflect those of Abe, whose push for aggressive monetary easing has helped lift stock prices to their highest level since September 2008 and pushed the yen to a 3 1/2-year low against the dollar.
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Senate Panel to Hold Vote March 19 on SEC Chairman Nomination
The Senate Banking Committee will vote March 19 on President Barack Obama’s nomination of Mary Jo White to lead the U.S. Securities and Exchange Commission.
The committee also will vote on the nomination of Richard Cordray for director of the Consumer Financial Protection Bureau. The nominations must also be voted on by the full Senate. No date for a floor vote has been set for either nominee.
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