The betting web site thinks Greece leaving the Euro before 2018 is the most likely of all results it is handicapping. The betting site says the odds are 7 to 1 that the European Commission confirms that Greece has ‘defaulted’ on debt in 2015, assumedly debt default as determined by the International Swaps and Derivatives Association (ISDA). ISDA declared the government of Argentina in default of its bond obligations last summer, a rare but increasingly common issue.
Greece: As negotiations progress, watch to see if investors take a haircut
Those close to the situation are going to be carefully watching negotiations, as the key issue to watch will be if Greece can force bond investors into a haircut rather than just re-structuring its debt over a longer period of time. The negotiations are expected to become a template for other troubled sovereign nations in Europe, with Spain, Portugal and Italy closely watching to see if Greece can have portions of its debt simply forgiven.
Watch for compromise and 11 to 4 chance of another general election in 2015
UBS economist Gyorgy Kovacs thinks compromise is the most likely outcome, which isn’t on Paddy Power’s list of bettable outcomes. He reasons that given that 76 percent of the Greek electorate wants the country to remain in the Euro Area, and that with a growing Greek economy, Greeks will likely compromise. “We see scope for some compromise that would reduce NPV of Greek debt and ease fiscal austerity,” he wrote in a report titled “Greece: SYRIZA wins, what’s next?
Compromise could be on the minds at Paddy Power, as the site says there is an 11 to 4 chance there will be another general election held in 2015. This compromise is likely to manifest if saving the economy is linked with a withdrawal from the Euro currency. As the Greek economy is finally expanding again, and at a relatively fast pace, after a six-year recession, a Morgan Stanley report says a resolution will occur “at some point” but this will only occur after “a tough negotiation.”
“Ummmm… honey, I had a little fender bender with the car…” was the line that a spouse might deliver after totaling the prized antique sports car.
A similar situation recently unfolded with Canarsie Capital in New York. Facing apparent significant losses, Canarsie’s founder, Owen Li, told his investors he was “truly sorry” for losing all their money. Li apparently ran through nearly $100 million in investor capital from late March 2014 until today, according to a CNBC report from Lawrence Delevingne.
Hedge Fund Manager losses nearly $100 million of investor funds
The fund currently has $200,000 to its name and phone calls are not being answered. Funny how losing nearly $100 million of investor funds is sometimes correlated with a lack of communication in terms of not answering phone calls.
“My only hope is that you understand that I acted in an attempt—however misguided—to generate higher returns for the fund and its investors. But even so, I acted overzealously, causing you devastating losses for which there is no excuse,” Li said in a letter to investors.
Hedge fund’s risk management system
What is interesting to note is the loss of funds. Presumably Li was providing investors an update on their performance, which they could see was lagging. Did the hedge fund investors follow a yellow flag, red flag risk management system? If the investor started to see a strategy drift in sudden amplified trading, were warnings given by the platform upon which the fund was housed? That’s difficult to tell, as the prime broker listed on the account, Morgan Stanley, is reported to no longer be affiliated with the fund.
Red flags are all over this fund. Strategy drift, enhanced trading and then the prime brokerage firm withdrawing their association with the fund.
But there were other associations, while not conclusive, that might have prompted hedge fund investors to require a little more oversight with their typically opaque fund investment. Li is a former trader at Raj Rajaratnam’s Galleon Group. Rajaratnam is now serving prison time for illegal insider activity, but Li was never accused of involvement in illegal activity. It is often the case in such hedge fund environments to keep confidential information, such as insider trading, in a tight silo as much as possible – need to know basis only.
In any case, the association might cause sophisticated investors to request – no, forcefully demand – that the investment be actively monitored on a platform of some type. Right now the investors are blaming Li for their losses, but they might want to look in the mirror for not following some hedge fund investment risk management protocols.
The surprise move of the Swiss National Bank to remove the cap on the CHF/EUR trade is a signal that the European Central Bank’s (ECB) quantitative easing (QE) is imminent, according to analysts at Morgan Stanley.
Potential further weakness of EUR
Morgan Stanley analysts Graham Seckel and Krupa Patel also suggested the possibility that the euro will experience further weakness. According to the analysts “such weakness would have put further upward pressure on the balance sheet of Swiss National Bank.
Seckel and Krupa noted that Swiss National Bank’s currency intervention resulted to the significant growth of its balance sheet in recent years. According to them, the size of the central bank is becoming more of a political issue in Switzerland.
The analysts estimated that the balance sheet of Swiss National Bank is approximately 85% of the country’s GDP.
Morgan Stanley’s foreign exchange strategist, Hans Redeker believed that the decision of the Swiss National Bank to remove the CHF/EUR cap partly reflected the central banks’ reduced need to acquire euro denominated assets.
CHF revaluation is negative for Swiss equities
According to Seckel and Krupa, the Swiss National Bank does not want a too strong revaluation of the CHF therefore it might instead increase intervention on the US dollar trade. The analysts noted that Morgan Stanley’s foreign strategy team is targeting a move to 1.05 for both USD/CHF from 0.82.
The analysts emphasized that the revaluation of the CHF is negative for the Swiss stock market citing the reason that will likely put downward presses on the economic growth (bad for tourism and exports).
The revaluation will also increase deflationary pressures and negative affect corporate profits.
Seckel and Krupa explained, “When the peg was put in place in 2011, Switzerland’s relative 12m EPS had fallen by around a third over the prior 12m. The peg then marked the through in this trend and Switzerland’s relative EPS outperformed the market by 25% since then.”
The analysts added that the MSCI Switzerland outperformed MSCI Europe by 30% over the same period. Swiss stock were also at a 35-year high.
Reason why Swiss earnings are sensitive to CHF
Seckel and Krupa explained that Swiss earnings are sensitive to the CHF because the companies in Switzerland are “very international in their focus.” They estimated that 85% of the sales of Swiss companies are generated overseas. Many of the Swiss large-cap entities obtained 90% to 95% of their revenues abroad.
The analysts noted that international investor’ perceived that the stronger CHF offsets the actual price declines for Swiss stocks in the very short-term, therefore the stock prices are up today in USD and EUR terms.
Seckel and Krupa believed that the situation is temporary. According to them, “the medium-term drag on EPS from a stronger CHF will ultimately undermine relative performance going forward.
Morgan Stanley released the earnings results from its fourth fiscal quarter before opening bell, posting adjusted earnings of 40 cents per share on $7.8 billion in revenue. The report continues what has been a dismal round of fourth quarter earnings reports in the Financials sector. Analysts had been expecting the firm to post earnings of 56 cents per share on $8.42 billion in revenue for the quarter.
Morgan Stanley reports several items
The firm’s net earnings from continuing operations were 47 cents per share. Included in the net results are a $1.4 billion “discrete tax benefit,” which amounted to 70 cents per share. Morgan Stanley also reported higher compensation expenses due to $1.1 billion in deferral adjustments, which amounted to 40 cents per share.
The firm reported $284 million in legal expenses in connection with the legacy residential mortgage-related issues, which amounted to 12 cents per share. Also Morgan Stanley saw negative FVA revenues of $468 million, which amounted to 17 cents per share.
Breaking down Morgan Stanley’s earnings report
The firm said its Investment Banking Division led the world in initial public offerings and was in second place in mergers and acquisitions.
Morgan Stanley also saw record quarterly revenue from its Wealth Management division, which was $3.8 billion. Pretax income from continuing operations in the division was $736 million, compared to last year’s $715 million. The firm also reported $21 billion in fee-based asset flows, another record.
Net revenues from the firm’s Institutional Securities division were $3.2 billion, while pretax losses from the division were $863 million, compared to last year’s $1.2 billion pretax loss. Investment Management net revenues were $588 million, while pretax losses from continuing operations were $6 million for the quarter. Assets under management or supervision were $403 billion during the quarter.
For the full year, net revenues were $34.3 billion, compared to the previous year’s $32.5 billion, and earnings were $2.96 per share, compared to $1.38 per share in the same quarter a year ago.
Shares of Morgan Stanley fell by as much as3% in premarket trading this morning.
Is The US Treasury Market Rigged? Some Say Yes by Gary D. Halbert
FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
January 13, 2015
IN THIS ISSUE:
1. The Largest Market in the World is Unregulated
2. “Why the Treasury Market Needs a Lifeguard”
3. World’s Largest Bond Market Needs a Single Regulator
4. How the Treasury Department Sells US Debt
5. Primary Dealers Are Main Players in Treasury Market
6. How Individuals Can Buy Treasury Securities Directly
The Largest Market in the World is Unregulated
The last time federal regulators took a hard look at how Wall Street banks and brokers trade US Treasury securities – the largest bond market on the planet by a longshot – a little company called Google was just starting out.
That was 1998, and the technological leaps since then – including ones that are now transforming bond markets – have left government regulators in the dust. In particular, executives from three of the biggest market-making firms in Treasuries say an electronic bait-and-switch tactic known as “spoofing,” – which is already the focus of a manipulation allegation at a major futures exchange – needs to be investigated in cash Treasuries (OTC, etc.) and related futures.
Rules first enacted in 1986 that have gone virtually untouched since then are allowing certain high-tech firms to outmaneuver less-savvy rivals and are manipulating bond prices. They say a lack of cohesive regulation and technology to monitor “high-frequency traders” is making the world’s biggest government bond market more dangerous for everyone.
The following article appeared in Bloomberg/Businessweek on December 11. Since then, I’ve seen no one else touch it. I’ve googled this subject dozens of ways… and very little on this topic comes up. As such, I have reprinted the article below, which I think you will find very interesting and troubling.
Why the Treasury Market Needs a Lifeguard
By Matthew Leising
If you have a complaint about trading in the $12.3 trillion Treasury market, who are you going to call? That question is surprisingly hard to answer. While the U.S. Department of the Treasury and the Federal Reserve Bank of New York exercise some degree of oversight, there’s no one central authority charged with policing the market to prevent illegal trading activity in what is the world’s largest, most active bond market.
The rules governing Treasury trading were enacted in 1986—before high-frequency trading was common—and haven’t been updated in more than a decade. Taking advantage of those outdated regulations, speed-trading firms outmaneuver less savvy rivals and, some executives at trading firms assert, manipulate prices.
A lack of cohesive regulation or adequate technology to monitor high-frequency traders is making the market more dangerous for everyone, they argue. “Understanding the daily movements in the market isn’t that relevant for the Treasury,” says Tony Fratto, who was the department’s chief spokesman during the George W. Bush administration. While officials understand automated trading strategies, “they’re not regulators of that market,” he says. “No one is.”
Safe and efficient trading of U.S. debt is “essential for the Department of the Treasury to borrow at the lowest possible cost and for the Federal Reserve System to effectively execute monetary policy,” regulators said in a 1998 study of how the market is regulated. Treasury bonds are also a major component of many pension plans and 401(k) investments.
One issue that remains unaddressed, according to executives from three of the largest Treasury trading firms, is an electronic bait-and-switch tactic known as spoofing. Spoofers try to make money by feigning interest in buying or selling at a certain price. That creates the illusion of demand and gets other traders to move the market. A spoofer cancels his original trade before it’s executed and profits by buying or selling at the new price. Spoofing has cost traders in Treasury bonds and related futures contracts $500,000 to $1 million a day, according to one of the people. The three executives, who asked not to be named because they aren’t authorized to speak publicly, say they have no idea where to take their allegations of spoofing.
The 1986 Government Securities Act gives bank regulators the authority to prevent fraud and manipulation in the Treasury market. It gave the Treasury Department the authority to write rules, but not to enforce them. For that, Treasury must turn to the Securities and Exchange Commission, which oversees broker-dealers that buy and sell Treasury bonds, or to other groups such as the Financial Industry Regulatory Authority (Finra), the industry’s self-regulatory group.
A review by Bloomberg of dozens of SEC enforcement cases over the past 10 years shows instances of the agency taking action against illegal Ponzi schemes, insider trading, and theft of investor money in the Treasury market, but no case alleging trading manipulation. An SEC spokesman declined to comment [other than to say]:
“The market continues to function smoothly, and the three agencies do not believe it is flawed in any fundamental way”
Finra spokesman George Smaragdis says the group has a rule for Treasury securities that says no broker or broker-dealer is allowed to “effect any transaction in, or induce the purchase or sale of, any security by means of any manipulative, deceptive, or other fraudulent device or contrivance.” Finra’s enforcement record includes actions related to excessive fees and failures to execute trades at the best prices for clients. No case that alleged trading manipulation was found.
Eric Pajonk, a spokesman for the Federal Reserve Bank of New York, declined to comment on the bank’s role in supervising the Treasury market. He referred to the 1998 study, conducted by Treasury, the SEC, and the Fed, which says the Markets Group of the New York Fed has “primary responsibility for day-to-day surveillance of the Treasury securities markets.” No mention is made of this role for the Markets Group on the New York Fed website. The monitoring and analyzing it does is to “inform the formulation and implementation of monetary and financial stability policy,” the site says.
When the Government Securities Act became law, Treasury trading was conducted manually. Now about half of Treasury trading by institutions is done by high-frequency traders, according to David Light, co-founder of CrossRate Technologies, which is trying to create a new electronic Treasury trading platform. In other markets, regulators have taken steps to keep pace with technological changes. The SEC spends about $2.5 million a year on a surveillance system called Midas to help root out bad behavior in the $24 trillion U.S. stock market. The Commodity Futures Trading Commission, the main derivatives regulator in the U.S., requested $115.8 million from Congress this year to fund its market surveillance and enforcement programs.
There’s no such system in Treasuries, nor any plans to create one. “The Treasury, Fed, whoever, have always taken a hands-off role with the government securities market,” says Craig Pirrong, a finance professor at the University of Houston. “It is rather remarkable that the Fed and Treasury have taken little interest in the dramatic change in market microstructure and trading technology.”
The Treasury Department “regularly monitors day-to-day movements of financial markets,” Adam Hodge, a spokesman, said in an e-mailed statement. “We take any concern about market manipulation seriously and routinely monitor developments with our regulatory partners.”
The 1998 study conducted by regulators concluded that the system was working as intended. “The market continues to function smoothly, and the three agencies do not believe it is flawed in any fundamental sense,” the report said. “As a result, we believe no additional rulemaking authority under the GSA, as amended, is required at this time.” The 16-year-old study is the most recent assessment of the market undertaken by the U.S. government.
The Treasury Department doesn’t have the tools or computer systems—or the inclination—to police modern markets, according to Fratto, the former Bush official, now a partner in Washington at banking lobbyist Hamilton Place Strategies. “They don’t monitor trade activity,” he says. “They monitor prices to inform their view of the macro economy. They may be afraid to tell you it’s not something they’re very interested in.”
That lack of concern could be a problem next year. Market volatility will rise in 2015 when the Fed finally seeks to raise interest rates for the first time in years, says Pirrong. “The volatility and trading activity will probably be greatest at the time of the Fed’s initial move.”
World’s Largest Bond Market Needs a Single Regulator
The US Treasury securities market, at an estimated $12.3 trillion, is by far the largest government securities market in the world. Yet it has no one single regulator to police it. The Treasury’s Debt Management Office has some responsibility for trading, yet Treasury has no authority to take enforcement actions against violators. The department can write rules, and it engages with market users and regulators such as the SEC, but is powerless to go after anyone breaking its own rules.
The SEC has regulatory oversight of broker-dealers that buy and sell Treasury bonds, but US Treasuries are exempt from being defined as a “security” under the Securities Exchange Act, the US law that gives the SEC its main authority.
A review of dozens of enforcement cases by the SEC over the past 10 years shows instances of the
A few key findings in the US include:
- A surge from Europe toward US targets, record high deal valuations and exit levels, and a deal count nearing 2007’s peak led US M&A activity to reach a record high last year. Total deal value soared 56.6% from US$ 900.1bn in 2013 to US$ 1,409.4bn in 2014, while total deal count rose 21.5% from 3,937 transactions to 4,782.
- US firms commanded some of the highest deal valuations globally, with average deal values increasing 30.15% in the past year, reaching a record high of US$ 616.3m in 2014. Premiums paid jumped to 29% in 2014, from 26% in 2013, with an EBITDA multiple of 14.5x.
- US private equity exits reached an all-time high in 2014 with 958 deals valued at US$ 262.1bn, up 70.6% by value compared to 2013 (US$ 153.6bn on 735 deals). Along with a general rise in Technology transactions, the past year saw an upswing in exits in the space, reaching the highest deal count and value on record: 292 deals worth US$ 49.6bn, more than double 2013’s value (US$ 24.7bn). In the Pharma, Medical & Biotech sector, the US$ 42.3bn worth of exits in 2014 was 56.1% higher than the previous peak in 2007 (US$ 27.1bn).
Sellers bask in US$ 3,230bn-worth of global M&A activity, only 11.8% less than 2007
A record value for private equity exits, the average price tag at an all time high, and soaring cross-border deal-making, proved 2014 to be a seller’s market. The year ended with US$ 3,230bn-worth of deals, 44.7% above 2013’s total (US$ 2,232.5bn), and down just 11.8% from the last highest annual total in 2007 (US$ 3,660.4bn).
Global M&A value hit a post-crisis high at the end of Q3 2014 and continued to climb towards the third highest annual total on Mergermarket record (since 2001). This came in spite of a reversal of quarterly increases from Q4 2013 to Q2 2014, after which totals fell quarter-on-quarter with Q4 dropping 7.5% from Q3 to US$ 787.8bn.
2014 saw private equity firms choosing to dispose of assets they had been holding onto, resulting in the year seeing record exits by both value at US$ 489.3bn (which soared to 21.4% above 2007’s peak) and number of deals (2,054). Trade buyers led with a record 1,484 transactions worth US$ 367bn. The 271 more deals than in 2013 resulted in a 82.3% higher deal value than 2013’s US$ 201.3bn.
The Consumer sector (US$ 80.9bn) was particularly active with regard to private equity exits, reaching the highest value and deal count on record. Trade buyers swooped in for Consumer companies and took an 89.6% proportion of the sector’s total exits with 182 deals worth US$ 72.5bn, 154.3% higher than the last peak in 2012.
Energy, Mining & Utilities was the leading sector by value with 1,638 deals totaling US$ 632.5bn, up 47.5% from 2013. TMT continued an upswing from 2013, seeing over 400 more announcements and an 18.9% increase by value reaching US$ 604.2bn. However, it was Pharma, Medical & Biotech activity that stole the limelight in 2014.
The Pharma, Medical & Biotech sector accounted for 52.3% of the total value of lapsed deals during the year (US$ 224.1bn), but the resurgence in the sector still amounted to 1,215 deals reaching an all time high value at US$ 379.5bn during 2014. Tax inversions and a global trend towards cross-border M&A resulted in deals in the industry between different countries accounting for a majority share of total deal value at 67.7% with US$ 257bn-worth of deals.
There was an abundance of cross-border deal making overall in 2014, demonstrated by the highest deal count record and the second highest value. The 5,501 deals worth US$ 1,399.7bn increased 82.6% by value compared to 2013 with 630 more announcements.
The size of cross-border transactions played a role in the deal value increase. The average deal size for cross-border deals jumped to US$ 453.9m, up from US$ 291.4m in 2013 and above the 2007 peak (US$ 437.7m).
The inflated deal size was in part due to the sudden attention to US companies from Europe. The total value of deals involving European companies targeting the US hit the highest on record at US$ 259.7bn with 421 announcements. For example, German corporations made three of their largest ever US-based acquisitions during 2014, with all three valued over US$ 12.7bn.
Deal complexity competing bids and possibly the size of deals, could be an explanation for the longer period taken to complete a deal. The average time taken in 2014 was 96 days, the longest time period on record after five annual increases.
Goldman Sachs remained the lead financial advisor league table by value with 378 deals worth US$ 939.9bn, increasing 57.4% from 2013. The firm knocked PwC from the top position in the league table by deal count after advising on 80 more transactions than 2013. The firm jumped from third position in 2013. It was was the lead advisor by value in the US, Europe and also Asia-Pacific (excl. Japan).
The top four firms (Goldman Sachs, JP Morgan, Morgan Stanley, Bank of America Merrill Lynch) all retained the same position as in 2013, but Citi moved into the top five with 224 deals worth US$ 619.5bn.
Jefferies, Perella Weinberg Partners, Societe Generale and Allen & Company entered into the top 20 during 2014.
Europe’s M&A makes a sudden rebound to a post-crisis high with deals worth US$ 901.4bn
After a rather subdued 2013, European M&A activity rebounded strongly in 2014, climbing to a post-crisis high at US$ 901.4bn. This was a 40.5% increase from 2013 (US$ 641.4bn), making it the highest value since 2008 when it stood at US$ 1,003.8bn. Volume was up by a modest 4.8% between 2013 and 2014 (5,816 versus 6,094).
There was a sense of confidence in global boardrooms during 2014 and this filtered through to European targets where the average price paid for a company was US$ 365.4m, the highest in seven years.
On a quarter-by-quarter basis, 2014’s M&A activity got off to a slow start in Q1 with deals valued at US$ 176.5bn, peaking at US$ 312.9bn in Q2, and seeing a decline thereafter to US$ 202.2bn in Q3, and a slight increase in Q4 with US$ 209.9bn-worth of deals.
Some eurozone countries showed signs of recovery. In Spain for example, the US$ 57.2bn-worth of deals increased 77.1% from 2013. The country has a strong pipeline for 2015, although the second half could be more complicated as attention will turn to the national general election.
Private equity exits stood at US$ 165.5bn, a 94.5% surge on 2013 and the highest figure since 2007. The average price paid for an exit exceeded even the peak years at US$ 492.7m. Consumer (US$ 37.9bn) and Industrials & Chemicals (US$ 29.2bn) saw the highest values.
The ongoing consolidation of Europe’s Telecommunication industry saw M&A in the TMT sector worth US$ 168.2bn account for the highest share of Europe’s value, with domestic transactions accounting for most of it (US$ 120.2bn). One of the trends currently shaping the sector is the convergence towards the “quad” model, with operators bundling together internet, TV, landline and mobile services.
The Pharma, Medical & Biotech sector was the second most active in 2014 with US$ 114.9bn-worth of deals reaching the highest on Mergermarket record after a 162.3% jump from 2013.
Europe’s 1,184 inbound deals totaled US$ 320.6bn and reached a record high by both deal value and deal count during 2014 (since 2001). The proportion of total M&A accounted for by inbound activity climbed to a 35.6% peak.
Most of the inbound investment came from US-based companies which accounted for 60.7% or US$ 194.6bn-worth of inbound deals. This was a 80.6% increase from 2013 and also 8.5% above the previous high in 2008 (US$ 179.3bn).
Mirroring the inbound deal flow, 71% of total outbound M&A was also directed towards the United States (US$ 259.7bn), the highest value on Mergermarket record (2001). As a result, after one of the lowest years for European outbound M&A in 2013, outbound activity surged to its highest level since 2007 during 2014 with US$ 365.8bn-worth of deals, up 190% from the previous year.
Further underlining the strong inbound trend, the top three transactions involving non-European bidders targeting European companies all originating from the US – Medtronic’s acquisition of Covidien (Ireland) for US$ 45.9bn; Walgreen’s purchase of the remaining 55% stake in Alliance Boots (Switzerland) for US$ 23.8bn; and General Electric’s acquisition of Alstom’s Thermal & Renewable Power and Grid business (France) for US$ 12.3bn.
France was the target country for two of the top five deals in the region, demonstrating the growth in size
Morgan Stanley terminated one of its financial advisors accused of stealing and selling the account data of approximately 350,000 clients online, according to report from the Wall Street Journal based on information from a person familiar with the situation.
The person said Morgan Stanley terminated the employment of Galen Marsh who was working at the bank’s branch in Midtown Manhattan.
A post on the website Pastebin was seen indicating that around 6 million account data of the clients of Morgan Stanley were for sale on December 15.
After two-weeks, a new posting on the site showed that the actual number of account data for sale was 1,200. Interested parties were directed to a link where they can purchase the data from a website that sells digital files and accepts virtual currencies such as Bitcoin as payment. Morgan Stanley’s clients’ data were being sold using Speedcoin, a more obscure digital currency than Bitcoin.
Morgan Stanley said none of its clients were financially harmed
Morgan Stanley discovered the data breach involving 900 of its client accounts during a routine review of public websites on December 27. According to the bank, the data that appeared briefly online included account names and numbers, states of residence and asset values.
According to Morgan Stanley, it is still investigating the incident and none of its clients were financially harm. The person familiar with the situation said the bank is trying to find out how Mr. Marsh obtained clients’ data of such volume.
In a memo, Gregory Fleming, president of wealth management unit at Morgan Stanley said, “It is important to note that 90% of our clients are unaffected and, for those impacted, there is no evidence that critical data such as Social Security numbers or account passwords were exposed or taken.”
Morgan Stanley’s employee denies selling clients’ data
Mr. Robert Gottlieb, a lawyer representing Mr. Marsh said his client already suffered the severe consequences of his actions after his employment was terminated.
Mr. Gottlieb also clarified that Mr. Marsh “did not sell nor ever intended to sell any account information. He did not post the information online. He did not share any account information with anyone. He did not use it for any financial gain. He is devastated by what has occurred and is extremely sorry for his conduct.”
Morgan Stanley reported that incident to regulators and law-enforcement authorities including the Federal Bureau of Investigation (FBI) and the Financial Industry Regulatory Authority (FINRA).
New court filings in a lawsuit involving Morgan Stanley cast light on how the incestuous relationship between New Century and Morgan Stanley helped precipitate the subprime mortgage crisis, and make it clear senior execs knew about the very poor quality of the loans. Emails and other confidential documents according to a report by Nathaniel Popper of New York Times’ Dealbook, highlight the great extent which Morgan Stanley actively influenced New Century’s move into riskier and more onerous mortgages in 2004, and how greedy, profit- and bonus-focused MS execs brushed off obviously legitimate questions regarding whether homeowners would be able to make the mortgage payments.
Excerpts from documents
According to a Morgan Stanley internal report written in late 2004, “Morgan Stanley is involved in almost every strategic decision that New Century makes in securitized products.” Securitized products refers to the loans the bank was packaging into “low risk” mortgage bonds.
The documents are in effect a smoking gun confirming that Morgan Stanley employees were quite aware of the low credit quality of the securitized mortgage products and even joked about it. A senior due diligence exec at MS, Pamela Barrow, wrote an email to a colleague describing mortgage holders as “first payment defaulting straw buyin’ house-swappin first time wanna be home buyers.”
“We should call all their mommas,” Barrow commented sarcastically in the email. “Betcha that would get some of them good old boys to pay that house bill.”
Justice Department investigating Morgan Stanley
The Justice Department is digging deeper into the relationship between New Century and Morgan Stanley, especially relating to the sale of mortgage securities in the run-up to the financial crisis, according to a person briefed on the matter. According to a New York Times source, the department believes it will reach a settlement in the case in the first half of next year
The new documents and emails stretch from 2004 to 2007. Of note, they were made public as part of filings in a separate lawsuit against MS. The documents paint a clear picture of how Morgan Stanley consistently pushed New Century to write more and more mortgages with questionable conditions that were highly profitable for Morgan Stanley, such as balloon payments, adjustable interest rates and usurious prepayment penalties that make mortagages very hard to refinance.
The NYT says the megabank had the ability to strongly influence New Century lending because it bought the most subprime loans from New Century.
High-Level Fed Committee Overruled Carmen Segarra’s Finding on Goldman
by Jake Bernstein ProPublica, Dec. 29, 2014, 11:16 a.m.
A committee that includes senior Federal Reserve officials reviewed and overturned a bank examiner’s finding that Goldman Sachs lacked a firm-wide policy to prevent conflicts of interest, according to a top Fed official.
Bill Dudley, the head of the Federal Reserve Bank of New York, disclosed the action by the “Operating Committee” in a little-noticed aspect of his testimony last month before the U.S. Senate. Dudley said the panel was part of a new effort by the Fed to raise standards across the board by comparing the practices and health of the nation’s banks against each other.
In his testimony, Dudley provided the Fed’s most detailed account to date of how it reversed the conclusions of Carmen Segarra, a New York Fed bank examiner who asserted that Goldman lacked the Fed’s recommended firm-wide policy to prevent conflicts of interest. Dudley told the senators that the Operating Committee had “fully vetted” Segarra’s finding but said “there was this lack of willingness to agree.” He said that while he encourages examiners to speak up, their views must be “fact based.”
New documents and secret recordings shed more light on the facts Segarra marshaled to support her position. The examiner, for example, compared Goldman’s approach to conflicts with that of Barclays and Morgan Stanley. She found that, unlike with Goldman, the policies of both banks were detailed, specific and clearly addressed to the entire firm.
ProPublica also found that:
- Goldman executives acknowledged to Segarra that they had no single firm-wide policy on conflicts of interest, according to official meeting minutes she kept.
- Segarra formally presented her findings in a session with specialized Fed examiners stationed at nine of the too-big-to-fail banks. They agreed that Goldman did not have the sort of policy recommended in Fed guidelines, according to Segarra and another examiner who was present.
- In disputing her finding just before she was fired, the senior Fed official overseeing Goldman Sachs pointed to the code of conduct for employees displayed on Goldman’s website, saying it amounted to a firm-wide policy. Goldman’s code of conduct at the time did not contain characteristics that were found in the conflicts policies of other banks that experts consider best practices. The Goldman code addressed conflicts involving employees’ personal holdings but not those that could arise from the firm’s deals.
Segarra was not called to testify at the Senate hearing. And in his appearance, Dudley did not detail specifically what evidence the Operating Committee considered in overruling Segarra, on what basis the decision was made, or whether it considered any of Segarra’s documentation or examination findings.
“I think the position of the senior supervisors was that there was a conflict-of-interest policy, and that is what the debate was about,” Dudley said.
As ProPublica and This American Life previously reported, Segarra secretly recorded 46 hours of internal meetings while at the Fed after encountering resistance to her examination into Goldman.
At the hearing, David Beim, a Columbia University professor, testified that the recordings “illustrated in Technicolor” the problems he found in the 2009 study of the New York Fed’s culture that Dudley had commissioned. Among other things, the study said examiners were afraid to speak up and that findings were being watered down by higher-ups and an over-reliance on consensus.
“It does suggest to me that not as much change has happened as I would have hoped and that indeed, there is a continuing cultural problem and culture is slow to change,” Beim told the senators.
Partly in response to concerns about examiner independence raised by Segarra’s case, the Federal Reserve Board has launched two reviews into whether information from frontline examiners is being heard by top decision-makers at the New York Fed and other regional reserve banks.
Asked about the issue, Federal Reserve Chairwoman Janet Yellen voiced strong support of Dudley. But Yellen also said that when examiners are at odds about what’s taking place in a bank, “it is important that there be channels by which they can make sure that disagreements are fed up to the highest levels.”
At the heart of the dispute over Segarra’s findings is one of the most vexing and prevalent problems on Wall Street: conflicts of interest. Among its peers, Goldman stands out for its frequent run-ins over the issue.
This month, the bank was among 10 Wall Street firms that were fined a total of $43.5 million for allegedly using the promise of favorable research, which was supposed to be impartial, to win business for their investment-banking divisions. The firms paid small fines without admitting wrongdoing.
During a hearing in November, senators accused Goldman of deliberately pushing up the price of aluminum and giving confidential information to traders in the metal, providing them an unfair advantage. Goldman denied the allegation; two other firms also were criticized at the hearing.
In 2010, the Securities and Exchange Commission hit Goldman with a record $550 million fine related to conflicts in structuring mortgage bonds. The next year, the firm faced a shareholder lawsuit over a deal involving its advisory role to energy company El Paso in its sale to Kinder Morgan. Goldman held a $4 billion stake in Kinder Morgan. A judge harshly chastised the bank for its handling of the conflict.
Segarra started at the New York Fed on Oct. 31, 2011, as a senior examiner for legal and compliance issues. Her bosses instructed Segarra to examine Goldman’s conflicts-of-interest policy as of Nov. 1, 2011, after the bank’s issues with conflicts landed in media reports.
Conflicts not only can result in fines or lawsuits; they also can threaten a bank’s reputation, potentially imperiling its safety and soundness. Official guidance from the Fed recommends that banks have a global policy 2013 that is, one that applies firm-wide 2013 to deal with conflicts of interest.
Five experts interviewed by ProPublica said the best policies have common characteristics: They define what a conflict is; explain how everyone in the firm is covered; identify roles and responsibilities; offer examples; provide ways to escalate conflicts to senior management; and track compliance.
“This is not hard,” Segarra said in an interview. Before joining the New York Fed, she had worked for years helping banks comply with rules and regulations. “Most big firms have this.”
The national business ethics survey consistently ranks conflicts of interest as one of the top three types of misconduct observed by employees, according to Patricia Harned, CEO of the Ethics and Compliance Officer Association. “The conflicts-of-interest policy should apply from the board of directors to the first level employee,” said Harned. “You need to spell out what you have to avoid.”
The basis for Segarra’s examination of Goldman was a Fed Supervision and Regulation Letter known as SR 08-8 that specifically called for firm-wide policies in key areas including conflicts. In 2009, a review by the Federal Reserve Board had found fault with the New York Fed’s efforts to ensure that banks followed the guidance.
In the course of her examination, Segarra said she asked her peers at other big banks to provide her with the conflicts-of-interest policies for the firms they covered. Her goal was to do the kind of comparisons Dudley praised in his recent Senate testimony.
The New York Fed typically teams up banks based on common characteristics. The idea is to identify best practices and expose shortcomings. If one bank is weaker than its twin in a specific area, the laggard can be encouraged to raise its game. For example, big retail banks JPMorgan Chase and Citigroup are compared. Foreign banks are also paired: Deutsche Bank with Barclays; Credit Suisse with UBS. Goldman, as a broker dealer, is paired with another large broker dealer, Morgan Stanley, according to former examiners.
ProPublica obtained Morgan Stanley’s policy, dated April 2011. It contained most of the best practices identified by experts. It was firm-wide and posted on the company’s intranet for every employee to see. Called “Morgan Stanley Global Conflicts of Interest Policy,” it applied to all employees of Morgan Stanley, offered a definition, spelled out roles and responsibilities, described how potential conflicts should be escalated and provided for annual reviews. The policy featured 20 different examples of potential conflicts.
Segarra said she knew that Goldman was capable of writing a similar global policy because she had seen one. The firm’s policy for vendors, for example, was called “Goldman Sachs Firmwide Vendor Management Program” and had many of the same features found in Morgan Stanley’s conflicts policy.
When Goldman was asked for its conflict-of-interest policy, a bank executive said it did not have a single policy, according to official minutes taken by Segarra in a meeting between supervisors and bank executives. It took months and several requests, Segarra said, before Goldman responded to her request for “copies of conflicts of interest policies, procedures, and risk assessments applicable to all [six] GS divisions … as of November 1, 2011.”
Goldman eventually provided hundreds of pages of documents. The bank said that as part of recommendations from the firm’s Business Standards Committee, it was updating