April 15, 2024

DealBook: HSBC Reveals Problems With Internal Controls

We will acknowledge and apologize for our past mistakes, Stuart Gulliver, chief of HSBC, wrote to employees in a memo.Jerome Favre/Bloomberg News“We will acknowledge and apologize for our past mistakes,” Stuart Gulliver, chief of HSBC, wrote to employees in a memo.

3:53 p.m. | Updated

LONDON — HSBC, the largest financial institution in Europe, has become the latest British bank to reveal major internal-control problems, saying that senior officials would apologize to U.S. lawmakers next week for not cracking down soon enough on money-laundering activities in America.

The money laundering, which a U.S. Senate subcommittee indicates was linked to terrorism and drug deals, could result in HSBC’s paying fines of up to $1 billion, according to analysts.

“Our anti-money laundering controls should have been stronger and more effective, and we failed to spot and deal with unacceptable behavior,” Stuart T. Gulliver, the chief executive of HSBC, wrote in a memo that became widely circulated after it was released to employees late Wednesday.

HSBC said Thursday that it would have no further comment before a hearing Tuesday in Washington.

The admission by HSBC, long seen as one of the more conservatively run and trustworthy of the financial giants based in London, could not come at a more awkward time for the bank. It is under new management since the period when the money laundering occurred, from 2004 to 2010, and it has shifted corporate focus to fast growing markets in Asia, which accounted for the bulk of its $16.8 billion in profit last year.

HSBC can distance itself from the money-laundering episode, by chalking it up to a previous management’s lapses. But the bank, along with more than a dozen financial institutions, also faces scrutiny by regulators on both sides of the Atlantic for any role the companies might have played in an the interest-rate manipulation scandal that has already embroiled one of HSBC’s main competitors, Barclays.

One big HSBC investor, who was not authorized to speak publicly, said that while it was a serious lapse not to have caught customer money laundering sooner, it did not necessarily indicate a deeper ethical problem within the bank. But the investor plans to closely follow developments to see what role — if any — the bank played in trying to manipulate key interest rates, including the London interbank offered rate, or Libor. If any issues arise, it could lead to more political pressure and damaging lawsuits, especially in London.

“We do not think there is a culture of money laundering at HSBC,” this person said. “Management overlooked it but will fix it. But Libor is different.”

Adding another political wrinkle: HSBC’s former chairman, Stephen Green, who was in office from 2006 to 2010 when many of the money-laundering detection problems occurred, is currently the trade minister in British prime minister David Cameron’s government. Mr. Green’s office did not reply to a request for comment on Thursday.

Shares of HSBC fell more than 2 percent Thursday in London.

British politicians and regulators are in the middle of a deep inquiry into banking practices of Barclays in the Libor scandal, for which the company has already agreed to pay fines in Britain and the United States of $450 million. A broader investigation into the conduct and practices of all banks operating in Britain is likely to follow, and regulators in the U.S. are conducting their own broader sweep.

In the case of the money laundering, the U.S. authorities have been examining HSBC for several years. On Tuesday, officials from the bank are set to testify in Washington before the Senate Permanent Committee on Investigations. A subcommittee spokesman declined on Thursday to discuss the investigation, but the panel’s Web site describes the agenda: ‘‘a hearing on the money laundering and terrorist financing vulnerabilities created when a global bank uses its U.S. affiliate to provide U.S. dollars, U.S. dollar services, and access to the U.S. financial system to high risk affiliates, high risk correspondent banks, and high risk clients, using HSBC as a case study.’’

Mr. Gulliver, HSBC’s chief executive, is not expected to testify.

In his memo to employees, Mr. Gulliver said that since 2010, the bank has doubled its annual spending on regulatory compliance to $400 million, and now has about 3,500 people worldwide working on compliance — more than 1,000 of them in the United States. Over all, HSBC has about 295,000 employees.

Ian Gordon, a bank analyst at Investec in London, said Thursday that for HSBC, the money laundering “is an historic issue and I don’t think there will be any material repercussions in terms of civil liability.”

But the analyst is among those who note that HSBC’s bigger issue in the near future is the Libor investigation.

Unlike Barclays, HSBC’s profits come mainly from a mix of consumer and corporate businesses in Asia. Investment banking — making up as much as 70 percent of Barclays’s profit — accounts for less than a third of HSBC’s bottom line.

Mr. Gulliver is a recent appointee to the top spot at the bank, taking over in early 2011 and he has been vocal in shifting focus toward Asia — where he spends a large amount of his time — and away from slower growth developed markets.

And although he has an investment banking background, Mr. Gulliver is a low-key British national who has spent much of his career out of the public eye in Asia. As a consequence, he is less a controversial public figure when compared with Robert E. Diamond Jr., the recently ousted Barclays chief, whom the former British business minister, Peter Mandelson, once referred to as the ‘‘unacceptable face’’ of London banking.

In a recent report, analysts at Morgan Stanley estimated that the possible litigation exposure for the industry at large from the Libor fallout could be as much as $6 billion. That figure, while involving significant guesswork, was calculated on the basis of the potential profits a bank could have made by benefiting from a lower interest rate.

According to Morgan Stanley’s calculations, HSBC’s potential penalty if found culpable in the Libor investigation would be $348 million, which translates into a 1 percent earnings per share hit for 2013. The bank that would suffer the most was Royal Bank of Scotland, the Morgan Stanley analysts said, with possible legal exposure of $1 billion.

Neil Gough contributed reporting from Hong Kong.

Article source: http://dealbook.nytimes.com/2012/07/12/hsbc-to-apologize-at-senate-hearing/?partner=rss&emc=rss

Fair Game: Foreclosure Relief? Don’t Hold Your Breath — Fair Game

So many were skeptical when the Office of the Comptroller of the Currency announced yet another program in April. This one was intended to provide reparations to homeowners who’d been hurt financially by foreclosure abuses at banks.

As the details trickle out, the program looks like more of the disappointing same. “This is just the next program that’s getting people’s hopes up,” said Alys Cohen, staff attorney at the National Consumer Law Center in Washington. “Not only will it not help people, it could easily harm them.”

The program arose out of a regulatory review in late 2010 of loan servicing practices at the nation’s largest banks. The review followed the robo-signing scandal that erupted after consumer lawyers — not regulators, mind you — identified numerous apparent forgeries and other improper foreclosure documents filed with courts by banks and their representatives.

Last April, the banks agreed to fix problems found in the review and were required to hire independent consultants to audit their practices in 2009 and 2010. JPMorgan Chase engaged Deloitte, while Citibank and U.S. Bancorp hired PricewaterhouseCoopers. Three other banks hired Promontory Financial.

On Nov. 1, letters started going out to more than four million borrowers who were ensnared in the foreclosure process in the two years covered by the program. Those people were told how to request reviews of their cases. The letters also described 22 types of financial harm they might have experienced. Borrowers have until April 30 to request a review.

Obviously, this program has a lot of moving parts. But many of them are flawed, according to Ms. Cohen and other foreclosure experts.

Some of the problems were aired at a Senate subcommittee hearing on Dec. 13. Three Democrats — Robert Menendez of New Jersey, Jeff Merkley of Oregon and Jack Reed of Rhode Island — expressed doubts about the program to Julie L. Williams, chief counsel at the comptroller’s office. The senators were especially vocal about the potential for conflicts of interest among the consultants hired to conduct the reviews.

This is a real defect since the consultants were chosen by the banks that are paying them. And companies that have done work for these banks in the past, or that hope to do more work for them in the future, were not barred from taking on the assignments.

According to Ms. Williams, the comptroller’s office closely vetted the consultants to disqualify any that posed a conflict.

BUT Michael Olenick, a specialist in mortgage research, said he spotted a conflicted consultant after one hour of digging. Allonhill, a smallish firm appointed by Aurora Bank, a mortgage servicer, is headed by Sue Allon, whose previous small firm acted as credit risk manager in a 2003 mortgage pool for which Aurora oversaw the loans’ servicing. The prospectus on that deal noted that Murrayhill, Ms. Allon’s former firm, would “monitor and advise the servicers with respect to default management of the mortgage loans.” It also said that Murrayhill would make recommendations to the servicers regarding delinquent loans.

Now, under the comptroller office’s program, Ms. Allon’s firm may be analyzing the treatment of borrowers on whose loans it acted as credit risk manager. “This conflict is so deep and so obvious, how could anybody have missed it?” Mr. Olenick asked.

A representative for Ms. Allon wrote in an e-mail that Allonhill “focuses on a different area of the mortgage industry than Murrayhill did.” She said the foreclosure information Allonhill was reviewing for Aurora was “outside the scope of what was provided to Murrayhill.”

Aurora did not comment.

JPMorgan Chase’s hiring of Deloitte to analyze foreclosure practices also raises questions. Deloitte was the auditor not only for Washington Mutual, the huge mortgage lender that collapsed in 2008, but also for Bear Stearns, another defunct firm. Both WaMu and Bear were acquired by JPMorgan, so any loans they made may come under scrutiny by the same firm that audited their books.

Nye Lavalle, a foreclosure fraud expert who began warning bank executives about bad lending practices back in 1999, is troubled by this situation. “This review process is a wink-wink, nod-nod,” he said.

JPMorgan and Deloitte declined to comment.

Robert Garsson, a spokesman for the comptroller’s office, said the regulator was satisfied with its vetting process. “We were particularly focused on situations where consultants and law firms may have previously worked on issues they would be called upon to evaluate in the review process,” he said in a statement. “If we identify conflicts that were not apparent at the time the engagement letters were signed, we will take steps to address them.” 

Beyond the potential for conflicts, Ms. Cohen pointed to other flaws in the program. For instance, she said the years under review were not when most subprime loans were put into foreclosure. Many predatory loans are likely to be excluded from the analysis.

Even more problematic, Ms. Cohen said, is the fact that the program has left troubled borrowers who participate in it unprotected against further damage. For example, participants in line to get remuneration may be asked to give up their rights to defend themselves if they get into financial trouble again.

“This process is not meant to fix the original lending practices, so people need to hang on to their right to challenge the original loan later,” she said.

She also noted that borrowers in the process of having their cases reviewed could still lose their homes under the program. “O.C.C. has said their policy will involve an escalation process and expedited review of people in a certain proximity to a foreclosure sale,” Ms. Cohen said. “But the sale itself is not being stayed in any systematic way.”

None of this surprises Ms. Cohen or others familiar with the regulator. “This is the O.C.C . that we’re talking about,” she said. “It has a long record of favoring banks over homeowners.”

Article source: http://feeds.nytimes.com/click.phdo?i=26509c6f8554de358b951616c8c5065a

In E-Mail Age, Postal Service Struggles to Avoid a Default

“Our situation is extremely serious,” the postmaster general, Patrick R. Donahoe, said in an interview. “If Congress doesn’t act, we will default.”

In recent weeks, Mr. Donahoe has been pushing a series of painful cost-cutting measures to erase the agency’s deficit, which will reach $9.2 billion this fiscal year. They include eliminating Saturday mail delivery, closing up to 3,700 postal locations and laying off 120,000 workers — nearly one-fifth of the agency’s work force — despite a no-layoffs clause in the unions’ contracts.

The post office’s problems stem from one hard reality: it is being squeezed on both revenue and costs.

As any computer user knows, the Internet revolution has led to people and businesses sending far less conventional mail.

At the same time, decades of contractual promises made to unionized workers, including no-layoff clauses, are increasing the post office’s costs. Labor represents 80 percent of the agency’s expenses, compared with 53 percent at United Parcel Service and 32 percent at FedEx, its two biggest private competitors. Postal workers also receive more generous health benefits than most other federal employees.

The Senate Homeland Security and Governmental Affairs Committee will hold a hearing on the agency’s predicament on Tuesday. So far, feuding Democrats and Republicans in Congress, still smarting from the brawl over the federal debt ceiling, have failed to agree on any solutions. It doesn’t help that many of the options for saving the postal service are politically unpalatable.

“The situation is dire,” said Thomas R. Carper, the Delaware Democrat who is chairman of the Senate subcommittee that oversees the postal service. “If we do nothing, if we don’t react in a smart, appropriate way, the postal service could literally close later this year. That’s not the kind of development we need to inject into a weak, uneven economic recovery.”

Missing the $5.5 billion payment due on Sept. 30, intended to finance retirees’ future health care, won’t cause immediate disaster. But sometime early next year, the agency will run out of money to pay its employees and gas up its trucks, officials warn, forcing it to stop delivering the roughly three billion pieces of mail it handles weekly.

The causes of the crisis are well known and immensely difficult to overcome.

Mail volume has plummeted with the rise of e-mail, electronic bill-paying and a Web that makes everything from fashion catalogs to news instantly available. The system will handle an estimated 167 billion pieces of mail this fiscal year, down 22 percent from five years ago.

It’s difficult to imagine that trend reversing, and pessimistic projections suggest that volume could plunge to 118 billion pieces by 2020. The law also prevents the post office from raising postage fees faster than inflation.

Meanwhile, the agency has had a tough time cutting its costs to match the revenue drop, with a history of labor contracts offering good health and pension benefits, underused post offices, and laws that restrict its ability to make basic business decisions, like reducing the frequency of deliveries.

Congress is considering numerous emergency proposals — most notably, allowing the post office to recover billions of dollars that management says it overpaid to its employees’ pension funds. That fix would help the agency get through the short-term crisis, but would delay the day of reckoning on bigger issues.

The agency’s leaders acknowledge that they must find a way to increase revenue, something that will prove far harder than simply slicing costs.

In some countries, post offices double as banks or sell insurance or cellphones. In the United States, the postal service is barred from entering many areas. Still, the agency is considering ideas, like gaining the right to deliver wine and beer, allowing commercial advertisements on postal trucks and in post offices, doing more “last-mile” deliveries for FedEx and U.P.S. and offering special hand-delivery services for correspondence and transactions for which e-mail is not considered secure enough.

Article source: http://feeds.nytimes.com/click.phdo?i=e3c9fc99cf6fdf12fdc5605897cbbb55

DealBook: Goldman Said to Receive Subpoena Over Financial Crisis

Goldman Sachs has received a subpoena from the office of the Manhattan district attorney, which is investigating the investment bank’s role in the financial crisis, according to people with knowledge of the matter.

The inquiry stems from a 650-page Senate report from the Permanent Subcommittee on Investigations that indicated Goldman had misled clients and Congress about its practices related to mortgage-linked securities.

Senator Carl Levin, Democrat of Michigan, who headed up the Congressional inquiry, had sent his findings to the Justice Department to figure out whether executives broke the law. The agency said it was reviewing the report.

The subpoena come two weeks after lawyers for Goldman Sachs met with the attorney general of New York’s office for an “exploratory” meeting about the Senate report, the people said.

“We don’t comment on specific regulatory or legal issues, but subpoenas are a normal part of the information request process and, of course, when we receive them we cooperate fully,” said a Goldman representative.

The investment bank has not been accused of any wrongdoing. A subpoena is a request for information.

Bloomberg News earlier reported on the issuance of the subpoena.

The subpoena is the latest blow to Goldman, which since the financial crisis has faced criticism that it shorted the mortgage market before it collapsed, making billions of dollars at the expense of its clients.

In early April, the Senate subcommittee published a scathing report, which took specific aim at Goldman. It notably highlighted testimony by the institution’s chief executive, Lloyd C. Blankfein, who denied the firm was making large bets against residential mortgages while selling securities based on home loans.

Goldman Sachs chief executive Lloyd Blankfein.Charles Dharapak/Associated PressThe Goldman Sachs chief executive Lloyd Blankfein.

“We didn’t have a massive short against the housing market,” Mr. Blankfein testified at a Congressional hearing in 2010. It was a sentiment echoed in various public statements that year.

The Senate committee took a different view. The Congressional report noted the phrase “net short” appeared more than 3,400 times in Goldman documents related to the mortgage market.

It also quoted a letter from Goldman to the Securities and Exchange Commission, in which the firm said “we maintained a net short sub-prime position and therefore stood to benefit from declining prices in the mortgage market.”

Shares of Goldman slipped more than 2 percent on Thursday. The stock, which closed on Wednesday at $136.17, was trading above $170 in January.

Correction: Lawyers for Goldman Sachs met with the attorney general of New York’s office, not the Manhattan district attorney.

Article source: http://feeds.nytimes.com/click.phdo?i=744f2e6110fead87d37daf1560d26e25