April 17, 2024

DealBook: New York Fed Was Aware of False Reporting on Rates

9:27 p.m. | Updated

The Federal Reserve Bank of New York learned in April 2008, as the financial crisis was brewing, that at least one bank was reporting false interest rates.

At the time, a Barclays employee told a New York Fed official that “we know that we’re not posting um, an honest” rate, according to documents released by the regulator on Friday. The employee indicated that other big banks made similarly bogus reports, saying that the British institution wanted to “fit in with the rest of the crowd.”

Although the New York Fed conferred with Britain and American regulators about the problems and recommended reforms, it failed to stop the illegal activity, which persisted through 2009.

British regulators have said that they did not have explicit proof then of wrongdoing by banks. But the Fed’s documents, which were released at the request of lawmakers, appear to undermine those claims.

The revelations fuel concerns that regulators are ill-equipped to police big banks and that financial institutions can game the system for their own purposes.

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Even after authorities have beefed up oversight and lawmakers have enacted new rules, blowups on Wall Street continue to occur with some regularity. Amid the rate-manipulation scandal, regulators are also dealing with the fallout from the multibillion-dollar trading losses at JP Morgan Chase and the collapse of a second brokerage firm, just months after the failure of MF Global.

“I wish I could say I’m shocked, because it is shocking,” said Frank Partnoy, the George E. Barrett professor of law and finance at the University of San Diego School of Law. “But regulators have not been particularly effective or aggressive in the past two decades of finance.”

Regulators are now expanding their global investigation into the manipulation of key interest rates, a multiyear inquiry that has already examined more than 10 big banks, including UBS, JPMorgan Chase andCitigroup. In June, Barclays agreed to pay $450 million to settle claims that it reported bogus rates to deflect concerns about its health and bolster profits.

The Barclays case is the first major action stemming from the inquiry into how big banks set major benchmarks like the London interbank offered rate, known as Libor. The rate is essentially how much interest banks would pay to borrow money on a short-term basis from other financial firms, a process that is overseen by the British Bankers’ Association, an industry trade group. Such benchmarks are used to determine the price of trillions of dollars of financial products, including mortgages and credit cards.

Since the Barclays settlement, lawmakers have focused their attention on regulators’ role in the rate-manipulation controversy.

“As much as $800 trillion in financial products are pegged to Libor, so any manipulation of this rate is of serious concern,” said Representative Randy Neugebauer, the chairman of the House Financial Services Subcommittee on Oversight and Investigations, which initially requested the documents from the New York Fed. “We’ll continue looking into this matter to determine who was involved in this practice and whether it could have been prevented by regulators.”

I'm pleased that the New York Fed responded to my request in a timely and transparent fashion, Representative Randy Neugebauer said.Andrew Harrer/Bloomberg News“I’m pleased that the New York Fed responded to my request in a timely and transparent fashion,” Representative Randy Neugebauer said.

Timothy F. Geithner, who served as the head of the New York Fed during the crisis years, and other regulators raised concerns about Libor. But they did not stop the problems. As the regulators sought more information about the rate-setting process, they were consumed with trying to save the global financial system after the near collapse of Bear Stearns in 2008 and the failure of Lehman Brothers later that year.

Mr. Geithner, who is now the Treasury secretary, will most likely address the matter in Congressional testimony this month. The New York Fed has defended its actions.

“Following the failure of Bear Stearns and shortly before the first media report on the subject, we made further inquiry of Barclays as to how Libor submissions were being conducted,” the New York Fed said in a statement. “We subsequently shared analysis and suggestions for reform of Libor.”

The New York Fed learned about concerns over the integrity of Libor in summer 2007, when a Barclays employee e-mailed a New York Fed official, saying, “Draw your own conclusions about why people are going for unrealistically low” rates. Barclays wrote in a September report, “Our feeling is that Libors are again becoming rather unrealistic and do not reflect the true cost of borrowing.”

But the New York Fed thought the reports amounted to market chatter and did not provide definitive proof of widespread manipulation. “In the context of our market monitoring following the onset of the financial crisis in late 2007, involving thousands of calls and e-mails with market participants over a period of many months, we received occasional anecdotal reports from Barclays of problems with Libor,” the New York Fed statement said.

The regulator started to identify real problems with the interest rates several months later. In April 2008, the Barclays employee mentioned to a New York Fed official, “where I would be able to borrow” in the Libor market, “without question it would be higher than the rate that I’m actually putting in.”

That same day, New York Fed officials wrote in a weekly internal memo that banks appeared to be understating the interest rates they would pay.

“Our contacts at Libor contributing banks have indicated a tendency to underreport actual borrowing costs,” New York Fed officials wrote, “to limit the potential for speculation about the institutions’ liquidity problems.”

After the April 2008 conversation, the New York Fed started notifying other American regulators, including the Treasury Department. Mr. Geithner reached out to British authorities as well, notably Mervyn King, the governor of theBank of England, and his deputy, Paul Tucker. Mr. Geithner suggested British authorities should “eliminate incentive to misreport.”

In response, Mr. King passed on the recommendations to the British Bankers’ Association , according to documents released by the Bank of England Friday. Mr. Tucker also arranged to talk toWilliam C. Dudley, the current president of the Federal Reserve Bank of New York, who was then executive vice president of the regulator’s markets group.

Angela Knight, the chief executive of the British Bankers’ Association, who is stepping down at the end of the summer, said the suggestions from United States authorities would be included in a review of Libor. The trade body published its initial findings days after receiving Mr. Geithner’s recommendations.

But regulators never addressed the fundamental problems with the rate-setting process. When the New York Fed raised concerns in 2008, Barclays has been trying to manipulate the interest rate for nearly three years, and the practice continued until 2009.

Mark Scott contributed reporting

Article source: http://dealbook.nytimes.com/2012/07/13/barclays-informed-new-york-fed-of-problems-with-libor-in-2007/?partner=rss&emc=rss

DealBook: JPMorgan Fears Traders Hid Loss, Now at $5.8 Billion

Jamie Dimon, chief of JPMorgan Chase, entered his bank's Manhattan headquarters on Friday.Jin Lee/Associated PressJamie Dimon, chief of JPMorgan Chase, entered his bank’s Manhattan headquarters on Friday.

12:36 p.m. | Updated

JPMorgan Chase, which reported its second-quarter results on Friday, disclosed that the losses on a soured credit bet could mount to more than $7 billion, as the nation’s largest bank indicated that traders may have intentionally tried to conceal the extent of the red ink on the disastrous position.

Amid a swirl of questions about how the traders marked their bets, JPMorgan also said Friday that it would be forced to restate its first-quarter results.

If the trades, made out of the powerful chief investment office unit in London, had been properly valued, the bank said it would have lost $1.4 billion on the position in the first quarter.

Jamie Dimon, the bank’s chief executive who has consistently reassured investors that the losses would be contained, announced that the bank lost $4.4 billion on the botched trade in the second quarter. So far this year, the bank says it has lost $5.8 billion on the trades in credit derivatives.

In a statement, JPMorgan said that “the firm has recently discovered information that raises questions about the integrity of the trader marks and suggests that certain individuals may have been seeking to avoid showing the full amount of the losses in the portfolio during the first quarter.”

The Securities and Exchange Commission, which is already investigating the trading loss is “interested” in the valuation of the trades, according to a person briefed on the investigation who insisted on anonymity because of the investigation was continuing.

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On a conference call with analysts on Friday, Mr. Dimon said that the trade could result in another $1.7 billion in losses in the future, but added that the estimate was considering a worst-case situation.

Doug Braunstein, the bank’s chief financial officer, told analysts that the decision to re-file its earnings was made on Thursday, just one day before the bank reported its second-quarter results.

As a result of the restatement, revenue for the first quarter fell by $660 million, and net income dropped by $459 million, the bank told analysts.

In its earnings report, JPMorgan Chase said it had a profit of $1.21 a share in the second quarter of 2012, down from $1.27 a share a year earlier but beating estimates. In a Thomson Reuters poll, analysts expected JPMorgan to show a per-share profit of 70 cents.

Revenue fell to $22.9 billion, down 16 percent from $27.4 billion in the same quarter a year ago. Net income also fell, to $4.96 billion, from $5.4 billion a year ago. The trading loss reduced the company’s second-quarter profit by 69 cents on an after-tax basis.

The problems surrounding the value of the trades is another black eye for the bank, which has suffered a bruising public fallout after first announcing a $2 billion loss in May. Since announcing the multibillion-dollar mistake, JPMorgan has lost $25 billion in market value.

On the much-anticipated earnings call, Michael Cavanagh who has been leading an internal investigation of the losses, tried to assure investors that any issues with valuation or risk controls were contained within the chief investment office, not endemic to the larger bank. As part of its broad investigation, JPMorgan said it would claw back two years of compensation from three executives at the unit.

Throughout the call, Mr. Dimon told analysts that the company had strengthened its risks controls to stave off further losses.

He added that the unit will refocus on its “core mandate of conservatively investing excess deposits to earn a fair return.”

JPMorgan still has provided no clarity about how much of the bungled trade remains. Mr. Dimon said in the statement that the chief investment office “will no longer trade a synthetic credit portfolio.”

In midday trading, shares of JPMorgan rose 6 percent to about $36.10 a share, but the company has seen its market value plummet since it first announced trading losses on May 10.

Mr. Dimon has repeatedly told investors and Congress that the bank would remain solidly profitable despite the trading blunder.

“Importantly, all of our client-driven businesses had solid performance,” Mr. Dimon said in a statement.

In its earnings release, the company said that revenue for the investment bank was $6.8 billion in the second quarter, down from $7.3 billion a year earlier. JPMorgan was buoyed by its retail financial services. The unit reported net income of $2.3 billion, compared with $383 million last year.

JPMorgan also slashed compensation within its investment bank by 22 percent, to $2.01 billion. In the same period last year, the investment bank had set aside $2.6 billion to reward its traders and other personnel.

Mike Cavanagh, who led the investigation into the trading losses, outlined a series of flaws that contributed to the debacle.

He reiterated much of what Mr. Dimon has said in the past about the trade being “poorly implemented.” But Mr. Cavanagh noted that the chief investment office’s trades grew in complexity and outpaced the skills and ability of the managers within the unit.

As widely anticipated, JPMorgan announced it would immediately take back compensation from three executives in London.

Mr. Dimon said that Ina Drew, who oversaw the chief investment office and resigned in the wake of the trading losses, has agreed to give up “a significant portion of her compensation.” Mr. Dimon did not reveal just how much compensation would be turned over.

After the call, Jason Goldberg, a banking analyst with Barclays, circulated a research note, emphasizing the company was still attractive.

Article source: http://dealbook.nytimes.com/2012/07/13/jpmorgan-says-traders-obscured-losses-in-first-quarter/?partner=rss&emc=rss

DealBook: Blog: Senate Banking Hearing on JPMorgan

Jamie Dimon, chief of JPMorgan Chase, answered questions before a Senate committee on Wednesday.Daniel Rosenbaum for The New York TimesJamie Dimon, chief of JPMorgan Chase, answered questions before a Senate committee on Wednesday.

Jamie Dimon, JPMorgan Chase’s chairman and chief executive, testified before the Senate Banking Committee about the multibillion-dollar trading losses incurred at his firm’s chief investment office.

Mr. Dimon has maintained that the loss was an “isolated event” without broader repercussions for customers or taxpayers. He has said that risk was necessary in banking, and said JPMorgan had the necessary strength to withstand the losses, which could eventually swell to $5 billion.

During the hearing, Mr. Dimon faced questions about how JPMorgan’s chief investment office failed to clamp down on a complex derivatives trade that metastasized into an unwieldy and hard-to-unwind gamble that failed. He addressed queries about whether the firm’s losses should prompt even tougher banking regulations, something Mr. Dimon has long opposed.

Here was DealBook’s live blog of the hearing.

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Article source: http://dealbook.nytimes.com/2012/06/13/live-blog-senate-banking-hearing-on-jpmorgan/?partner=rss&emc=rss