Today's Top Stories Editor's Corner: Mortgage profits squeeze to hit banks Also Noted: Spotlight On... Endowments mull wisdom of hedge funds News From the Fierce Network:
Today's Top News1. Goldman Sachs braces for the coming great rotation
The idea that a Great Rotation is at hand has gained currency lately. The idea is that the historic bull run in bonds is destined to end, with stocks as the great beneficiary. The possibility of rising interest rates as the economy recovers cannot be discounted, and it would behoove all to ponder the impact of this rotation. The idea has apparently been discussed at Goldman Sachs. In the past year, Goldman Sachs "has dramatically cut the amount of money it could lose on any given day if interest rates were to rise, which would cause bond prices to fall. The bank has also upped its own borrowing in order to lock in low interest rates. The moves mirror cautious statements recently made about the bond market by Goldman's two top executives. Last week, at the World Economic Forum in Davos, COO Gary Cohn, who is the firm's No. 2 executive, warned that many banks and investors might not be prepared for the possibility of a 'significant repricing' in the bond market," according to CNN The bank indeed seems to be hedging itself against a big surge in rates. Its VAR linked to interest rates has plunged to $67 million from $123 million in the fourth quarter a year ago. It will be interesting to see if the bank benefits from a great bond crash the way it did from the housing collapse. For more: Related articles: Read more about: Goldman Sachs, bonds
In the end, if you come across as a career criminal, you'll likely be dealt with more harshly by a judge. That's exactly what happened to Roomy Khan, who turned into a cooperating witness and a key figure in the case against Raj Rajaratnam, of Galleon Group. Rajaratnam was convicted of insider trading and sent to prison for 11 years, one of the government's biggest victories. Khan was of significant value as a witness against another convicted insider trader as well. Despite her substantial value to prosecutors, she was sent to prison for one year. The argument could be made that she is a criminal recidivist. She pleaded guilty in 2001 to wire fraud and was sentenced in 2002 to home detention after agreeing to cooperate with a federal probe of Rajaratnam in California. But she eventually started trading on inside information again, and she pleaded guilty again in 2009 to more serious charges that carried up to 20 years in prison. Along the way, she was caught lying to FBI agents and to prosecutors, whom she was supposed to be helping. She also destroyed evidence and tipped off others who were under investigation. All that can't be forgotten. In the mind of the judge, it merited prison time, despite her teary pleas for leniency. She might have gotten off light. One can only hope that when she gets out she will not lapse back into criminal behavior. For more: Read more about: insider trading 3. Fabrice Tourre leaves Goldman Sachs
Fabrice "Fab" Tourre, one of the more interesting characters of the financial crisis, can't seem to stay out of the news. He's been trying to live a quieter life as a Ph.D. candidate at the University of Chicago, but he's still a part of the grand story of the financial crisis and allegations of bank wrong-doing. No one thinks he was a major player in the ABACUS scandal that engulfed Goldman Sachs, but he wrote some interesting emails for prosecutors to pick through. He ended up being charged with civil fraud for his role in the ABACUS CDO marketing and sales fraud, for which Goldman Sachs paid $550 million to settle (without admitting any crimes directly). The latest development is that "Fab" has left Goldman Sachs after having been on unpaid leave. The bank continues to pay his legal costs, however, which makes it likely that he'll continue to trial unless the SEC decides to drop the case. With the trial still set for July, this is a good time to assess the SEC'S chances. It would be instructive to look at what happened at the trial of Brian Stoker, a mid-level executive at Citigroup who has charged personally along with the bank for similar CDO-related crimes. He was acquitted by a jury, one of whom said later that he kept thinking about why the Citigroup CEDO wasn't on trial. If Tourre's legal team can couch what he did in the context of Goldman Sachs' overall CDO activity and on the suspect behavior of those higher up the food chain, he'll likely have a good chance. In the end, email itself hasn't proved to be that powerful in the minds of jury. For more:
Read more about: Goldman Sachs, fraud 4. Is a global LIBOR settlement coming?
Deutsche Bank co-CEO Anshu Jain dropped an interesting bit of information at a recent news conference in the wake of the bank's eye-opening $3 billion loss for the fourth quarter. He noted that he and other top bank CEOs discussed a possible global settlement to the Libor scandal, which has engulfed banks around the world. "There were unofficial discussions, where we felt that if you went back and looked at other industries that have gone through an industry-wide settlement process, whether there is something to be gained…Pretty much all of us felt it was worth further discussing it," Jain said, in a Bloomberg report. This would be a decent outcome in many ways if in fact the infractions were similar across all the offending banks. This might be the mother of all global settlements, if it truly encompassed regulators and prosecutors in different countries (notably the U.S. and the U.K.) as well as the banks based in so many countries. It seems exceedingly complex and quite unlikely, especially from a political point of view. There have been times, when the idea made complete sense, such as the global settlement to the tainted research scandal of the dotcom era and the recent cases against top mortgage lenders and services. Then again, I fully expected a global settlement to charges of CDO marketing abuse, but that never materialized. In this case, if a global deal could be reached it might mark a milestone in terms of cooperation and investigatory efficiency. For more: Related articles: Read more about: LIBOR, Enforcement Action 5. JPMorgan traders bet against bank's CIO unit
Reuters reports a new twist in the JPMorgan London Whale "hedging" fiasco. Some of the firm's own traders bet against the very derivatives positions placed by its chief investment office. "The U.S. Senate Permanent Committee on Investigations, which launched an inquiry into the trading loss last fall, is looking into the how different divisions of the bank wound up on opposite sides of the same trade, said one of the people familiar with the matter." It's unclear what the importance of this will ultimately be. It's not unusual for a bank to hold in aggregate opposite sides of a bet. That's what hedging is all about in some ways. A mutual fund at JPMorgan Chase, the Strategic Income Opportunities Fund, was taking the opposite side of various CDS trades. Those trades worked out well for the fund, to the detriment of the JPMorgan CIO unit that stuck the bank ultimately with losses of more than $6.5 billion. There might be an issue if the CIO unit was somehow coordinating the activity in a bid to hedge the bank more fully in aggregate against expected losses from the losing positions, or if there was inappropriate information flow somehow. But this seems more like the mutual fund situation. Various units can act independently of each other, which is often a good thing. More information may come to light on this, as a report from the committee is expected soon. For more:
Read more about: JPMorgan Also NotedSPOTLIGHT ON... Endowments mull wisdom of hedge funds Endowments have hardly set the world on fire with their returns as of late. Last year, on average, modest gains in fixed income and equities were offset by big losses on alternative investments, which were supposed to goose returns. One expert told Hedge Fund Review that, "There is growing concern as to whether hedge funds perform in a way that meets return expectations and dampens volatility. Historically, they have done that, but 2012 was particularly disappointing. People are asking whether the hedge fund model still makes sense." Article Company News:
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Monday, February 4, 2013
| 02.04.13 | Mortgage profits squeeze to hit banks
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