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2. JPMorgan Chase, Citigroup hacking case comes to light

For years now, net interest margins have been a pressing concern for banks. Over the last few years, with little incentive to expand their loan portfolios aggressively, banks have bought up bonds aggressively. Bloomberg notes FDIC data showing that securities, mainly bonds, constituted about 21 percent of the assets at U.S. lenders at the end of March. The figure has been above 20 percent since the three months ending September 2010. Before that, the 20 percent level was last breached in 2004.

So if rates rise, banks will no doubt take a hit on the value of their bonds. The jump in the 10-year Treasury yield has led to an 18 percent decline in the net unrealized gains that the 25 biggest U.S. banks have on securities classified as available for sale, according to an analysis by Bloomberg Industries. Ouch.

What's more, short-term rates, which are the more significant determinant of loan activity, have not risen in lockstep with long-term yields. Indeed, the short-end of the curve remains stuck in very low-yield mode, denying banks a significant pick up in interest income. In any case, even if rates were rising at the short-term end of the curve, it doesn't appear as though banks are willing to expand loan production aggressively in ways that will lead to big income gains.

So banks are in a dicey position, as rates increase. This will likely be a dominant issue for the remainder of 2013. The best we can hope for is a gradual transition.

Bank executives would love to have people believe that rising rates are great news for the industry. They will put their best spin on this. But it's mere lipstick on a badger in the eyes of many.

For more:
- here's the article

Read more about: High Interest Rates, NIM
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By Jim Kim

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3. JPMorgan, Morgan Stanley give up on synthetic CDO

Over the past two years, banks have been attacked ad nauseam by hackers of unknown origin. The conventional wisdom holds that these attacks tend to be of the Advanced Persistent Threat (APT) variety, meaning the attacks are sponsored by governments abroad (most likely China and Iran) and are quite sophisticated in nature. The point of these attacks is to disrupt financial operations and compromise intellectual property or trade secrets.

While these threats stepped up, more traditional criminals, who were more bent on theft of money than politics, sensed an opportunity. In a way, the rise of APTs created a nice diversion for them. U.S. authorities have announced another large cybercrime ring has been broken up -- one that targeted 15 banks with an eye on easy money and little else.

Among the victims were JPMorgan Chase, Citigroup, E Trade and a list of vendors: Aon Hewitt, Automated Data Processing, Electronic Payments, Fundtech Holdings, iPayment Inc., Nordstrom Bank, PayPal, TD Ameritrade Corp., the U.S. Defense Department's Defense Finance and Accounting Service, TIAA-CREF, USAA and Veracity Payment Solutions, as noted by the LA Times.

Using a variety subterfuges, "the group gained access to the login credentials of more than 130 ADP customers. They used the information to hack into the accounts, transferring about $4 million. In a similar way, they obtained at least 40 Chase accounts, moving $60,000 to prepaid American Express debit cards." All told $15 million was stolen. It's unclear how much was recovered.

Banks need to remain aware that a plethora of traditional cybercriminals would love to slide in behind the APT wave and wreak havoc with customer accounts.

For more:
- here's the article

Read more about: Cyber Security, JPMorgan Chase
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By Jim Kim

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4. Ex BoA employees paint ugly picture of HAMP process

It was big news when Morgan Stanley and JPMorgan Chase sought to revive the traditional synthetic CDO at the request of big clients. The idea that investors, so soon after the financial crisis, would willingly invest in a basket of CDSes tranched into varying risk categories struck some as odd. But the reality was that with interest rates so low institutional investors just might bite.

As it turns out, the experiment was short-lived. Morgan Stanley and JPMorgan Chase, according to the Financial Times, have given up on the deal "after investors balked at buying some of the derivatives on offer." Interestingly, the banks apparently had trouble selling the top tranches, the senior level offerings that in theory should be the safest. One has to wonder if the selling the junior pieces would have been all but impossible. We'll perhaps never know.

If rates begin to rise, as many expect, one has to wonder if CDOs and synthetic CDOs will rise again any time soon. It may be that investors can satisfy their yield needs with other products. That said, there will always be funds that seek above-average yields and derivatives of this ilk will perhaps remain in the mix. We may see more bespoke deals that are simpler to execute. Citigroup executed a simplified form of a CDS bundle earlier this year.

For more:
- here's the article

Read more about: synthetic CDOs, CDOs
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By Jim Kim

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When it comes to modifications and foreclosures, what was Bank of America's ultimate goal?

"We were regularly drilled that it was our job to maximize fees for the bank by fostering and extending delay of the HAMP modification process by any means we could," one employee has testified in a court proceeding against the bank.

According to the same employee, managers told staff to "delay modifications by telling homeowners who called in that their documents were 'under review,' when in fact, there had been no review," noted Bloomberg.

Bank of America has been sued by homeowners who didn't receive loan modifications even after making payments under various trial programs. Intriguingly, the suit features the testimony of seven former loan employees, which makes the case that much more interesting. A ruling on whether this should become a class action is expected in August.

The ex-employees paint a troubling picture of what goes on in the underbelly of the bank's efforts to deal with modification requests. Employees were apparently given cash bonuses and gifts if they could get more people into foreclosure, even if they were in trial modifications.

Said one ex-employee: "I witnessed employees and managers change and falsify information in the systems of record, and remove documents from homeowners' files to make the account appear ineligible for a loan modification." The point was to allow managers to meet quotas for closed cases.

Another ex-employee testified: "I personally reviewed hundreds of files in which the computer systems showed that the homeowner had fulfilled a trial-period plan" before being denied. "On many occasions, homeowners who did not receive the permanent modification that they were entitled to ultimately lost their homes." The ex-employee said the bank offered some applicants "who should've gotten HAMP modifications a more-expensive private loan that charged as much as 5 percent interest, compared with 2 percent under the U.S. program."

To be sure, standards in this area were set by the national mortgage settlement, but compliance has emerged as a big issue. This could well blow up in the bank's face. As for the ex-employees, one wonders if they are pondering whistle blower action under the False Claims Act -- a course that others have taken.

For more:
- here's the article

Read more about: Civil Suit, Modifications
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5. Steven Cohen, a pop icon

By Jim Kim

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