Monthly Archives: December 2014

Ocwen, Hands Tied by N.Y., Turns to ‘Cleanup Calls’ for Profits

Ocwen Financial, operating under a settlement with New York’s banking regulator that restricts its servicing portfolio acquisitions, is looking at its old private-label mortgage securities as a new profit center.

Over the next two years, Ocwen plans to break up maturing securities where the remaining unpaid principal had fallen below 10% of its original unpaid principal balances. By exercising its cleanup call rights on the bonds, Ocwen can re-securitize the performing loans, work out the nonperformers and sell the repossessed homes.

“In these cases, we can call the bonds and re-securitize the performing loans almost immediately and recognize the gain,” Ocwen chief executive Ron Faris said during a conference call Dec. 22.

Read on.

Is The CDS Market Manipulated?


From Joshua Rosner of Graham Fisher

Credit Event, Or Not? Is Another Market Being Manipulated? (pdf)

As investors and market participants become increasingly aware of the regulatory failures that allowed for manipulation of LIBOR, FOREX, municipal bond bidding and certain commodities markets, regulatory sources are increasingly expressing concern that they have paid too little attention to potential manipulations of an arguably larger, more systemically important and less regulated market – the CDS market as self-governed, through ‘regulatory license’, by the International Swaps and Derivatives Association (ISDA).

It appears regulators are now turning their attention toward the CDS market, its problematic self-regulatory structure, the myriad of conflicts of interest, the potential avenues for manipulation by large dealers and the opaque and potentially self-serving manner in which determinations of “credit events” are privately decided by ISDA’s Determinations Committees (DCs). A growing volume of news stories, the publication of several new academic papers, the reversal of Dodd-Frank’s “Push-Out” rule which would have forced banks to move their derivatives out of the depository, and the DCs’ handling of several recent questions have only served to increase regulatory concerns and cause some to point out numerous similarities between the various manipulation scandals, the possibility of manipulations in the CDS market and the implications to the global economy.

Source: Dan Awrey

RBS Suspend Bonuses Of 18 FX-Rigging Traders

As Bloomberg reports,

Royal Bank of Scotland suspended bonuses of 18 traders as part of a review of its foreign-exchange business in the wake of a $634 million fine.

The bank is reviewing the conduct of more than 50 current and former traders who worked at the investment bank, it said in a statement today. Six employees face disciplinary action, with three of them suspended pending investigations.

A former RBS trader was arrested on Dec. 19 in relation to the U.K. Serious Fraud Office’s investigation into currency rigging, according to a person with knowledge of the situation, who asked not to be identified because the details are private.

“We are undertaking a robust and thorough review into the actions of the traders that caused this wrongdoing and the management that oversaw it,” Jon Pain, RBS’s head of conduct and regulatory affairs, said in the statement. “No further bonus payments will be made or unvested bonus awards released to those in scope of the review until it has concluded.”

The SFO confirmed it had last week arrested a man in Billericay, a town in Essex, east of London. The agency declined to comment on his identity or employment.

RBS said that given the “complex” nature of the investigations, it will provide a further update when the review is complete, probably in the first quarter.

Ambac sues BofA over faulty mortgage bonds

Ambac Assurance Corp. (AMBC) sued Bank of America(BAC) in order to recoup hundreds of millions of dollars that it lost during the financial crisis from insuring roughly $1.68 billion of securities backed at least in part by risky mortgages from countrywide, Reuters said.

In a complaint filed on Tuesday in a New York state court in Manhattan, Ambac accused Countrywide of lying about how well it underwrote so-called “pay option adjustable-rate mortgage negative amortization” loans that backed the securities.

The securities were issued in eight transactions between 2005 and 2007, Ambac said.

Bank of America announced in August a $16.65 billion settlement agreement with the U.S. Department of Justice, certain federal agencies and six states to resolve claims over toxic residential mortgage-backed securities, collateralized debt obligations and an origination release on residential mortgage loans sold to Fannie Mae and Freddie Mac.

At the time, Chief Executive Officer Brian Moynihan said, “We believe this settlement, which resolves significant remaining mortgage-related exposures, is in the best interests of our shareholders, and allows us to continue to focus on the future.”

Source: Reuters

DOJ probing Morgan Stanley’s relationship with New Century

After a year full of reaching billion-dollar settlements with some of the country’s largest banks over the toxic mortgages that led to the financial crisis, the U.S. Department of Justice reportedly has its sights set on another bank, Morgan Stanley (MS).

According to a report from the New York Times, the DOJ has begun examining the pre-crisis relationship between Morgan Stanley and New Century Financial, and Morgan Stanley’s role in “actively” influencing New Century’s risky lending practices.

According to the Times report, the DOJ is reviewing a mountain of documents provided as part of a lawsuit filed against Morgan Stanley by the American Civil Liberties Union in 2012.

In the lawsuit, the ACLU accused Morgan Stanley of encouraging New Century to write high-risk, toxic mortgages in predominately African-American neighborhoods in the run-up to the crisis.

“Hoping to realize large profits from the securitization of extremely risky mortgages, Morgan Stanley worked hand-in-glove with New Century, encouraging it to issue mortgages that ignored all of the most basic fair lending principles in order to create a large number of mortgages that could be processed and sold as securities,” the ACLU said in a statement at the time.

Now, as the case is progressing, the DOJ is beginning to look into the Morgan Stanley-New Century relationship.

From the NY Times report:

The documents indicate that Morgan Stanley employees were aware of the low credit quality — and occasionally joked about it — even as they continued to snap up loans from New Century. A top due diligence executive at Morgan Stanley, Pamela Barrow, wrote to a colleague in 2006 sarcastically describing the “first payment defaulting straw buyin’ house-swappin first time wanna be home buyers.”

“We should call all their mommas,” Ms. Barrow added in the email. “Betcha that would get some of them good old boys to pay that house bill.”

According to the Times report, internal documents from Morgan Stanley showed that by 2005 the bank purchased half of all the loans that New Century originated since 2001, for roughly $42 billion.

Again, from the Times report:

The documents suggest that the primary way Morgan Stanley guided New Century was in contracts that spelled out the kinds of loans the bank was willing to buy in pools of mortgages. A 2006 term sheet said that the bank wanted a $1 billion pool to be at least 85 percent adjustable-rate mortgages, with at least 75 percent of the pool to include a prepayment penalty. And it dictated how many loans the bank wanted from various geographic regions.

An internal Morgan Stanley report also said that the bank got a “ ‘first and last’ look each month at any whole loan sales by New Century and in exchange Morgan Stanley provides balance sheet liquidity for New Century.”

The Year in White-Collar Crime

White-collar crime cases can take years to develop, so today’s headlines often reflect what happened well in the past. And as we approach the end of 2014, there is a sense, to steal a line from Yogi Berra, that it’s like déjà vu all over again.

We will, of course, see continued fallout from the practices that helped fuel the financial crisis. This past year, the Justice Department reached multibillion-dollar settlements with Bank of America and JPMorgan Chase for selling shoddy mortgage-backed securities before the financial crisis hit in 2008. Most of the loans packaged for investors were made by companies acquired by the banks as the real estate market spiraled downward in 2008, so they paid for the sins of others.

The settlements with big banks hardly close out cases from the financial crisis as names from the past keep popping to the surface. DealBook reported that the Justice Department was considering a civil fraud case against Angelo R. Mozilo, former chief executive of Countrywide Financial, which was at the center of the subprime mortgage market. Prosecutors in Los Angeles closed a criminal investigation a few months after Mr. Mozilo reached a settlement with theSecurities and Exchange Commission in 2010 over securities fraud charges. But he may be back in the news again if a new round of civil fraud charges is filed.

The S.E.C. sued the former chief executives of mortgage giants Fannie Mae andFreddie Mac, along with other officers of the companies, for securities fraud in 2011 for not adequately disclosing the companies’ exposure to the subprime mortgages that led to a government bailout. Those cases are just winding up the discovery phase, so it is unlikely there will be a trial in 2015 as the two sides continue to fight over whether the case should proceed.

Read on.

BP says reviewed forex desk in light of regulatory probe

(Reuters) – BP reviewed the activities of its in-house foreign exchange traders, the British oil and gas group said on Tuesday, after the Financial Times reported that BP was investigating whether its traders were involved in rigging the currency market.

The newspaper’s report cited a person familiar with the matter as saying BP’s internal review of its currency trading operations in London was “ongoing.”

The FT reported that the investigation, which is not being carried out by any financial regulator, was prompted after a Bloomberg report cited undated messages sent to BP’s employees by a network of foreign-exchange traders at four major banks about planned currency trades “sometimes hours before they happened.”

Asked to comment on the FT report, BP issued an emailed statement that said: “Following regulatory market (not into BP) investigations regarding the FX markets, we conducted a review into our activities in this area. BP’s FX desk has relationships (as a customer) with 26 relationship banks, including JP Morgan, Citibank and Barclays.”

Read on.

The Rigging Triangle Exposed: The JPMorgan-British Petroleum-Bank Of England Cartel


A quick reminder on the “Cartel”:

The four banks in the Cartel controlled about 45 percent of the global spot-currency market, according to a survey by Euromoney Institutional Investor Plc, so information about their plans was valuable. Some days they worked together to push around the 4 p.m. fix, settlements with the banks show.

The Cartel chat room was started by Usher as early as 2009, according to a person with knowledge of the matter. Usher had risen quickly to the top of his profession. After joining HBOS Plc in 2001, he was hired by Royal Bank of Scotland Group Plc in 2003 and a year later collected an industry award on his employer’s behalf…. The four members of the chat room ribbed each other like high school buddies. Usher was referred to as Feston because he resembled an overweight version of British chef Heston Blumenthal, according to people who have seen the chats. Matt Gardiner, a UBS trader based in Zurich, was called Fossil because he was a few years older than the others. Rohan Ramchandani, Citigroup’s cricket-loving head of spot trading, was called Ruggy, while Chris Ashton, the last one to join, was dubbed Robocop.

From Bloomberg:

Copies of messages sent to BP traders over the course of a year were provided to Bloomberg News by a person with access to the online conversations. The person, who redacted the names of banks sending the messages and dates of conversations, said they came from firms whose senior foreign-exchange traders belonged to a chat room called “The Cartel” that was set up by Usher and included dealers at JPMorgan, Citigroup Inc., Barclays Plc and UBS Group AG.

The information offered an insight into currency moves minutes, sometimes hours before they happened. The messages could drag the U.K.’s biggest energy company into a scandal that has enveloped 11 banks and led to more than 30 traders from London to Singapore losing or being suspended from their jobs. Last month six banks were fined $4.3 billion for passing along information about their clients and working together to rig foreign-exchange markets.

On a side note: Usher is Dick Usher. Who is Dick Usher?:

The name Dick Usher is familiar to regular readers: he was the head of spot foreign exchange for JPMorgan, and the bank’s alleged chief FX market manipulator, who was promptly fired after it was revealed that JPM was the bank coordinating the biggest FX rigging scheme in history, as initially revealed in “Another JPMorganite Busted For “Bandits’ Club” Market Manipulation.” Subsequent revelations – which would have been impossible without the tremendous reporting of Bloomberg’s Liam Vaughan – showed that JPM was not alone: as recent legal actions confirmed, virtually every single bank was also a keen FX rigging participant. 

However, the undisputed ringleader was always America’s largest bank, which would make sense: having a virtually unlimited balance sheet, JPM could outlast practically any margin call, and make money while its far smaller peers were closed out of trades… and existence.

But while the past year revealed that FX rigging was a just as pervasive, if not even more profitable industry for banks than the great Libor-fixing scandal (for details see “How To Rig FX Like A Pro “Bandit”, And Make Millions In The Process“), the conventional wisdom was that it involved almost exclusively bankers at the largest global banks including JPM, Goldman, Deutsche, Barclays, RBS, HSBC, and UBS.

Now, courtesy of some more brilliant reporting by Vaughan, we can finally link banks with the other two facets of what has emerged to be an unprecedented FX-rigging “triangle” cartel: private sector companies that have no direct banking operations yet who have intimate prop trading exposure, as well as central banks themselves.

By “banks” we, of course, refer to the ringleader itself: JP Morgan, and its former head of spot forex trading in London, Dick Usher. As for the company that benefited from its heretofore secret participation in the biggest FX rigging scandal in history, it is none other than British Petroleum.

We learn about all this thanks to a story that begins with, of all thing, a story about freshwater fishing at a lake in Essex called “Wharf Pool.”

As Bloomberg reports, “an hour away by train, in London’s financial district, the lake’s owners ply their trade. Wharf Pool was purchased for about 250,000 pounds ($388,000) in 2012 by Richard Usher, the former JPMorgan Chase & Co. trader at the center of a global investigation into corruption in the foreign-exchange market, and Andrew White, a currency trader at oil company BP Plc.


Suit After Saddled With Bad Chase Mortgages

MANHATTAN (CN) – A Florida man who bought defaulted home loans from J.P. Morgan Chase, then worked with borrowers to avoid foreclosure, sued the bank for allegedly saddling him with bad mortgages it needed to get off its books as the country’s housing crisis deepened.
Laurence Schneider, of Boca Raton, filed the suit for punitive damages on Christmas Eve in New York County Supreme Court. J.P. Morgan Chase & Co., subsidiary J.P. Morgan Chase Bank NA, and mortgage servicer Chase Home Finance, which merged with the subsidiary in 2011, are all named as defendants. He says their fraud, breach of contract, defamation, racketeering and other offenses “destroyed” his businesses.
For years, Schneider’s two businesses in suburban Coconut Creek, Fla., purchased hundreds of first- and second-lien residential mortgages from Chase, according to the 69-page complaint.
Repayment plans that the Schneider businesses, S&A Capital Partners Inc. and 1st Fidelity Loan Servicing, worked out on the defaulted loans allowed borrowers to stay in their homes and rebuild their credit. Schneider says his businesses, named as plaintiffs, stayed afloat by increasing the value of the loans above their purchase price.
Schneider’s third business, Mortgage Resolution Servicing, is also named as a plaintiff. He says it was created to purchase a large pool of loans – more than 3,500 – that Chase wanted to get off its books.

Read on.

Accounting fraud is ripe for fresh scrutiny

Dodgy numbers will replace insider trading as Wall Street watchdogs’ preferred prey in 2015. New auditing and analytics have already given the U.S. Securities and Exchange Commission a head start, even if the 2002 Sarbanes-Oxley reforms make cases of accounting fraud harder to track down.

American enforcers have racked up hefty settlements and priceless publicity pursuing the likes of SAC Capital for trading illegally on secrets. The SEC alone filed 52 such cases in fiscal 2014, near the 2006 high of 61.

Meanwhile, the number of accounting fraud actions has fallen about 60 percent since peaking at 219 in 2007. SarbOx’s strict rules on internal company controls and officer responsibility deserve some credit: Far fewer listed firms restate their financials now than a decade ago, the SEC says.

Yet the watchdog may also have missed some serious misconduct. None of the five enforcement units it created in 2010 focused on accounting. And big cases like intentional financial statement errors at American Realty Capital Properties emerged only after being reported by the companies themselves.

The SEC seems determined to do better. It says a new audit task force is using software to analyze annual reports for accounting red flags. The “management’s discussion and analysis” section, for example, can signal trouble with certain words or too much talk about minor matters. The task force’s “accounting quality model” also sifts company filings for unusual numbers, auditor changes and off-balance-sheet transactions – which Enron, Lehman Brothers and other failed firms used to conceal debt and inflate profits.

The efforts are already bearing fruit. The watchdog touts 2014 accounting fraud actions against Bank of America, Diamond Foods and CVS Caremark as well as smaller companies like Arizona-based JDA Software.

Read on.